Abstract

This study examines the effects of credit market freedom on the dynamics of Chinese banks’ output reallocation through the intermediation of cost X-ineciency. We nd two distinct regimes that underpin the mechanism of foreign banks and domestic banks respectively. Credit market freedom is found to signicantly foster cost X-eciency among the foreign banks, whichsubsequently lead to marginally more ecient allocation of outputs with e-cient foreign banks gain market shares at the expense of those inecient ones.

On the other hand, the same circuit of eects does not apply to the domestic banks. Therefore, arguably foreign banks attach more importance to eciency, while domestic banks leech on to state protection for their respective existence.

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