This paper explores whether increasing market competition in China under its current market system enables improving Chinese bank efficiency levels similar to those in capitalist countries. Spatial inequality is considered in testing of bank efficiency. The empirical findings show that the Chinese government had to continually reform the banking industry in China to deal with foreign bank competition after China joined the WTO in 2001. Consequently, the cost and profit efficiency of the Chinese banking industry have progressed considerably. The extent of liberalization in a region enables cost reductions in finding foreign bank customers, thereby improving bank cost efficiency. The potential foreign customer sources generated by foreign investments and government expenditure in neighboring regions improve cost efficiency. The economic activities also generated by government fiscal expenditures improve bank profit efficiency. We further find that excessive competition caused by financial industry agglomeration generates a market crowding effect, reducing both cost efficiency and profit efficiency.
Journal of Quantitative Finance and Economics 2019 1(2), p.85-109