Empirical Essays on China's Financial Markets

Download or read book Empirical Essays on China's Financial Markets written by Sherena Sheng Huang and published by . This book was released on 2017 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis thoroughly examines productive efficiency, productivity change andliquidity risk transmission in China's financial sector. The thesis covers a major periodof development in China that witnesses processes of marketization, privatisation andfinancial liberalisation from 1993 to 2013~2014. Three investigative chapters areempirical in nature. Chapter 2 employs risk-adjusted stochastic cost and profitfrontiers to estimate bank productive efficiency, which is a broader concept ofefficiency that includes X-efficiency, economies of scale, and economies of scope. Thechapter analyses the variation of these constituents at Chinese banks by bank size andownership type. It addresses the question "does size matter" by estimating therelationship between productive efficiency constituents and bank stabilitycomponents. The chapter records an improvement in each constituent of productiveefficiency by Chinese banks between 2003 and 2013. Despite this good outcome, therelationships with bank stability are less clear-cut. Whilst the results show X-efficiencyis positively associated with bank returns on assets (ROA), the relationship betweenX-efficiency and bank profit variation is inverse. This implies that those banks thatlose less potential profit to inefficiencies hold higher levels of profit volatility, and thisoffsets the effect on ROA, which produces an inverse relationship between Xefficiencyand bank stability. The same pattern of relationships exists for economies ofscope and bank stability, whereas economies of scale place a positive effect on bankstability. A liberalised and deregulated market intensifies competition among banks.Sufficient bank capital and stabilised revenue are a prerequisite to bank stability atbanks in all sizes. Banks are exposed in risk if pursuing cost minimisation withinadequate capital and volatile returns. Increasing returns to scale show assistance toaccumulate capital and prevent profit fluctuations at Chinese banks. But can it last?Chapter three first time evidences the impact of foreign strategic investment on bankproductivity change using a risk-adjusted cost frontier. The analytical work provesthat the productivity of Chinese banks grew by 14% per annum from 1993 to 2013, andthis growth is mainly contributed by size effect. It also reveals that bank technicalchange is driven by pure technical change rather than output augmenting and nonneutraltechnical change. A natural experiment proves the positive effects of the welldefinedcooperation framework between foreign strategic investors and domesticbanks. A greater productivity growth rate presents at banks that received foreignstrategic investment after the deregulation on foreign shareholdings taking place in2003. Thus, the well-defined strategic cooperation framework between overseasinvestors and domestic banks should be more encouraged in China. The thirdinvestigative study (chapter four) employs three liquidity indicators to identifycommonality in liquidity between financial institutions and real estate firms in China.The three liquidity indicators cover the impact of market capacity, transaction costand informational efficiency on market liquidity. The study uncovers a bi-directionalloop in liquidity between financial institutions and real estate firms with theinteraction becoming stronger between banks and real estate firms and in turbulentperiods. The overheated real estate market places pressure on affordability of Chineseresidents and heightens potential credit risks for financial institutions. Strong andfrequent liquidity co-movement between the two sectors shows greater probabilitiesto incur systematic liquidity risks. Hence monitoring such liquidity interplay betweenfinancial institutions and real estate firms may prevent liquidity risk transmission inthe future.