Is bank competition detrimental to efficiency? Evidence from China

•We address the relationship between bank competition and efficiency in China.•We compute Lerner indices to measure competition and cost efficiency scores.•Granger-causality tests in a dynamic GMM panel framework are performed between competition and efficiency.•Cost efficiency improves over the last decade, contrary to competition.•We find no relation between competition and efficiency, contrary to evidence for Western banks.

This paper addresses the relationship between bank competition and efficiency by computing Lerner indices and cost efficiency scores for a sample of Chinese banks over the period 2002-2011. Granger-causality tests are performed in a dynamic GMM panel estimator framework to evaluate the sign and direction of causality between them. We observe no increase in bank competition over the period, even as cost efficiency improves. In a departure from the empirical literature showing that competition negatively Granger-causes cost efficiency for Western banks, we find no significant relation between competition and efficiency. This suggests that measures to increase bank competition in the Chinese context are not detrimental to efficiency.