Performance Evolution Laws of China's Commercial Banking in The Process of Financial Liberalization, Jilin University Press, 2016.05

Abstract ： With the high-speed development of China's macroeconomic, banking conducts important transmission as economic development agencies in the development and restructures higher profits. China's banking industry is highly profitable status quo, the necessary in-depth analysis of the corresponding factors affecting the performance of commercial banks. However, analysis of the commercial banking sector based on the theory of industrial organization has no definite results. Due to the different stages’ features, scholars at home and abroad get very different conclusions. At present, China's banking industry is in a transitional stage in the process of financial liberalization, obtaining high profits in the previous stage has also been widespread concern of all parties, and how to maintain the efficient operation of the high profits in this context has become a hot issue to discuss. Therefore, it is necessary to study the factors that affect the performance evolution and quantify its impact in China's banking industry gradually opening up and restructuring process.

In the 1930s, the theory of industrial organization has initially formed, Harvard University's Mason as the representatives making a greater contribution. He and his students Bain (1959) in their empirical research to study the market structure, they find that there is a certain but one-way relationship between market behavior and market performance, there are certain one-way to have a causal relationship. These scholars are known as the "Harvard School", whose theory is classical industrial organization SCP analysis paradigm. In the 1970s, with the emergence of the phenomenon of "stagflation", University of Chicago Professor Stigler questioned the view of Harvard School, for they think that a simple one-way causal relationship between the structure conduct - performance is not consistent with reality. Reality market structure - conduct performance has the two-way interaction, and empirical studies have shown that in the fierce market competition, enterprises have higher productivity and greater efficiency in cost savings, so that enterprises obtain high profits, resulting in highly concentrated market structure with big companies. Since then, some scholars amend and supplement the SCP paradigm, and gradually formed "new industrial organization theory" (NIO) with the game theory and information economics theory as the basis and analysis tools.

The variety of test and analysis of performance impact factor theory are put forward in the Western market economy conditions, thus it needs adaptive test in China a developing country. At the same time, the previous research phases of the Chinese scholars are different, so that the market characteristics are not the same. With China's banking sector assets expanding rapidly in recent years, it has a strong specificity and periodicity. The banking sector focuses on asset size, and it is difficult to sustain profits with the extensive growth of the market share, and high growth can no be long-term trend. Therefore, scholars launched to study the performance of commercial banks in China, aiming to provide a reference for the government to develop and implement policies in a healthy financial market to increase bank profits continually. In the rapidly changing economic structure and financial markets, numerous problems are exposed behind the high profits, so that the more in-depth study of the driving force of the commercial bank profit growth is very necessary. It will not only be able to make more accurate quantitative analysis of the impact of various factors on the performance of commercial banks, but also enable the government develop and implement policies more effectively to promote the healthy development of the financial industry, optimize and upgrade the industrial structure. According to "China's Financial Statistics Yearbook” and the bank's annual report data, under the theoretical framework of industrial organization, the paper establishes the appropriate model and makes use of micro-econometric methods to analyze the performance evolution and its influencing factors in China's commercial banks. Specific analysis and results are as follows:

A. Whether the changes in the inspection of commercial banks in China market performance are consistent with the hypothesis of market power or efficiency structure hypothesis. First, according to the dynamic changes of the SCP analysis of market structure, in Chinese commercial banking market Chinese banks still accounted for more than 70% market share, but in the last 10 years it shows downward trend, with oligopolistic market structure gradually weakening. Secondly, as for the efficiency measure, by adopting the Malmquist productivity index measure, it measures the dynamic indicators of factor utilization levels, which can be seen as metrics to reflect the level of commercial bank management and its evolution characteristics. Finally, using generalized least squares method, drawing on empirical research on the commercial banking panel data estimation results found that the level of performance and market structure of China's commercial banks has nothing to do, and China's high oligopolistic market structure is due to historical reasons, therefore, it does not meet the market forces hypothesis. The model results show that there is a positive impact of the efficiency and asset size on performance improvement, but pre-efficiency. Phased model confirmed that the state-owned banks or joint-stock bank’s asset expansion and improved efficiency have made performance improved, but the joint-stock banks were significantly weaker than the state-owned commercial banks. We need not only continue to maintain the efficiency of state-owned banks, but also guard against financial risks’ influence on credit expansion. At the same time, the performance of joint-stock commercial banks can be improved gradually through mergers and the establishment of effective competition in the system.

B. Analyze the impact on the performance evolution from the perspective of competition. According to the statistical representation of the structural method to measure the degree of competition on China's commercial bank market competition, the degree of competition for China's commercial banks has increase slightly. However, based on the measurement of the structural method, we cannot explain the changes in its level of performance from the degree of competition of the expansion of the credit scale, so we can use the speculated variational indicator which can reflect dynamic changes in the competition to measure the degree of competition. Among them, we use the GMM estimation method to estimate the loan demand function, while using the point SUR to estimate the cost function. Finally the degree of competition for China's commercial banks is not constantly changing along a trend, but the volatility changes. In the overall level, competition is reduced. CV changes and a gradual downward trend of indicators of market structure does not match, and the results do not support the SCP hypothesis. It further clarify the relationship between competition and performance, using the Granger causality test to confirm that the changes in the level of competition is the main factor to cause changes in the banking efficiency, and confirm the view of the efficient structure hypothesis. The dynamic correlation of the verification of both select the impulse response function and found that the relationship between the two is not stable as positive impact. China's banking industry is largely impacted by policy changes, while competition in the commercial banking sector is not price competition. The banking industry needs to introduce more perfect competition mechanism, the establish a stable macroeconomic environment and good order of the financial markets, such as active use of technology innovation, development of technology, enhancing competition in the banking sector by increasing the number of banks and other means to promote bank competition, By enhancing the banking sector individuals and the overall level of efficiency, it will benefit the upgrading of the bank individual and overall efficiency.

C. 70 percent of China's commercial banking profits are derived from the reality of deposit and loan spreads, and set China's market-oriented interest rate reform as the background. With the panel data of cycle of changes in interest rates and commercial bank performance, in order to reflect different interest rate term structure selected by different, we first build a comprehensive spread of the corresponding indicators, and performance indicators are selected with the consideration of the costs, and risks in the banking business performance metrics use application data of Cointegration test, and make use of panel data model estimation method to test the relationship between the two. We found that fluctuation of comprehensive rates is positively correlated of bank performance. We select Flannery's partial adjustment model for a better understanding of interest rate cycle changes in short-term and long-term effects, to analyze it from the long-term and short-term, and the results show that the state-owned commercial banks is more sensitive to interest rate changes than the shares of commercial banks, and it is necessary for commercial banks to consider the risk prevention mechanism in declining interest rates stage. There must be cyclical fluctuations in the interest rate market, therefore, we need to hedge interest rate risk, and establish a reasonable and perfect mechanism to prevent the risk of fluctuations in interest rates. In this process, the financial industry should pay close attention to the level of interest rate fluctuations and cyclical movements, and on this basis establish a reasonable balance of scientific management mechanism. However, taking into account the continuity of the commercial banking performance improvement, you need to consider non-interest income, the advancement of financial innovations and financial services.

D. In order to obtain more revenue and to circumvent the risk of fluctuations in interest rates in non-traditional business product selection in the process of financial liberalization, the descriptive result and model estimation found that non-traditional business of commercial banking in China has not yet formed a certain scale, and its structure is not rich, and the market is not fully standardized, and it has limitation in enhancing the role of bank performance. The relative percentage of non-interest income has not been improved, on the contrast, there was a decrease in the 2006. The state-owned banks non-interest income is the relatively larger, while the original non-traditional business as a joint-stock commercial banks accounted for low percentage in recent years in non-interest income, even lower than the state-owned banks. The panel data fixed effect model test results show, that by the use of its funds and scale advantages in the banking and financial reform process, the state-owned banks has a rapid growth in non-interest income, but this effect is still small, and the largest impact on bank earnings is the expansion of scale and savings and loan poor change. Commercial banks meet the demand for financial services with the non-traditional business, improving the banks’ performance. According to the type of non-interest income, a more detailed study of different types of non-traditional business shows, that a large and stable proportion of interest income is fee and commission income. For China's commercial banks, non-interest income changes are consistent with commission and fee changes in income. Therefore, under the premise of rational planned commission and fee income in a healthy market environment, we increase the financial innovation, rich its sources, and deepen the financial mixed operation with non-interest income as the main body of non-interest income, to improve service with more revenue.

The experience of research findings obtained in this study contribute to more clearly understand the characteristics of the evolution of the performance of commercial banks in the financial reform process, to identify the different factors and the degree of variation. Ultimately, it serve as a refernce to ensure the continued growth of performance of China's banking industry, to fight against financial risks, to formulate and implement public policies, to improve financial services, and to optimize and upgrade industrial structure with market demand as a guide.

Keywords： Commercial Banking; Financial Liberalization; Market Performance; The Theory of Industrial Organization Structure