Economic Modelling 28 (2011) 2083–2089

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Economic Modelling
j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e c m o d

Technical efficiency in the Chinese banking sector

Carlos P. Barros a, Zhongfei Chen b, Qi Bin Liang c,⁎, Nicolas Peypoch c
a
Instituto Superior de Economia e Gestão, Technical University of Lisbon, Rua Miguel Lupi, 20,1249-068 Lisbon, Portugal
b
Wuhan University of Technology Economic School, JianLake Campus, Luoshi Road 122, Wuhan, Hubei Province, China
c
University of Perpignan Via Domitia, CAEPEM, IAE, 52 Avenue Paul Alduy, F-66860 Perpignan Cedex, France

a r t i c l e i n f o a b s t r a c t

Article history: This paper applies an innovative DEA (Data Envelopment Analysis) model, the Inverse B-convex model, in
Accepted 5 April 2011 order to investigate the technical efficiency of a representative sample of Chinese banks. The banks are ranked
according to their efficiency over the period 1998–2008. The results paint a mixed picture of the Chinese
JEL classification: banks' performance. The influence of firm size and ownership on bank efficiency is not observed. However,
G21
the study shows that overall efficiency improved over time, especially after the entry of China into the WTO.
D24
Policy implications are derived.
Keywords: © 2011 Elsevier B.V. All rights reserved.
China
Banks
B-convexity
Efficiency

1. Introduction
This paper explores the use of the Inverse B-convex model as an
instrument for assessing the technical efficiency of Chinese banks,
combining operational and financial data. There is some research on
the efficiency of Chinese banks with DEA models (Laurenceson and
Yong, 2008; Ariff and Can, 2008), with mixed results on their
efficiency. However, the assumption of convexity of the data is
questionable. In the line of operations research and analysis of
technical efficiency, several studies proposed to relax the convexity
assumptions; for example, the Free Disposal Hull model (Deprins et al.,
1984; Tulkens and Vanden Eeckaut, 1995) and the B-convex model
(Briec and Horvath, 2004, submitted for publication). The first is based
on an extremely weak extrapolation of the production technology and
is characterized by a zero or infinite marginal productivity. The main
drawback of this model is the high number of efficient firms from its
analysis. The second is built on the assumption that the least upper
bound of a pair of input vectors can produce the upper bound of the
outputs they can individually produce, and implies a cubic form of the
output set. From this point of view the technology involves a kind of
externality. The Inverse B-convex model is derived from the latter via a
specific isomorphism and involves the complementarity of inputs; it
seems more appropriate with respect to the B-convex model in the
banking industry. The advantage of this approach over alternative
models is twofold. First, it is not necessary to suppose the nature of
returns to scale for the technology. Second, this method allows us to
take into account the possible complementarity of inputs.
The motivations for the present research are the following: First,
by market capitalization, China has three of the four largest banks in
the world today (Economist, 2010), signifying the global importance
of Chinese banks and justifying the present research. Second, there is a
systematic conclusion of the research on efficiency, based on various
alternative methodologies, that Chinese banks are inefficient (Berger
et al., 2009). Reasons for this systematic result vary, but are usually
attributed to the management procedures adopted in the banks, in
which the government and the Communist Party are closely entwined
with the bank managers. This situation is appealing for state planners,
but is inefficient for individual banks (Economist, 2010). Finally,
adopting the innovative DEA model, the Inverse B-convex model, and
focusing on a contemporary period of analysis, 1998–2008, we
investigate the Chinese banks' efficiency. Therefore, this paper
innovates in the context and presents an updated and clear view of
the extent of efficiency of Chinese banks, complementing research in
this field.
The remainder of this paper is organized as follows. Section 2
presents the literature survey. Section 3 describes the contextual
setting. Section 4 presents the research hypotheses. Section 5 details
the methodology. Section 6 presents the data and the results. Section 7
discusses and concludes.
2. Literature review

⁎ Corresponding author.
There is some recent research on China banks' efficiency with
E-mail addresses: cbarros@iseg.utl.pt (C.P. Barros), qi-bin.liang@univ-perp.fr mixed and contradictory results (Berger et al., 2009). Chen et al.
(Q.B. Liang), peypoch@univ-perp.fr (N. Peypoch). (2005) compare the cost efficiency of the four largest banks and two

0264-9993/$ – see front matter © 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.econmod.2011.04.003
2084 C.P. Barros et al. / Economic Modelling 28 (2011) 2083–2089
Fig. 1. Inverse B-convex estimation.
smaller size classes for the period 1993–2000, concluding that the big
four and smaller joint-equity banks are all cost-efficient, relative to
medium-sized joint-equity banks. Furthermore, financial deregula-
tion in the mid-1990s had strong effects, on efficiency. Kumbhakar
and Wang (2005), with an input distance function, found that the big
four are less efficient than the joint-equity banks for the period 1993–
2002. Moreover, the deregulation had no significant effect in
efficiency improvement.
Fu and Heffernan (2007, 2009), for the period 1985–2002,
validated the Kumbhakar and Wang (2005) results, finding with a
cost frontier model that the X-efficiency of Chinese banks significantly
declined, concluding that the reform had little impact on the structure
of China's banking sector.
Laurenceson and Yong (2008), with a Data Envelopment Analysis
for 2005, 2006 and 2007, analyzed the efficiency of the 11 most
prominent banks 5 years after China's WTO entry, concluding that the
differences between levels are small.
Ariff and Can (2008) analyzed the cost and profit efficiency of 29
Chinese commercial banks from 1995 to 2004 with a two-stage DEA
model, using a Tobit model in the second stage, and concluding that
profit efficiency levels are well below cost efficiency and inefficiencies
are related to revenue. Furthermore, state-owned banks are less
efficient as joint-stock banks and medium-sized banks are signifi-
cantly more efficient than small and large banks.
Berger et al. (2009) analyzed the profit efficiency of Chinese banks
from 1994 to 2003 and concluded that the big four state banks are the
least efficient, while foreign banks are the most efficient and minority
foreign ownership is associated with significant improved efficiency,
concluding that minority foreign ownership will likely improve
efficiency.
Lin and Zhang (2009) analyzed with regression models the
performance of Chinese banks from 1997 to 2004, concluding that
the big four state banks are less profitable and less efficient and have
worse asset quality than other types of banks.
Jia (2009), analyzing the relationship between bank ownership
and performance with regression models, concludes that lending by
state-owned banks has been less prudent than lending by joint-equity
banks.
Jiang et al. (2009) analyze Chinese bank technical efficiency from
1995 to 2005 with a stochastic distance function, concluding that the
bank efficiency has improved and joint-stock ownership is associated
with better performance in terms of profitability than state ownership.
Thus mixed findings emerge from this research with state-owned
banks less efficient than joint-stock or foreign banks, but more recently
the results improve (Jiang et al., 2009), which justifies the present
research, which aims to investigate if this improvement is consistent
with alternative methodologies, since the inefficient results are
consistent along several periods and with alternative methodologies.
3. Contextual setting
In 1948, the People's Bank of China (PBC),1 which is now the Central
Bank of China, was established and functioned as a central bank as well
as a commercial bank. In other words, it was characterized as a mono-
bank (Alicia García-Herrero et al., 2006). During the period from 1979 to
1984, the authorities decided to reestablish or establish four Specialized
Banks (SBs), i.e. the Agricultural Bank of China (ABC), the Bank Of China
(BOC), the China Construction Bank (CCB)2 and the Industrial and
Commercial Bank of China (ICBC). All the aforementioned banks were
separated from the PBC (except for the CCB from the Ministry of
Finance) and operated respectively in the agricultural area, the foreign
exchange area, the fixed-asset investment area and the industrial and
commercial areas. However, they were not totally profit-orientated, also
having to conduct policy-related business, and always hampered by
government intervention. As a result, non-performing loans arose and
accumulated in the following years.
When the reform is favorable of the market economy it began to be
deepened and advanced, and the government started to take
comprehensive measures to improve the banking system of China.
In 1994, the government founded three policy banks3 to take over the
policy-related business from the four SBs, in order to transform the
latter into commercial banks, which are characterized by market-
functioning and profitable institutions (Alicia García-Herrero et al.,
2009). In addition, from 1986, the authorities successively approved
the opening of a number of joint-equity commercial banks, including
the national joint-equity commercial banks and the regional com-
mercial banks,4 in order to decrease the monopoly power of the four
Wholly Stated-Owned Banks (WSOBs) in the financial market. The
four WSOBs were castigated by the outside world for their high non-
performing loan ratio and having already gone technically bankrupt
after the Asian, financial crisis (John Whalley, 2003). Therefore, the
government carried special treasury to the value of out a package of
measures to deal with the threatening situation, including issuing
270 billion Yuan, drastically reducing top-heavy employment and
closing branches, reducing the tax burden and establishing four asset
management companies (AMC) to strip off a large sum of bad loans
from four WSOBs (Bonin and Huang, 2001).
China entered the World Trade Organization (WTO) in 2001.
According to the agreement, its financial sector would fully open up to
the world 5 years later (i.e. 2006), when all foreign banks were to be
treated on an equal basis with domestic banks and allowed to conduct
RMB business. At this point, the government was very eager to
enhance the efficiency and competitiveness of domestic commercial
banks, especially the four WSOBs. It launched the third wave of reform
in three stages: (i) it continued to replenish the capital funds of the
WSOBs5; (ii) it transformed the four WOBs into standard joint-equity
companies in accordance with the requirements of establishing a
modern corporate system, and accepted the most notable foreign
commercial banks as strategic investors to ameliorate the internal
governance of the WSOBs (Richard Podpiera, 2006); and (iii) it
launched the IPO on the stock market as a public company (see
Tables 1 and 2).
1
The PBC was not separated from the Ministry of Finance of China until 1978.
2
The Bank Of China was originally set up in 1905, the Agricultural Bank of China in
1951 and the China Construction Bank in 1954.
3
i.e. the China Development Bank, the Export–import Bank of China and the
Agricultural Development Bank of China.
4
According to the statistics from the China Banking Regulatory Commission (CBRC),
there were 5 state-owned commercial banks, 12 joint-equity commercial banks and
109 city commercial banks by 2009.
5
Since 2004 the government has established an investment company (i.e. the
Central Huijin Investment Ltd.) to utilize the exchange reserve to raise the banks'
capital adequacy ratio. Additionally, it has injected 80 billion dollars or so into the BOC,
the CCB, the ICBC, the ABC and the China Everbright Bank (CEB) by 2009.
 C.P. Barros et al. / Economic Modelling 28 (2011) 2083–2089 2085

Table 1
The 17 national commercial banks of China.
Sources: The financial report of the commercial banks; the Almanac of China's Finance and Banking (the People's Bank of China, the China Society for Financing and Banking).

The state-holding commercial banks The national joint-equity commercial banks

ABC BOC CCB ICBC BC CMB MSB SPD CITIC CEB HXB IB SZD GDD HF BH ZS

The year established 1951 1905 1954 1984 1908 1987 1996 1993 1987 1992 1992 1988 1987 1988 1987 2005 2004
Listed company No Yes Yes Yes Yes Yes Yes Yes Yes No Yes Yes Yes No No No No
The date of listing N.A. 2006 2005 2006 2005 2002 2000 1999 2007 N.A. 2003 2007 1991 N.A. N.A. N.A. N.A.
Foreign No Yes+ Yes+ Yes− Yes+ No No Yes+ Yes+ Yes− Yes+ Yes+ Yes− Yes+ Yes+ Yes+ No
The participation date N.A. 2005 2005 2006 2004 N.A. N.A. 2003 2006 1992 2005 2004 2004 2006 2008 2005 N.A.

Specification: ABC, Agriculture Bank of China; BOC, Bank Of China; CCB, China Construction Bank; ICBC, Industrial and Commercial Bank of China; BC, Bank of Communication; CMB,
China Merchants Bank; MSB, China Minsheng Bank; SPD, Shanghai Pudong Development bank; CITIC, China CITIC Bank; CEB, China Everbright Bank; HXB, Hua Xia Bank; IB, Industrial
Bank; SZD, ShenZheng Development bank; GDD, GuangDong Development bank; HF, Evergrowing Bank; BH, China BoHai bank; and ZS, China Zheshang Bank.
Yes+, the strategic investor is a commercial bank; Yes−, the strategic investor is not a commercial bank.

Having undergone three waves of reforms, the banking system of
China seems to be more market-orientated and liberalized. However,
its contestability is not very high, the four state-holding commercial
banks still dominate the market, while the joint-equity banks have
only acquired a small portion of market share. Furthermore, re-
searchers argue that the former only have the advantage in scale and
size with respect to the latter (see Table 3), while the latter are more
streamlined and flexible than the former (Fu and Heffernan, 2009).
Therefore, the optimum scale or size of commercial banks within
China should be tested and studied deliberately. Although the reform
brought diversification to the WSOBs' equity through the financial
restructuring, the first majority shareholder or the state shareholder
still possesses a large proportion of the share (See Table 2), the same
as when they were called “the state-holding commercial banks”.
Furthermore whether this ownership structure is suitable for
enhancing the efficiency of the WSOBs is still in doubt. Lastly, after
these reforms the domestic commercial banks have tended to be
increasingly homogenous in the aspects of financial products and
service, which have led the market to be distorted and the social
welfare to be in deficit (Alicia García-Herrero et al., 2006). Therefore
reform in the future needs to be considered and developed in order to
reduce any possible negative effects.
At present, the commercial banks in China can be divided into five
groups: the state-holding commercial banks, the national joint-equity
commercial banks, the city commercial banks, the rural commercial
banks and the foreign commercial banks. The reform of the first two
groups has always been given priority. Moreover, the city commercial
banks and the rural commercial banks basically evolved from the local
Credit Cooperatives, and their assets and liabilities (combined with
those of the foreign commercial banks) account for a rather small
proportion of the total amount in all of China's financial institutions.
Therefore, in our research, we have opted to study the banks in the
first two groups, i.e. 17 commercial banks, and for the longest relevant
period: 1998–2008.
4. Research hypotheses
We aim here to test the relationship between bank technical
efficiency and the following covariates: group membership, bank size
and time. More justification about the selection of each of these
covariates is provided in the following subsections.
4.1. Group ownership
In line with the impact of size, group membership might also
impact efficiency by contributing to the transfer of knowledge and
economies of scale between groups firms. Chu (2004), for example,
tested this hypothesis on a sample of Taiwanese firms and reached the
conclusion that group affiliation can be beneficial, though the success
might be dependent on the size of the group. Other studies have also
linked the success of a group affiliation to the type of the market,
where firms with group affiliation tend to outperform non-group
affiliated firms in competing markets, since it becomes harder to
obtain recourses and gain new market shares (Khanna and Palepu,
2000; Ghemawat and Khanna, 1998). From here, and as in China,
banks face a highly competitive and saturated industry, it might thus
be more profitable form them to join a group, since they can benefit
from the sharing of resources and reputation to make up for the
external market failures (Khanna and Palepu, 2000). We then assume
H1: Group ownership has a positive influence on the efficiency of
China banks.

Table 2
Proportion of shares held by the first majority shareholder.
Sources: The financial reports of the commercial banks; the Almanac of China's Finance and Banking (the People's Bank of China, the China Society for Financing and Banking).

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

The state-holding commercial banks ABC 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
BOC 100.00% 10.00% 100.00% 100.00% 100.00% 100.00% 100.00% 83.15% 67.49% 67.49% 67.52%
CCB 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 85.23% 70.69% 61.49% 59.12% 48.22%
ICBC 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 35.30% 35.30% 35.40%
BC N.A. N.A. N.A. N.A. N.A. N.A. N.A. 21.78% 21.78% 22.02% 26.48%
The national joint-stock commercial banks CMB N.A. N.A. N.A. N.A. 17.95% 17.95% 17.95% 17.78% 17.79% 17.88% 17.78%
MSB N.A. N.A. 7.97% 7.98% 7.98% 7.40% 6.98% 5.99% 5.98% 5.90% 5.90%
SPD N.A. 8.26% 8.26% 8.26% 8.26% 6.44% 7.01% 7.01% 23.57% 23.57% 23.57%
CITIC 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 62.33% 62.33%
CEB 24.16% 24.16% 24.16% 24.16% 24.16% 24.16% 24.16% 24.16% 24.16% 70.88% 70.88%
HXB N.A. N.A. N.A. N.A. N.A. 14.29% 14.29% 14.29% 10.19% 10.19% 13.98%
IB N.A. N.A. N.A. N.A. 34.00% 34.00% 25.51% 25.51% 20.40% 20.40% 20.80%
SZD 10.45% 10.45% 8.96% 8.96% 7.08% 7.08% 17.89% 17.89% 17.89% 16.70% 16.76%
GDD N.A. N.A. N.A. N.A. N.A. N.A. N.A. 9.74% 20.00% 20.00% 20.00%
HF N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. 6.50% 16.54%
BH N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. 25.00% 25.00% 25.00%
ZS N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. 10.34% 10.34% 14.29%
2086 C.P. Barros et al. / Economic Modelling 28 (2011) 2083–2089

 
Table 3 Now, let us denote K = Rm n
þ × −Rþ . There are some assumptions
The share of assets and liabilities of different financial institutions in China (2008). that can be made on the production technology (Shephard, 1970).
Source: The China Banking Regulatory Commission.
T1: T is a closed set.
No. Assets (100 Proportion Liabilities (100 Proportion
million Yuan) (%) million Yuan) (%) T2: T is a bounded set, i;e for any z ∈ T, (z − K) ∩ T is bounded.
T3: T is strongly disposable, i.e. T = ðT + K Þ ∩ Rdþ .
State-owned 5 318,358.0 51.0% 298,783.6 51.0%
commercial banks T1–T3 defines a technology with freely disposable inputs and outputs.
National 12 88,130.6 14.1% 83,683.9 14.3%
joint-equity
commercial 5.1. Inverse B-convex concept
banks
City commercial 109 41,319.7 6.6% 38,650.9 6.6% We now present the Inverse B-convexity concept. Complete details
banks are given in Briec and Horvath (2004) and Briec and Liang (submitted for
Other financial 176,104.7 28.2% 164,897.2 28.1%
publication). The Inverse B-convex sets are derived from B-convex sets
institutions
via a suitable isomorphism. One can loosely say that Inverse B-convexity is
obtained from usual convexity, making the formal substitution +↦min.
Semilattice plays a crucial role in this context. A subset L ⊂ Rd is said to be a
4.2. Firm size
lower-semilattice if ∀z, t ∈ L then z∧t ∈ L, where:
It is often argued that large firms could be more efficient, because z∧t = ðminfz1 ; t1 g; …; minfzd ; td gÞ:
they could use more specialized inputs, coordinate their resources
better, and reap the advantages of economies of scale (Alvarez and Let us consider z1 ; z2 ; …; zl ∈ Rd . In the remainder of the paper we
Crespi, 2003). With our present context, firm size might also take an denote:
additional importance, since the current China banking is character-

∧z =
ized by distinct market values. These big banks might thus be more l  n o n o
k 1 l 1 l
profitable if they increase their size, in order to achieve economies of min z1 ; …; z1 ; …; min zd ; …; zd :
k=1
scale and make up for the external market failures (Khanna and
Palepu, 2000; Ghemawat and Khanna, 1998).
A new type of semilattice technologies is introduced where the
As related studies in the banking also indicated that firm size
connectedness assumption is important because it allows the
contributes to higher efficiency (Altunbas et al., 1997; Berger and
possibility of transforming a production technique continuously.
Humphrey, 1991; Alvarez and Arias, 2003), we then assume H2: Firm
Since a semilattice is generally notpath-connected,
 Inverse B-convex
size has a positive impact on the efficiency of China banks.
sets are path-connected. Let A = z1 ; …; zl ⊂ Rdþ then the set:
8 9
4.3. Efficiency and time > >

The needs to improve cost efficiency through economies of scales

−1
B ð AÞ =
< l
>
: k = 1
∧ k
ρk z ; min fρk g = 1
k = 1…l
=
>
;
ð5:4Þ

and scope, or to increase revenues through gaining additional market

shares, are usually the main drivers for most companies acting in is called the Inverse B-convex set hull of A.
competitive markets. This activity usually results in a selection with
efficiency to increase along the time, Jovanovic (1982) resulting in 5.2. Inverse B-convex estimation of the production technology
more competitive organizations. Above we highlighted that time is an
important driver of efficiency through selection of best practices and We now introduce the Inverse B-convex nonparametric estima-
based on it here we assume H3: Time has a positive influence on the tion of a production set given a data set A.
 
efficiency of China banks. Let A = z1; …; zl ⊂ Rd++ a set of l observed production vectors.
Let K = Rm n
þ × −Rþ .
5. Methodology  
−1 d
Tmin = B ð AÞ + K ∩ Rþ ð5:5Þ
We first define the notations used in this paper. Let Rdþ
be the non
negative Euclidean d-orthant; for z; w ∈ Rdþ we denote z ≤ w ⇔ zi ≤ wi is called Inverse B-convex estimation of the production technology.
∀ i ∈ {1, …, d}. Now let m; n ∈ N be two positive natural numbers such Note that in equivalent form, we can write:
that d = m + n. A production technology transforms inputs x = (x1, …, 8 9
xm) into outputs y= (y1, …, yn). The set T ⊂ Rm
∧
+n
> l
>
∧
þ of all input–output < l
k =
vectors that are feasible is called the production set. Namely, it is defined d
Tmin = z = ðx; yÞ∈Rþ : x≥
k
ρk x ; y≤ ρk y ; min fρk g = 1 :
>
: k=1 k=1 k = 1…l >
;
as follows:
n o ð5:6Þ
m+n
T = z = ðx; yÞ ∈ Rþ : x can produce y : ð5:1Þ
Where mink = 1…l{ρk} = 1 characterizes the variable returns to
scale assumption (VRS). By dropping the above constraint we can
T can also be characterized by an input correspondence L : y → L(y)
define the Inverse B-convex estimation of the production technology
and an output correspondence P : x → P(x), where:
under a constant returns to scale assumption. The following result
  states that the
m
Lð yÞ = x ∈ Rþ : z = ðx; yÞ∈ T ð5:2Þ  basic properties of the above estimation.
Let A = z1 ; …; zl ⊂Rd++ be a set of l observed production vectors
and Tmin be the Inverse B-convex estimation of the production
is the set of all input vectors that yield at least y and:
technology. Then:
 n 
P ðxÞ = y ∈ Rþ : z = ðx; yÞ∈ T ð5:3Þ a) Tmin is a closed set.
b) Tmin is a B− 1-convex set.
is the set of all the output vectors obtainable from x. c) Tmin is a minimum-semilattice, i.e. ∀ z, w ∈ Tmin, z ∧ w ∈ Tmin.
 C.P. Barros et al. / Economic Modelling 28 (2011) 2083–2089 2087

We now present the properties of input and output sets for Inverse Table 4
B-convex nonparametric technology. Let T be an Inverse B-convex Characteristics of inputs and outputs, 1998–2008.

production technology satisfying T1–T3. The input set L(y) and the Variables Minimum Maximum Mean Stand. dev.
output set P(x) of the technology are Inverse B-convex. Let
  Output
A = z1 ; …; zl ⊂Rd++ be a set of l observed production vectors and Loans 3190 4,289,955 704,751 952,803
TFDH be the FDH estimation of the production technology. Then: Securities 2112 3,252,902 330,599 106,299

a) The input correspondence of the FDH technology LFDH(y) is Inputs

B-convex. Number of employees 226 567,230 96,117 369,353
b) The output correspondence of the FDH technology PFDH(x) is Deposits 5614 8,077,732 1,041,331 915,559
Total assets 7629 9,581,795 1,298,970 2,007,213
Inverse B-convex.
The Inverse B-convex estimation has a comprehensive economic
meaning. In short, if a producer uses a smaller input quantity then he is Banks are assumed to produce two outputs: (i) loans, and
able to produce a smaller output quantity. If two input bundles are (ii) securities.6 Three inputs are used to produce bank output:
feasible, then the minimum they produce is also feasible. This condition (iii) number of employees, (iv) deposits, and (v) total assets. The
is also stronger than the free disposal assumption. The following figure descriptive statistics are shown in Table 4.
proposes an illustration of the Inverse B-convex technology Fig. 1. The Farrell measure of the Inverse B-convex technology VRS are
The path connecting z3 and z1, is obtained as follows. For ρ3 = 1 we presented in the next two tables.
have ρ1 ≥ 1, then ρ3 z3 ∧ ρ1 z1 = z3. Since z1 is above the line generated Table 5 shows mixed results. A score equal to one indicates that the
by z3, for ρ1 = 1 we have ρ3 ≥ 1 then ρ3z3 ∧ ρ1 z1 = ρ3z3 if ρ3x3 ≤ x1, corresponding bank is technically efficient at 100%, whereas a score
ρ3z3 ∧ ρ1z1 = (x1, ρ3y3) if ρ3x3 ≥ x1 and ρ3y3 ≤ y1, and ρ3z3 ∧ ρ1z1 = z1 if less than or equal to one indicates that the bank is inefficient. Along
ρ3y3 ≥ y1. The other piecewise of the boundary is similarly obtained. this line, it can be stated that only the China BoHai bank (BH) is
Further explanation concerning the production frontier can be found efficient each year of the time period considered. On average, the Bank
in Briec and Liang (submitted for publication). Of China (BOC) is less efficient compared to the other banks of the
We can see that the returns to scale are locally decreasing between sample under the period analyzed; BOC could be reduces its inputs by
points z1 and z2 and locally increasing between points z3 and z1. 4.79% without changing its outputs level in order to reach the efficient
The above model offers additional choice on the nature of the production frontier.
structure analysis technology. Compared to the DEA model, which Table 6 presents the efficiency scores in an output orientation. The
postulates a priori a returns to scale assumption of the technology results are also mixed. A score equal to one indicates that the
which may be variable, the Inverse B-convex model does not define corresponding bank is technically efficient at 100%, whereas a score
the nature of returns to scale (increasing, decreasing, non-increasing greater than or equal to one indicates that the bank is inefficient. We
etc.). Moreover, its structure implies the complementarity in terms of can see that the results provided by the output orientation of the
inputs and includes the FDH model as a borderline case. model are different to the input orientation (Table 5). Indeed, we now
have 2 banks which are technically efficient each year of the time
5.3. Measurement of technical efficiency of Inverse B-convex period analyzed: Industrial and Commercial Bank of China (ICBC) and
nonparametric technologies China BoHai bank (BH). Moreover, the most inefficient bank on
average is now Hua Xia Bank (HXB) with a score equal to 1.0758. HXB
The expression for calculating the Farrell measure over an Inverse B- could increase its outputs by 7.58% without changing its input level.
convex set nonparametric technology under a variable returns to scale It is also interesting to note that the traditional relations between the
assumption is given as follows: efficiency scores in input and output orientations in the DEA models are
not respected when the Inverse B-convexity model is used. More
 
Let A = z1 ; …; zl ⊂Rd+ + . Assume that ∀ k = 1…l, xk ≠ 0. Let us(con-
)
precisely, Tables 5 and 6 show that a bank which is technically efficient
  yk in input orientation is not always efficient in the output orientation. It is,
sider Tmin = B−1 ð AÞ + K ∩Rdþ . Moreover denote βkk = minj = 1…n j .
yjk for example, the case of Bank Of China (BOC) in 1998.
Tables 5 and 6 reveal that the results of testing hypotheses H1, H2
and H3 are mixed, in fact, based on the input score in Table 5, it can be
The input distance function is:
verified that the most efficient bank is a joint-stock bank, BH, followed
8 9 by another joint-stock bank, SPD, but the third most efficient bank is a
 < =
i k k xki public bank, IBC and the second-best public bank ranks in seventh
DTmin x ;y = max min n o : ð5:7Þ
i = 1…m k :xk min βk ; 1 ; position out of seventeen. The least efficient bank is a public bank,
i k
BOC, ranked in the last (seventeen) position. However, the other bad
positions from fourteen to sixteen are occupied by joint-stock banks.
Therefore, no clear conclusion can be derived relative to bank
The output distance function is: ownership and therefore we are unable to accept hypothesis 1,
because neither the public banks nor the joint-stock banks display a
8 9
> 8 9 > group efficiency dynamics. Relative to size, the bigger Chinese banks
 >
< <xk βk = >
=
o k k i k k are the public banks (ABC, BOC, CCB, ICBC and BC) and they present
DTmin x ; y = min min max ; max βk : ð5:8Þ
>
>i = 1…m k : xk ; k >
> mixed results, therefore we are unable to accept also hypothesis 2.
: i ;
k
xi ≤xi
k
Therefore economies of scale related to distinct market values are not
translating in efficiency performance. Finally, efficiency increases
along the period allowing the acceptation of hypothesis 3.
6. Data and results

The financial statements of Chinese banks are sourced from their 6

Our choice of bank output is consistent with the established literature. This is
websites (from 1998 to 2008) and the Almanac of China's Financial important because the definition and measurement of output could significantly affect
and Banking (from 2000 to 2008), yielding 153 observations. the level of bank efficiency (Berger and Humphrey, 1997).
2088 C.P. Barros et al. / Economic Modelling 28 (2011) 2083–2089

Table 5
Table input score.

Bank 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Mean

ABC 0.9404 1 1 1 1 1 0.999 1 1 1 0.9982 0.9943

BOC 0.8504 0.9001 0.8615 0.979 0.9985 1 1 1 1 0.9251 0.9588 0.9521
CCB 1 0.9181 0.9242 1 1 0.946 1 1 1 1 1 0.9808
ICBC 1 1 1 1 1 1 1 0.9806 1 1 1 0.9982
BC 1 1 1 1 1 1 0.9918 0.9558 0.9301 0.9799 0.8985 0.9778
CMB 0.8396 0.9237 0.8321 1 1 1 0.9797 1 1 0.9906 0.9912 0.9597
MSB 1 1 1 1 1 1 1 1 0.9487 1 1 0.9953
SPD 1 0.9848 1 1 1 1 1 1 1 1 1 0.9986
CITIC 1 1 0.9939 0.8823 1 1 0.9973 1 1 1 0.9372 0.9828
CEB 0.9067 0.9547 1 0.9351 1 1 1 1 0.9887 0.9677 0.9675 0.9746
HXB 0.9089 0.9383 0.8847 0.8843 0.9953 1 0.9796 1 1 1 1 0.9628
IB 0.9737 0.9953 1 1 1 0.9976 0.9896 1 1 1 1 0.9960
SZD 1 0.9799 0.9639 1 1 1 1 1 1 1 1 0.9949
GDD 0.9909 0.9926 0.8531 0.8883 1 0.9416 1 0.9626 0.9835 0.9888 1 0.9637
HF 1 1 1 1 0.9557 1 0.9457 1 1 1 1 0.9910
BH 1 1 1 1 1 1 1 1 1 1 1 1
ZS 1 0.9382 0.9382 1 1 1 1 1 1 1 1 0.9888

Table 6
Table output score.

Bank 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Mean

ABC 1.0634 1 1 1 1 1 1.001 1 1 1 1.0018 1.0060

BOC 1 1 1.1608 1.0214 1.0015 1 1 1 1 1.081 1.043 1.0280
CCB 1 1 1.082 1 1 1.0571 1 1 1 1 1 1.0126
ICBC 1 1 1 1 1 1 1 1 1 1 1 1
BC 1 1 1 1 1 1 1.0082 1.0463 1.0751 1.0205 1.113 1.0239
CMB 1.1911 1.0825 1.2018 1 1 1 1.0207 1 1 1.0095 1.0088 1.0468
MSB 1 1 1 1 1 1 1 1 1.0541 1 1 1.0049
SPD 1 1.0154 1 1 1 1 1 1 1 1 1 1.0014
CITIC 1 1 1.0061 1.1334 1 1 1.0027 1 1 1 1.067 1.0190
CEB 1.1029 1.0475 1 1.0694 1 1 1 1 1.0115 1.0334 1.0336 1.0271
HXB 1.4125 1.0657 1.1304 1.1991 1.0047 1 1.0208 1 1 1 1 1.0758
IB 1.027 1.0047 1 1 1 1.0024 1.0105 1 1 1 1 1.0041
SZD 1 1.0205 1.0374 1 1 1 1 1 1 1 1 1.0053
GDD 1.0092 1.0075 1.1722 1.1258 1 1.0621 1 1.0389 1.0168 1.0114 1 1.0403
HF 1 1 1 1 1.0464 1 1.0574 1 1 1 1 1.0094
BH 1 1 1 1 1 1 1 1 1 1 1 1
ZS 1 1.0659 1.0659 1 1 1 1 1 1 1 1 1.0120

Furthermore, the relative inefficiency is low and comparable with References

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7. Discussion and conclusion
The policy implication of the present research is that Chinese
banks' efficiency varies along the period, with a clear change observed
after 2001, but later efficiency tends to decrease for all banks with the
exception of BH. Thus competition is observed to be beneficial for
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