Empirical Essays on China's Financial Markets

  • Sheng Huang

Abstract

This thesis thoroughly examines productive efficiency, productivity change and liquidity risk transmission in China’s financial sector. The thesis covers a major period of development in China that witnesses processes of marketization, privatisation and financial liberalisation from 1993 to 2013~2014. Three investigative chapters are empirical in nature. Chapter 2 employs risk-adjusted stochastic cost and profit frontiers to estimate bank productive efficiency, which is a broader concept of efficiency that includes X-efficiency, economies of scale, and economies of scope. The chapter analyses the variation of these constituents at Chinese banks by bank size and ownership type. It addresses the question “does size matter” by estimating the relationship between productive efficiency constituents and bank stability components. The chapter records an improvement in each constituent of productive efficiency by Chinese banks between 2003 and 2013. Despite this good outcome, the relationships with bank stability are less clear-cut. Whilst the results show X-efficiency is positively associated with bank returns on assets (ROA), the relationship between X-efficiency and bank profit variation is inverse. This implies that those banks that lose less potential profit to inefficiencies hold higher levels of profit volatility, and this offsets the effect on ROA, which produces an inverse relationship between Xefficiency and bank stability. The same pattern of relationships exists for economies of scope and bank stability, whereas economies of scale place a positive effect on bank stability. A liberalised and deregulated market intensifies competition among banks. Sufficient bank capital and stabilised revenue are a prerequisite to bank stability at banks in all sizes. Banks are exposed in risk if pursuing cost minimisation with inadequate capital and volatile returns. Increasing returns to scale show assistance to accumulate capital and prevent profit fluctuations at Chinese banks. But can it last? Chapter three first time evidences the impact of foreign strategic investment on bank productivity change using a risk-adjusted cost frontier. The analytical work proves that the productivity of Chinese banks grew by 14% per annum from 1993 to 2013, and this growth is mainly contributed by size effect. It also reveals that bank technical change is driven by pure technical change rather than output augmenting and nonneutral technical change. A natural experiment proves the positive effects of the welldefined cooperation framework between foreign strategic investors and domestic banks. A greater productivity growth rate presents at banks that received foreign strategic investment after the deregulation on foreign shareholdings taking place in 2003. Thus, the well-defined strategic cooperation framework between overseas investors and domestic banks should be more encouraged in China. The third investigative study (chapter four) employs three liquidity indicators to identify commonality in liquidity between financial institutions and real estate firms in China. The three liquidity indicators cover the impact of market capacity, transaction cost and informational efficiency on market liquidity. The study uncovers a bi-directional loop in liquidity between financial institutions and real estate firms with the interaction becoming stronger between banks and real estate firms and in turbulent periods. The overheated real estate market places pressure on affordability of Chinese residents and heightens potential credit risks for financial institutions. Strong and frequent liquidity co-movement between the two sectors shows greater probabilities to incur systematic liquidity risks. Hence monitoring such liquidity interplay between financial institutions and real estate firms may prevent liquidity risk transmission in the future.

Details

Iaith wreiddiolSaesneg
Sefydliad dyfarnu
Goruchwylydd / Goruchwylwyr / Cynghorydd
Dyddiad dyfarnuIon 2017