Chinese Banking Reform by Chunxia Jiang & Shujie Yao

Author:Chunxia Jiang & Shujie Yao
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

5.4.4 The Boone Indicator—the Profit Elasticity Approach

The Boone indicator of market power is obtained by estimating the relation between profitability and average cost in Eq. (5.7) using a panel fixed effect estimation approach with robust errors. Concerning the potential endogeneity issue as firm profitability and cost are jointly determined, we also employ the generalized method of moments (GMM) estimation approach where one-year lagged values of explanatory variables are treated as instruments. To estimate the time-varying Boone indicator over the sample period, we construct a dummy variable for each time period and include it in the cross terms with average costs in the estimation. The coefficient in each time period of the cross term is the Boone indicator. In all estimations, the coefficients for the Boone indicator from both panel regression and GMM estimation are negative and significant. For additional robustness check, we include a set of bank-specific control variables to capture the effects of differences in funding and asset structure across banks, including the ratio of customer deposits to the sum of total deposits and short-term funding, the ratio of loans to total assets, and the ratio of non-earning assets to total assets. The estimated Boone indicator from both panel regression and GMM estimation are not affected significantly and the trend remains consistent.

Figure 5.5 plots the annual Boone indicator of the Chinese banking industry over the sample period. We use the absolute value of the Boone indicator and the larger the value, the higher the degree of banking competition. The Boone indicators estimated from two different approaches are generally consistent in terms of magnitude and trend. It experienced fluctuations in the first few years and then declined sharply. The downward trend stabilized in 2000 and increased slightly until a sudden drop during the 2008 crisis and a further drop in 2011, followed by a slight increase in the subsequent 4 years. Overall, the Boone indicator suggests that the degree of competition in the Chinese banking industry declined in the second half of the 1990s and remained relatively stable during the rest of the sample period.

Fig. 5.5Boone indicator of market power of Chinese banking sector (1995–2015). Note Boone indicator is negative and we plot its absolute value for convenient comparison

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