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| Structural Total Factor Productivity Growth in China's Banking Sector |
| ZHU Ning, LIU Weiqi, YU Zhiqian, WANG Bing
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School of Economics and Finance, South China University of Technology;
School of Economics and Statistics, Guangzhou University;
School of Economics, Jinan University |
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Abstract To effectively promote the high-quality economic development of China's financial sector, the new direction of China's financial reform must include financial structural reform. Indirect financing is the typical financing mode of China's banking system, and thus the banking sector has a key role in financial structural reform in China. In this context, total factor productivity (TFP) is a crucial index for evaluating the performance of financial structural reforms and their ability to generate high-quality economic growth. Therefore, as financial structural reform of China's banking sector is deepening, a method is required to scientifically evaluate and explore the source of the sector's structural TFP growth.
Previous studies typically evaluate TFP growth and decomposition based on technical efficiency. However, technical efficiency examines only the efficiency of individual firms and does not examine the efficiency of an overall sector (or industry). Moreover, the lack of a structural effect may mean that examination of the decomposition of TFP growth could lead to important information on the source of TFP growth being missed. This could include information on structural efficiency change, which involves the improvement of resource reallocation efficiency among individual firms, and information on institutional innovative change, which involves the improvement of the environment of overall banking system. Thus, policy suggestions developed without consideration of the above information could be inappropriate.
To address the above-described research gap, this paper constructs an aggregate Luenberger productivity indicator based on industrial and individual levels of productivity to effectively evaluate and explore the source of structural TFP growth in various banks in China and across China's entire banking sector. First, based on the assumption of variable returns to scale, this paper uses all of the production possibility sets of individual banks to construct an aggregate structural TFP growth model and decomposes this model into overall efficiency change and overall technological change. Overall efficiency change is then decomposed into aggregate technical efficiency change and structural efficiency change, and structural efficiency change is further decomposed into scope efficiency change and scale efficiency change. Additionally, overall technological change is decomposed into aggregate technological change and institutional innovation change.
This paper samples data from 2012 to 2018 from 62 Chinese commercial banks and selects input and output variables according to a profit-oriented approach to evaluate structural TFP growth. To ensure that a reasonable structural TFP growth model is obtained, a direction vector is set using data from 2012 as the base period. This shows that China's banking sector has good structural TFP growth during the study period, with the average annual growth rate being 1.24%. Overall technological progress is found to be the main driver of structural TFP growth, whereas the overall efficiency change has a somewhat negative effect on structural TFP growth. The decompositions of overall technological change and overall efficiency change clearly show that institutional innovation change and aggregate technological progress promote the structural TFP growth of China's banking sector. In addition, all of the components make limited contributions to overall efficiency change. Similar to the findings regarding the effects on China's entire banking sector, it is found that three types of banks perform well: state-owned banks, joint stock banks and local banks. Overall technological change is the main driver of the structural TFP growth of various types of banks, whereas overall efficiency changes have negative effects on structural TFP growth. Furthermore, institutional innovation changes make significant contributions to the structural TFP growth of various types of banks, particularly to that of joint stock banks. Thus, aggregate technological changes have positive effects on the structural TFP growth of joint stock and local banks. In addition, large state-owned banks outperform joint stock and local banks in terms of scope efficiency change and scale efficiency change.
This paper makes the following policy suggestions for financial structural reform based on the results above, which may promote high-quality economic development of China's banking sector. (1) It is imperative that financial structural reform is accelerated, given the current shortcomings in scope efficiency change and scale efficiency change. (2) The strengthening of risk management in China's banking sector must be urgently addressed, as non-performing loans lead to negative technical efficiency change. (3) Full use should be made of financial technology to optimize the structure of banking products, as technological progress is the main driver of the development of China's banking sector. (4) Further improvements must be made to the financial environment and infrastructure, and institutional guarantees and support must be provided to financial services in the real economy because institutional innovation improvement is essential for structural TFP growth.
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Received: 27 September 2020
Published: 02 August 2021
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