The Market Competition, Law Enforcement, and Banking System’s Efficiency in China

In economic literature, the benefit of competition is well recognized, for example, it could reduce monopoly rents and cost inefficiencies, and finally improve the welfare of the economy. In the case of banking system, the market competition in banking sector could improve efficiency of the banking system as a whole, and promote economic growth as a result. However, the effect of competition on banking system’s efficiency hinges on some environmental factors, such as the efficiency of law enforcement. In this paper, we measure the level and evolution of bank system’s competition between 1996 and 2009. Making use of the micro data of Chinese commercial banks from 1996 to 2009, we choose the RP method to measure the competition level of China’s banking system. Then we study the relationship between market competition, law enforcement and Chinese banking system efficiency, which shows that higher market completion could lead to more efficient banking system. This effect is more salient when law enforcement is more efficient.