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Measuring bank competition under binding interest rate regulation: the case of China

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  • Bing Xu
  • Adrian van Rixtel
  • Michiel van Leuvensteijn

Abstract

Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition have concluded that bank competition in China declined during the past decade, despite progressive reforms implemented since the 1980s. We show that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar–Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the profit elasticity (PE) approach does not suffer from these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996–2008, we show that competition actually increased in the past decade when the PE indicator is used.

Suggested Citation

  • Bing Xu & Adrian van Rixtel & Michiel van Leuvensteijn, 2016. "Measuring bank competition under binding interest rate regulation: the case of China," Applied Economics, Taylor & Francis Journals, vol. 48(49), pages 4699-4718, October.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:49:p:4699-4718
    DOI: 10.1080/00036846.2016.1164818
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    References listed on IDEAS

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    1. Zhaohui Hong & Ying Yan, 1997. "Trust and investment corporations in China," Working Papers (Old Series) 9706, Federal Reserve Bank of Cleveland.
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    Cited by:

    1. van Leuvensteijn, Michiel & Huljak, Ivan & de Bondt, Gabe, 2024. "A new measure of firm-level competition: an application to euro area banks," Working Paper Series 2925, European Central Bank.
    2. Xiangyi Zhou & Zheng Pei & Botao Qin, 2021. "Assessing Market Competition in the Chinese Banking Industry Based on a Conjectural Variation Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(2), pages 73-98, March.
    3. João Amador & Ana Cristina Soares, 2018. "Competition in the Portuguese economy: insights from a profit elasticity approach," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(2), pages 339-365, May.
    4. Gopalan, Sasidaran & Rajan, Ramkishen S., 2017. "Does foreign bank presence affect interest rate pass-through in emerging and developing economies?," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 373-392.
    5. Phoebe Tian, 2024. "The Role of Long-Term Contracting in Business Lending," Staff Working Papers 24-2, Bank of Canada.
    6. Ivan Huljak & Reiner Martin & Diego Moccero, 2021. "Bank productivity in CESEE countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/21, pages 83-104.
    7. Rongrong Sun, 2021. "Requiem for the interest rate controls in China," Pacific Economic Review, Wiley Blackwell, vol. 26(2), pages 139-160, May.
    8. Jiayi Du & Guangjun Shen & Jingxian Zou, 2023. "Tax incentives and firm financing structures: evidence from China’s accelerated depreciation policy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(5), pages 1346-1373, October.

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