Journal of Applied Finance & Banking

Shadow Prices of Non-performing Loans for Chinese Banks in the Post-Crisis Era

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• Abstract

   

  This paper examines how non-performing loans (NPLs) affect Chinese commercial banks before, during, and after the 2008 global financial crisis as well as the subsequent 2008--2010 stimulus. By accounting for NPLs as undesirable outputs, banks' technical efficiency is estimated using directional output distance function. The envelop theorem is applied to calculate the shadow price of NPLs. The shadow price of NPLs is the opportunity cost of reducing NPLs by one Chinese yuan. Empirical results show that the four major state-owned banks are the least technically efficient while foreign banks are the most efficient over the sample period 2007-2014. I also find that the crisis has a negative effect on banks' technical efficiency while the stimulus initially has a positive effect on four major state-owned commercial banks and joint-stock commercial banks, but later shows a negative effect with a higher default ratio and lower efficiency. Finally, the data show that the stimulus has greatly increased the shadow price of NPLs for four major state-owned commercial banks. Starting in 2011, the shadow prices of NPLs for four major state-owned commercial banks are much higher than all other bank types.

  JEL classification numbers: G21, L11, C13

  Keywords: the directional output distance function, shadow price of non-performing loans, technical efficiency, Chinese banks.