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

This paper examines how non-performing loans (NPLs) affect Chinese commercialbanks before, during, and after the 2008 global financial crisis as well as thesubsequent 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 shadowprice 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 leasttechnically efficient while foreign banks are the most efficient over the sampleperiod 2007-2014. I also find that the crisis has a negative effect on banks' technicalefficiency while the stimulus initially has a positive effect on four major stateowned commercial banks and joint-stock commercial banks, but later shows anegative effect with a higher default ratio and lower efficiency. Finally, the datashow that the stimulus has greatly increased the shadow price of NPLs for fourmajor state-owned commercial banks. Starting in 2011, the shadow prices of NPLsfor four major state-owned commercial banks are much higher than all other banktypes.