Agr Ban

The World Economy
The World Economy (2014)

doi: 10.1111/twec.12194
Identifying Determinants of Branch

Performances in Agricultural Bank of
China: A Spatial Econometric Approach
Yi-Cheng Liu1, Wen Yang2 and Chao-Cheng Mai3,4
1
Department of International Business, Tamkang University, New Taipei City, Taiwan, 2Department of
Statistics, Tamkang University, New Taipei City, Taiwan, 3Department of Industrial Economics,
Tamkang University, New Taipei City, Taiwan, and 4Research Center for Humanities and Social
Sciences, Academia Sinica, Nankang, Taipei, Taiwan
1. INTRODUCTION
T HE Agricultural Bank of China (ABC) was resurrected in 1979 to support rural economic
development by China’s government. The predecessor of the ABC was the Agricultural
Cooperative Bank in 1951. The ABC accounted for more than 95 per cent of China’s rural
credits until the early 1990s (Liu and Wu, 2008). In 1993, the government implemented
restructuring policy: Decision on Financial Institutional Reforms. It removed the state-owned
banks, including the ABC, from policy financing. In 1994, three new policy banks (the Agri-
cultural Development Bank of China, China Development Bank and Export–Import Bank of
China) were set up to replace the original state-owned banks. Furthermore, under the Com-
mercial Banking Law of 1995, the ABC began to operate as commercial banks that were
responsible for their profits and losses. Loans were to be made on a commercial basis instead
of a policy basis. Thus, the ABC has evolved from a state-owned specialised bank to a wholly
state-owned commercial bank and subsequently a state-controlled commercial bank.1 It was
then restructured into a joint-stock limited liability company in 2009. It was listed in both
Shanghai and Hong Kong Stock Exchanges and became a public shareholding commercial
bank in 2010. At the same time, it accepted foreign investment, including Standard Chartered
Bank and Seven Group of Australia, as main shareholders. The transformation and privatisa-
tion allowed domestic and foreign investment on the bank and has changed the original man-
agement goal and nature.
The ABC ranked third in 2013 up from fifth in 2012 by profit in the world according to
the annual survey of The Banker Magazine in 2012 and 2013. It moved up to 64th in 2013
from 84th in 2012 at the Global 500 (The Fortune Magazine in 2012 and 2013). Geographical
dimensions and spatial territorial features of China’s financial sector have been omitted in the
previous literature. Despite the trend of financial globalisation, however, banking services
We would like to thank the associate editor Eden Yu and two anonymous referees for helpful comments
and suggestions.
1
The ABC has now become a commercial bank listed in stock exchanges. Its main businesses are less
policy-led after two decades of reforms, including the establishment of Agricultural Development Bank
of China, replaced the original role of the ABC. The deregulation and the development of local financial
system substituted the function of the ABC. Furthermore, according to the statements of the chairman in
the ABC interim report 2013: ‘We will adhere to the business philosophy of a modern commercial bank.
We persist in maximizing our shareholders value and increasing return to shareholders’. Clearly, the
ABC is now listed as commercial bank.
© 2014 John Wiley & Sons Ltd 1
2 Y.-C. LIU, W. YANG AND C.-C. MAI
occur at regional or local levels, still displaying considerable differences from one to another.
This leads to the need for better understanding of spatial territorial performances of the ABC.
The location and performances of bank branches are critical to the success of the banking
business. The major ingredients for the location decisions and performances of branch banks
are often highly sensitive to socioeconomic, demographical, and behavioural factors. Accord-
ingly, the traditional normative approach alone cannot analyse the excessive location-related
data associated with the external factors and cannot appropriately evaluate behavioural criteria
for branch banking sites (Min, 1989). The spatial econometric model can be applied to over-
come the shortcoming in previous literature related to the evaluation of bank branches’ perfor-
mances (Triki and Maktouf, 2012). Prior studies related to China’s banking industry have
never taken into account the impacts caused by spatial association effects and factors related
to urbanisation.
We are thus motivated to conduct this research and focus the investigation on the ABC
due to the data availability. Our analysis constructs a panel of data that combines information
on branches’ locations, outputs and local economic, industrial and demographical characteris-
tics. The empirical evidence clearly indicates that spatial autocorrelation exists significantly
and highlights spatial effects. There would be a bias if the econometric model excluded spa-
tial effects. Thus, it is important to apply spatial econometric methods, which consider the
possibility of spatial effects, to obtain more appropriate empirical results.
Thus, this paper is the first research to assess the performances of one of China’s larg-
est banks at the branch level with empirical evidence obtained from employing spatial lag
and error models and by underlining the impact of urbanisation. Thus, we emphasise and
take factors related to urbanisation into account with the application of the spatial econo-
metric method in evaluating bank branches’ performances. As a result, we conclude that
the performances of the ABC concentrated on economically better-developed regions such
as east coastal provinces and municipalities. The growth of service sector and urbanisation
are contributing factors to the branch performance of the ABC during the period of this
study.
The paper is set up as follows. Section 2 reviews existing literature. In Section 3, we pres-
ent data adopted, introduce the model applied and describe the estimation procedure.
Section 4 discusses the empirical results. We conclude in Section 5.
2. LITERATURE REVIEW
Previous literature identified important factors of evaluating bank performances and deter-
minants of bank branches’ performances. There are three main approaches in analysing ser-
vice industry efficiency: the production, intermediation and the value-added approaches.
Berger and Humphrey (1997) regarded that neither the production approach nor the intermedi-
ation approach is perfect. Berger and Humphrey (1992) proposed the value-added approach to
identify output. In this approach, all liability and asset categories of bank balance sheet are
considered to have some output characteristics, to the extent that ‘they have substantial valued
added, as judged using an external source of operation cost allocation’. Studies of Doyle et al.
(1979), Berger et al. (1987), Min (1989), Berg et al. (1991, 1993), Zardkoohi and Kolari
(1994), Berger and Humphrey (1997) and Cook et al. (2000) used total loans and deposits to
measure outputs for each branch office. In this paper, we adopt the value-added approach and
use both loans and deposits as dependent variables to scrutinise performances of different
branches.
© 2014 John Wiley & Sons Ltd

IDENTIFYING DETERMINANTS OF BRANCH PERFORMANCES 3
The total number of employees in three sectors (primary, secondary and tertiary) was
employed in evaluating bank branches’ performances by Doyle et al. (1979), Boufounou
(1995) and Crocco et al. (2010). However, the data of the number of employers in the three
sectors (primary, secondary and tertiary) and the decomposition of these three sectors at the
provincial and municipality level in Mainland China were released incompletely and patchily.
Instead, we use outputs of these three sectors at the provincial and municipality levels as
proxy variables to assess the impacts of changes of the three sectors on provincial branches’
performances. Thus, outputs of the three sectors stand for different patterns of econ-
omic development in each province in Mainland China. Due to the transformation of the
ABC mentioned in Section 1, the ABC is now seeking to develop urban and county busi-
nesses into the ‘two-engines’ of growth. Based on its branch network restructure, it develops
the retail banking business and enhances competitiveness in key urban areas. The bank has
been shifting into capitalising urban areas. Therefore, it is assumed that branch performances
should be positively and closely related to the higher-developed sectors such as secondary
and tertiary industries and relatively less so to the primary sector.
The studies (Graddy and Kyle, 1979; Avery et al., 1999; Bos and Kool, 2006; Crocco
et al., 2010) pointed to urbanisation as an important factor in allocating the branch network
of banks. Branches in urban areas outperform those in rural areas. In addition, the perfor-
mances of branches situated in larger urban areas perform even better. Therefore, the number
of urban employed workers at the provincial or municipal level stands for the degree of the
urbanisation of the province and has positive effects on branch performance.
The population factor is employed in assessing bank branch performances by many studies,
such as Clawson (1974), Jackson (1975), Ali and Greenbaum (1977), Doyle et al. (1979,
1981), Graddy and Kyle (1979), Olsen and Lord (1979), Min (1989), Boufounou (1995),
Amel and Liang (1997) and Avery et al. (1999). Clearly, population has a positive effect on
branch performance.
Prior studies related to China’s banking industry have never taken into account the impacts
caused by spatial association effects and factors of urbanisation. This paper is therefore the
first attempt to investigate the importance of the five determining variables (adopted from the
above-existing literature) on China’s bank branches’ performances by providing empirical evi-
dence with the application of spatial econometric methods and while underlining the impact
of urbanisation.
3. SPATIAL ECONOMETRIC MODELS
With respect to the spatial correlation, spatial analysis is one type of quantitative analysis
technique used in geographical studies. To be rigour in research, it is necessary to take the
spatial factors into account because the results can be affected if the data are subject to
changes of the spatial location. In addition, the spatial autocorrelation is a quantitative meth-
odology used in quantifying the potential spatial correlation of the geography. It aims to iden-
tify whether appropriate spatial clusters exist. Moran’s I is the most frequently used method
to assess the spatial autocorrelation. The definition is as follows:
Pn P n
wij ðxi xÞðxj xÞ
n i¼1 j¼1
I¼P n Pn Pn ;
wij ðxi xÞ2
i¼1 j¼1 i¼1

where n denotes the number of spatial locations observed, xi denotes the observed value at
the spatial location i, x denotes the mean value of n number of observed values from spatial
locations, and wij denotes whether or not there is a spatial neighbourhood between spatial
location i and spatial location j of the spatial weight matrix W. Here, wij = 1 if a spatial
neighbourhood exists between spatial location i and spatial location j of the spatial weight
matrix W, and wij = 0 if there is no spatial neighbourhood between spatial location i and spa-
tial location j of the spatial weight matrix W. In addition, the value of diagonal is equal to
zero, that is, wii = 0. There is no spatial correlation between provinces, and therefore, spill-
over effects among provinces do not exist if W*dependent (or spatial autocorrelation) is not
significant. On the contrary, there is spatial correlation between provinces, and spillover
effects among provinces exist if W*dependent (or spatial autocorrelation) is significant. The
form of spatial weight matrix W can be expressed as follows:
2 3
0 w12 . . . w1j . . . w1n
6 w21 0 . . . w2j . . . w2n 7
6 7
6 7
W¼6 6 wi1 wi2 . . . 0 . . . win 7:
7
6 7
4 5
wn1 wn2 . . . wnj . . . 0
The value is between 1 and 1 according to the above formula of Moran’s I. There is
positive spatial autocorrelation if Moran’s I value is larger than 0. There is negative spatial
autocorrelation if the value is smaller than 0. There is no spatial autocorrelation, and they are
randomly distributed if the value is equal to zero.
Furthermore, we can obtain the expectation E(I) and the variance V(I) of I. In addition, the
following formula can be used to standardise the I value and to diagnose whether or not a
spatial autocorrelation exists.
I EðIÞ
ZðIÞ ¼ pffiffiffiffiffiffiffiffiffi :
VðIÞ
It is a so-called spatial cluster if the test results show that there is a significant spatial auto-
correlation. There is a positive spatial autocorrelation if the values of the observed region and
the neighbouring region are both high (high–high) or are both low (low–low). Conversely,
there is a negative spatial autocorrelation if the value of the observed region is high and that
of the neighbouring region is low (high–low) or the value of the observed region is low and
that of the neighbouring region is high (low–high).
Despite the substantial difficulties in obtaining adequate and reliable data on China’s
banks, the volume of deposits and loans in renminbi are consistently available for most prov-
inces and municipalities, as in the case of the ABC. It is suggested that the larger the deposits
or loans, the better the performance of the branches. We used two dependent variables in this
study: LR (loans in each province or municipality) and DR (deposits in each province or
municipality). There are five independent variables: PI, SI, TI (the total value of the primary,
secondary or tertiary industries in each province or municipality), UE (the total number of
urban employees of the province or municipalities) and POP (the total of population in the
province or municipality). The definitions of these variables are displayed in Table 1. The
variables are used at the 26 provinces and four municipality levels. All the nominal variables
have been transformed with regional consumer price indices into real terms and used under

TABLE 1
Definitions of the Variables
Variable Names Definitions
LRi,t The total amount of loans in renminbi of the province i in year t

DRi,t The total amount of deposits in renminbi of the province i in year t
PIi,t The output of the primary industry of the province i in year t
SIi,t The output of the secondary industry of the province i in year t
TIi,t The output of the tertiary industry of the province i in year t
UEi,t The total number of urban employees of the province i in year t
POPi,t The number of population of the province i in year t
Notes:
(i) All the nominal variables have been transformed into real terms and used under logarithms.
(ii) The output of the primary, secondary and tertiary industry is measured by 100 million yuan.
(iii) Both DR and LR are measured by the unit of 100 million yuan.
(iv) Both the variables on UE and POP are measured at the year-end in 10,000 persons according to China Statistical
Yearbook.
(v) The ‘deposits’ are the overall deposits. It covers all types of deposits (a, domestic short-term loans; b, domestic
midterm and long-term loans; c, exports and imports finance; d, bill finance) according to the Statistical Yearbook of
Agricultural Bank of China (2008).
logarithms. The indices data are available from 1994 to 2011 from China Statistical Yearbook
(2012). Data on branches’ loans and deposits in 30 provinces and municipalities of the ABC
from the year 1997 to 2011 were collected from Almanac of China’s Finance and Banking
(1990–2012) and Statistical Yearbook of Agricultural Bank of China (1978–2008). Other data
were from China Statistical Yearbook (1979–2012). We further group the data into six regions
(see also Table 2) referring to the national geography. The six regions, the provinces and
municipalities in the study are the Yangtze River Delta (Shanghai city, Jiangsu and Zhejiang
provinces), Pearl River Delta (Fujian, Guangdong, Hainan and Guangxi provinces), Bohai Sea
region (Beijing city, Tianjing city and Hebei and Shandong provinces), central region (Shanxi,
Anhui, Jiangxi, Henan, Hubei and Hunan provinces), western region (Chongqing city, and
Guizhou, Sichuan, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia and Xinjiang provinces) and
north-east region (Inner Mongolia, Liaoning, Jilin and Heilongjiang provinces).
We first employ an exploratory spatial data analysis (ESDA) approach and two methods:
the Moran’s I and the local indicators of spatial association (LISA) are adopted to evaluate
TABLE 2
Six Regions in Mainland China According to the National Geography
Name of the Regions Provinces and Municipalities Included
Yangtze River Delta Shanghai city, Jiangsu and Zhejiang provinces

Pearl River Delta Fujian, Guangdong, Hainan and Guangxi provinces
Bohai Sea region Beijing city, Tianjing city and Hebei and Shandong provinces
Central region Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan provinces
Western region Chongqing city, and Guizhou, Sichuan, Yunnan, Shaanxi, Gansu,
Qinghai, Ningxia and Xinjiang provinces
Northeast region Inner Mongolia, Liaoning, Jilin and Heilongjiang provinces

the performances of the ABC at the province and municipality level with the exploration of
spatial data.
The results of Moran’s I indicate the extent of significant spatial clustering for the outputs
(loans and deposits) of totally 30 provinces and municipalities in the sample and evaluate
their temporal trends in the period of the study. The measure can be illustrated by Moran
scatterplots (Anselin, 1993) to show the decomposition of the association into spatial clusters
of similar high or low values and clusters of dissimilar values and to assess the existence of
outliers.
The indication provided by the Moran scatterplots is exploratory because it offers no mea-
sure of ‘statistical’ significance associated with the individual patterns. We therefore further
employ LISA (Anselin, 1995). The data are computed to G* statistics (Getis and Ord, 1992)
and can be visualised using geography information system (GIS) or mapping system as trian-
gles pointing up for high–high associated or down for low–low and with varying sizes related
to different significant levels.
Our analysis carried out the estimation from 1997 to 2011. To be manageable, we only
present tables with the results obtained from Moran’s I statistic in years including the begin-
ning 1997 (Asian financial crises), the midyear (subprime crisis occurred in 2007 and 2008)
and the end of the year of the observation period in this study, 1997, 2002, 2007, 2008, 2010
and 2011 for renminbi. For consistency’s sake and to reduce bias, we further show the maps
obtained with the application of LISA as mentioned earlier. The results of LISA analysis
identify provinces with either similar, positive associations with their neighbours in terms of
their loans or deposits (high–high, low–low) or those with negative association (high–low,
low–high). The revealed distribution identifies either regions of concentration or those of dis-
persal in terms of their loans or deposits relations. Thus, the LISA results can be interpreted
as a spatial interaction pattern. These maps confirm and clarify the findings obtained from
Moran scatterplots. The temporal trends were deemed sufficient to analyse the long-run evolu-
tion of branches’ performances of the ABC from the geospatial perspective.
Moran’s I test is one of the useful tools in identifying the existence of spatial effects (Chou
et al., 2009). The results of Moran’s I test presented in Table 3 clearly indicate that spatial
autocorrelation exists significantly with the only exception being variable: PI in the years
from 2003 to 2007, 2009 and 2010. Thus, the results in Table 3 that highlight spatial effects
cannot be ignored. We also recognise the time-period effects in the panel data set of this
study by observing scatterplots of each variable. It is regarded that the closer the spots are
alongside the curve, the more significant the time-period effects it implies. Almost all of spots
are very close to the curve according to the scatterplots of each variable (to be manageable,
we only present scatterplots of two variables: LR and DR, in Figures 1 and 2).
With respect to the lag term decision, we adopted Akaike information criterion (AIC) to
choose the last lag term. The results are presented in Figure 3. Using either LR or DR as the
dependent variable in the spatial econometric model, the values of AIC become larger when
the lag time increases (see Figure 3). It is thought that the smaller the value of AIC is, the
more appropriate the lag term is. Zero-lag term appears to be the smallest of the test and is
therefore the most appropriate in examining the effects of the panel data employed in this
paper on LR and DR.
We use panel data analysis, which includes variables of provinces and municipalities from
1997 to 2011, to investigate how these variables affect the dependent variable Y (LR or DR of
the ABC). The MATLAB software package (MathWorks, Natrick, MA) is applied to estimate
the models in this study. These can be examined by the following equation (1):

TABLE 3
Moran’s I Test for Spatial Correlation on Variables
Years LR DR PI SI TI UE POP
1997 0.2388** 0.2185** 0.1805* 0.2918*** 0.3360*** 0.2849*** 0.2151**

(0.0312) (0.0493) (0.0638) (0.0065) (0.0024) (0.0017) (0.0178)
1998 0.20624* 0.2156* 0.1727* 0.1727* 0.3420*** 0.2587*** 0.2150**
(0.0575) (0.0541) (0.0726) (0.0726) (0.0020) (0.0047) (0.0179)
1999 0.2090* 0.2129* 0.1764* 0.1764* 0.3407*** 0.2803*** 0.2149**
(0.0535) (0.0578) (0.0683) (0.0683) (0.0020) (0.0028) (0.0179)
2000 0.2121* 0.2078* 0.1747* 0.1747* 0.3433*** 0.3181*** 0.2094**
(0.0579) (0.0632) (0.0746) (0.0746) (0.0019) (0.0009) (0.0222)
2001 0.2238** 0.2193** 0.1640* 0.6940*** 0.3299*** 0.2757*** 0.2149**
(0.0477) (0.0490) (0.081) (0.0093) (0.0026) (0.0036) (0.0194)
2002 0.2350** 0.2258** 0.1669* 0.2860*** 0.33292*** 0.2419*** 0.2143**
(0.0370) (0.0441) (0.0848) (0.0071) (0.0027) (0.0084) (0.0200)
2003 0.2496** 0.2411** 0.1322 0.3027*** 0.3390*** 0.2164** 0.2170**
(0.0268) (0.0309) (0.1650) (0.0047) (0.0023) (0.0145) (0.0189)
2004 0.2814** 0.2418** 0.14070 0.3040*** 0.34197*** 0.1201 0.2842***
(0.0121) (0.0282) (0.1320) (0.0046) (0.0022) (0.163) (0.0026)
2005 0.3145*** 0.2460** 0.1242 0.3113*** 0.3119*** 0.1927** 0.2081**
(0.0041) (0.0244) (0.1750) (0.0038) (0.0049) (0.0235) (0.0257)
2006 0.3219*** 0.2490** 0.1267 0.8951*** 0.3075*** 0.2046** 0.2077**
(0.0041) (0.0210) (0.1640) (0.0058) (0.0053) (0.0207 (0.0266)
2007 0.3277*** 0.3240*** 0.1182 0.2978*** 0.3094*** 0.1840** 0.2070**
(0.0024) (0.0064) (0.1840) (0.0050) (0.0051) (0.0445) (0.0279)
2008 0.3884*** 0.2491** 0.1306** 0.28817*** 0.3100*** 0.2164** 0.2066**
(0.0002) (0.0334) (0.0138) (0.00645) (0.0050) (0.016) (0.0290)
2009 – – 0.1381 0.2955*** 0.3222*** 0.2415** 0.2061**
(0.115) (0.0047) (0.0036) (0.0109) (0.0302)
2010 0.3926*** 0.2876*** 0.1126 0.28140*** 0.3371*** 0.1580* 0.2113**
(0.0002) (0.0095) (0.193) (00066) (0.0026) (0.0961) (0.0288)
2011 0.4187* 0.2477** 0.2153** 0.2729*** 0.3366*** 0.2406*** 0.2123**
(0.0000) (0.0215) (0.0199) (0.0081) (0.0027) (0.0055) (0.0285)
Notes:
(i) Data of LR and DR in 2009 are not available due to the fact that the amounts of deposits and loans of the ABC
were not disclosed.
(ii) The italic values indicate there are significant correlations.
(iii) *Significance at level 0.1; **significance at level 0.05; ***significance at level 0.01.
ln Yit ¼ a þ b1 ln PIit þ b2 ln SIit þ b3 ln TIit þ b4 ln UEit þ b5 ln POPit þ eit ; (1)

where Yit denotes LRit or DRit.
In addition, the above equation can be simplified as follows:
X
5
ln Yit ¼ a þ bk ln X it þ eit ; (2)
k¼1
where Xit denotes PIit, SIit, TIit, UEit and POPit.

All five variables are theoretically supposed to have positive signs corresponding to the
dependent variables. Thus, the larger the value of PI, SI, TI, UE or POP, the larger the
volume of LR or DR would be, and vice versa.

FIGURE 1
Scatterplot of Variable LR
ID = Shanghai ID = Beijing ID = Jilin ID = Sichuan ID = Tianjin
8
7
6
5
4
ID = Anhui ID = Ningxia ID = Shandong ID = Shanxi ID = Guangdong
8
7
6
5
4
ID = Guangxi ID = Xinjiang ID = Jiangsu ID = Jiangxi ID = Hubei
8
7
6
5
4
InLR
ID = Henan ID = Zhejiang ID = Hainan ID = Hubei ID = Hunan
8
7
6
5
4
ID = Gansu ID = Fujian ID = Guizhou ID = Liaoning ID = Chongqing
8
7
6
5
4
ID = Shaanxi ID = Yunnan ID = Qinghai ID = Heilongjiang ID = Inner Mongolia
8
7
6
5
4
2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010
Year

FIGURE 2
Scatterplot of Variable DR
ID = Shanghai ID = Beijing ID = Jilin ID = Sichuan ID = Tianjin
ID = Anhui ID = Ningxia ID = Shandong ID = Shanxi ID = Guangdong
ID = Guangxi ID = Xinjiang ID = Jiangsu ID = Jiangxi ID = Hebei
4
InDR
ID = Henan ID = Zhejiang ID = Hainan ID = Hubei ID = Hunan
ID = Gansu ID = Fujian ID = Guizhou ID = Liaoning ID = Chongqing
ID = Shaanxi ID = Yunnan ID = Qinghai ID = Heilongjiang ID = Inner Mongolia
2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010 2000 2005 2010
Year

FIGURE 3
The Value of Akaike Information Criterion (AIC) at Different Lag Terms
Lag Time (Year)
0 1 2 3 4 5
0
–100 LR
–200 DR
–300 –377.62
–446.4
–400 –517.24
AIC
–500 –589.95
–664.49
–600 –534.47
–763.01 –615.1
–700
–800 –695.81
–770.39
–900 –851.74
–922.88
–1000
Note:
The horizontal axis stands for the lag time (by year), and the vertical axis stands for the value of AIC.
Early literature modelled spatial dependence with regard to spatial weight matrices. The
important difference is that the spatial weight matrix is not assumed to be known and is not
parameterised. Typical examples of this type of processes include the spatial autoregressive
processes and spatial moving average processes. Local non-stationarity and heteroscedasticity
are built-in features of these types of processes.2 Spatial dependence exists when the value
associated with one location is dependent on those of other locations. The effect of this
similarity of values and locations is a loss of information. Spatial dependence can result
from spatial interaction effects (e.g. externalities or spillover effects) or from measurement
error (e.g. related to a mismatch between the scale at which a phenomenon occurs and how
it is measured). Spatial dependence is a property of joint multivariate density functions,
while spatial autocorrelation is a moment or characteristic of these functions. Only the latter
can be estimated in practice. Spatial heterogeneity exists when structural changes related to
location exist in a data set. In such cases, spatial regimes could exist, which are character-
ised by differing parameter values or functional forms (e.g. patients in some areas can struc-
turally deviate from patients in other areas). Spatial heterogeneity can result in non-
constant error variance (heteroscedasticity) across regions, especially when scale-related
measurement errors are present. It may be difficult to distinguish from spatial dependence
(Chou et al., 2011).
A conventional gravity model explains the variation in the vector of origin–destination
flows. It is better that forces leading to flows from an origin region to a destination region
may create similar flows to nearby or neighbouring destinations. In contrast to the gravity
model, a spatial econometric model of the variation in origin–destination flows would be
characterised by: (i) reliance on spatial lags of the dependent variable vector, which is
2
The potential heteroscedasticity may be an issue in our analysis. Although few attempts have been
proposed to handle this issue, such as the Heteroscedasticity and autocorrelation consistent (HAC) or
generalised method of moments (GMM) estimation techniques proposed by Moscone and Tosetti (2011,
2012), no programs or code could be directly applied to empirical studies. So future research in this
direction should be encouraged.

referred to as a spatial autoregressive model, and (ii) spatial lags of the disturbance terms,
which is labelled as a spatial error model. The above two models were developed by Ans-
elin et al. (1997). Combining these two models is well known as the SAC model (LeSage
and Pace, 2009). Due to the fact that this study relates to spatial and time-specific charac-
teristics, we follow the spatial lag and spatial error models employed by Crocco et al.
(2010), Lee and Yu (2010) and Triki and Maktouf (2012). To this end, the two spatial
models were modified and used to assess spatial effects and spatial correlation. The two
models find consistent results, which is a bias correction procedure of the parameters esti-
mated when adopting the direct method based on maximising the likelihood function with
the purpose of adopting the transformation approach. Therefore, the spatial lag model and
spatial error model are expressed as equations (3) and (4) representing two dependent vari-
ables: LR and DR.
Spatial lag model:
y ¼ a þ qWy þ Xb þ e; (3)
where y is a dependent variable LR or DR; q is the spatial autocorrelation coefficient; W is
the spatial weight matrix; X is the matrix of independent variables; parameter b reveals the
effect of the independent variable X to the dependent variable y; and e is an error term that
follows normally distributed, with mean 0 and variance r2.
Spatial error model:
y ¼a þ Xb þ e;
(4)
e ¼kWe0 þ /;
where / is a error term that has effects on spatial autocorrelation and k is the spatial error
autocorrelation coefficient. The weight matrices W in this model are the same as those in the
spatial lag model, and it uses Beijing (the headquarter of the ABC and one of the municipali-
ties) as the central location in comparison with all other locations by the use of provincial or
municipality branches data.
The fitness of the panel data used in this paper is the random effects model or the fixed
effects model examined by applying the Hausman test. The results of the Hausman test from
Tables 4–7 show that the fixed effects model is more appropriate, due to all of the p-values
being smaller than 0.05 and therefore statistically significant.
Elhorst (2003) added up two dummy variables li and mt in the fixed effects model with
panel data. li denotes the spatial-specific fixed effect of the bank at the province i. In
other words, it indicates the long-term impacts of the geographical feature of province i
on deposits and loans. Meanwhile, mt denotes the time-specific fixed effects of the year t.
It indicates the short-term impacts of characteristics in year t on deposits and loans in
each province or municipality. Therefore, the spatial lag fixed effects model and spa-
tial error fixed effects model of the panel data used in this study can be derived as
follows:
yit ¼ a þ qWyit þ X it b þ li þ mt þ eit ; (5)
yit ¼X it b þ li þ mt þ eit ;
(6)
eit ¼kWe0it þ /i ;
where li denotes spatial-specific fixed effects of province i and mt denotes time-specific fixed
effects of the year t.

TABLE 4
Results Estimated by Applying Spatial Lag Model with Fixed Effects on LR
Types of Model Model I Model II Model III Model IV

Variables No Spatial and Spatial Fixed Time-period Spatial and
Time-specific Effects Fixed Effects Time-period
Fixed Effects Fixed Effects
PIi,t 0.2734*** 0.3126*** 0.2163*** 0.2439***

(0.000) (0.0000) (0.0000) (0.0032)
SIi,t 0.1596*** 0.0375 0.1166* 0.2526***
(0.0106) (0.6746) (0.0539) (0.0044)
TIi,t 0.9007*** 0.5086*** 0.9222*** 0.6248***
(0.0000) (0.0000) (0.000) (0.000)
UEi,t 0.1430*** 0.0990 0.1757** 0.7128***
(0.0000) (0.1480) (0.0193) (0.000)
POPi,t 0.3786*** 0.3753** 0.2456*** 0.6984***
(0.0000) (0.011) (0.0011) (0.000)
W*dependent 0.0200 0.5110*** 0.0160 0.2160***
(0.1409) (0.000) (0.6093) (0.0002)
Log-likelihood 122.4441 14.8019 88.6683 80.7244
r2 0.1049 0.0510 0.0895 0.0405
R2 0.8613 0.9325 0.8816 0.9465
Adjustment R2 0.8596 0.6544 0.8502 0.3269
LR test for spatial 274.4919*** (0.000)
LR test for time period 67.5515*** (0.001)
Hausman test 156.0360*** (0.000)
Notes:
(i) Figures in parentheses are the p-value.
This study adopts the spatial panel data, so we use LR test to examine whether the data
have spatial and time effects. The results of LR test are the same as the Wald test, which is
also used for the assessment of the panel data.3
Furthermore, four types of estimation were conducted by Elhorst (2003) with the applica-
tion of the spatial lag fixed effects model and the spatial error fixed effects model. These
include the following:
Model I: the model without both spatial-specific fixed effects li and time-specific fixed
effects mt.
3
Table 4 presents that the test statistic value of LR in the spatial lag model is 274.4919 (p= 0.000).
This indicates that there is spatial effect. The test statistic value of LR for time period is 67.5515
(p = 0.001). This indicates that there is time effect. Table 6 presents that the test statistic value of LR in
the spatial error model is 76.5743 (p = 0.000). This indicates that there is spatial effect. The test statistic
value of LR for time period is 66.0998 (p = 0.0002). This indicates that there is time effect. Table 5
presents that the test statistic value of DR in the spatial lag model is 414.162 (p = 0.000). This indicates
that there are spatial effects. The test statistic value of DR for time period is 298.40444 (p = 0.000).
This indicates that there is time effect. Table 7 presents that the test statistic value of DR in the spatial
lag model is 464.3291 (p = 0.000). This indicates that there is spatial effect. The test statistic value of
DR for time period is 299.7161 (p = 0.001). This indicates that there is time effect. Thus, the spatial
econometric models of this study can be formulated by equations (5) and (6).

TABLE 5
Results Estimated by Applying Spatial Lag Model With Fixed Effects on DR

time-specific Fixed Effects Fixed Effects Time-period
Effects Fixed Effects
PIi,t 0.2949*** 0.0184 0.1582*** 0.1577**

(0.0000) (0.8000) (0.0000) (0.0347)
SIi,t 0.0589 0.2474*** 0.0190 0.0526
(0.4382) (0.0056) (0.7338) (0.5119)
TIi,t 1.0292*** 0.5391*** 0.9469*** 0.4767***
(0.0000) (0.0000) (0.0000) (0.0000)
UEi,t 0.2546*** 0.2796*** 0.1725** 0.2151***
(0.0000) (0.0001) (0.0127) (0.0090)
POPi,t 0.2587*** 0.1463 0.1378** 0.2577**
(0.0000) (0.3307) (0.0488) (0.0382)
W*dependent 0.0440*** 0.6520*** 0.0220 0.0190
(0.0038) (0.0000) (0.4154) (0.7764)
Log-likelihood 204.9884 2.0927 55.7862 119.3605
r2 0.1553 0.0515 0.0760 0.0332
R2 0.8587 0.9532 0.9309 0.9698
Adjustment R2 0.8527 0.7546 0.8940 0.1267
Hausman test 58.9736*** (0.000)
Notes:
Model II: the model with the spatial-specific fixed effects li but without time-specific fixed
effects mt.
Model III: the model with the time-specific fixed effects mt but without spatial-specific
fixed effects li.
Model IV: the model with both spatial-specific fixed effects li and time-specific fixed
effects mt.
We therefore also conducted the above four types of estimation proposed by Elhorst
(2003) to compare and analyse the impacts of spatial-specific and time-specific effects on the
parameters of deposits and loans of this study.
The parameters of the above models are estimated by employing maximum likelihood
method. Note that LR and DR are used as two dependent variables in this paper. The maxi-
mum likelihood estimation (MLE) cannot be applied in estimating the parameters if the prob-
ability distribution of the variables does not follow normally distributed. Four of the most
frequently adopted techniques used to test the normal distribution of these two dependent
variables are Shapiro–Wilk; Kolmogorov–Smirnov; Cramer–von Mises and Anderson–Darling.
For instance, the p-values of LR and DR by Shapiro–Wilk age are 0.5198 and 0.6076, respec-
tively. The p-values of these two by Kolmogorov–Smirnov are larger than 0.15. Thus, these
p-values are all larger than 0.05. The results signal that both the distributions of LR and DR

TABLE 6
Results Estimated by Using Spatial Error Model With Fixed Effects on LR

PIi,t 0.1525*** 0.2344*** 0.1360*** 0.2387***

(0.0000) (0.0004) (0.0000) (0.0036)
SIi,t 0.1021** 0.2973*** 0.0855* 0.3547***
(0.0450) (0.0000) (0.0956) (0.0000)
TIi,t 0.6792*** 0.5363*** 0.8025*** 0.6022***
(0.0000) (0.0000) (0.0000) (0.0000)
UEi,t 0.0546** 0.2161** 0.2080*** 0.5490***
(0.0401) (0.0159) (0.0021) (0.0000)
POPi,t 0.2078*** 0.2788** 0.0582 0.5561***
(0.0000) (0.0365) (0.4057) (0.0000)
Spatial autocorrelation 0.6880*** 0.7320*** 0.5870*** 0.3990***
(0.0000) (0.0000) (0.0000) (0.0000)
Log-likelihood 67.8702 53.0891 55.6184 82.1206
r2 0.0706 0.0387 0.0696 0.0381
R2 0.8452 0.9005 0.8758 0.9431
Adjustment R2 0.8490 0.6771 0.8441 0.3109
Hausman test 69.4051*** (0.0000)
Notes:
follow the normal distribution. Therefore, the MLE is used to estimate parameters. Further-
more, the maximum likelihood function adopts the log-likelihood value. Statistically, the
larger the log-likelihood value, the better the goodness of fit of the model (Beck et al., 2006).
In addition, both the instrumental variables (IV) and the generalised method of moments
(GMM) are consistent estimators (Wooldrige, 2001) in the case of a large sample. They are
much less effective in the case of a small sample. On the other hand, the method of IV is use-
ful in resolving endogeneity, but it highly depends on the capability of rigorously selecting
relevant explanatory variables such as IV (Angrist and Krueger, 2001). Therefore, the results
might not be convincing due to the use of inappropriate IV.
Finally, with respect to the use of the software for spatial lag models with fixed effects
panel data proposed by Elhorst (2003, 2010a), the parameter estimated by applying MLE can
be inconsistent if the number of the sample (N) is large and the number of the observation
time (T) is small. It can still be inconsistent if both N and T of the spatial lag model with spa-
tial and time-period fixed effects are large (Lee and Yu, 2010). However, the above cases
pointed out by Lee and Yu (2010) do not apply to the sample of this study because both N
and T in this study are not large. In addition, Elhorst (2010b) modified and provided the esti-
mation equations for fixed effects and random effects of both the spatial lag model and spatial
error model by MLE method with the software MATLAB code. On the other hand, no source
codes are released for IV or GMM.

TABLE 7
Results Estimated by Using Spatial Error Model With Fixed Effects on DR

PIi,t 0.1346*** 0.1347* 0.1741*** 0.1636**

(0.0000) (0.0543) (0.0000) (0.0285)
SIi,t 0.1407** 0.0577 0.0296 0.0575
(0.0114) (0.4577) (0.5866) (0.4731)
TIi,t 0.8287*** 0.7065*** 0.9132*** 0.4755***
(0.0000) (0.0000) (0.000) (0.0000)
UEi,t 0.16677*** 0.2013** 0.1578** 0.2153***
(0.0000) (0.0348) (0.0197) (0.0090)
POPi,t 0.1203*** 0.1166 0.1455** 0.2526**
(0.0042) (0.4057) (0.0329) (0.0522)
Spatial autocorrelation 0.6970*** 0.7720*** 0.1270* 0.0040
(0.0000) (0.0000) (0.0553) (0.9542)
Log-likelihood 106.2640 27.1761 55.1304 119.2617
r2 0.0844 0.0428 0.0759 0.0332
R2 0.8462 0.8918 0.9302 0.9698
Adjustment R2 0.8496 0.7162 0.8932 0.1262
Hausman test 12.7187** (0.0477)
Notes:
4. EMPIRICAL RESULTS
The empirical results of Moran’s I obtained by applying GeoDA software are summarised
and presented in Tables 8 and 9. Figures 4 and 5 map the provinces with significant values iden-
tified by the LISA approach for the selected years. The analysis adopts the branches’ perfor-
mances in Beijing, the municipality and the capital of China as the reference region geospatially
in comparison with the other performances in all other municipalities and provinces.
According to empirical findings from Moran I, the spatial pattern of branches’ perfor-
mances appears to be that there is significant inequality between the coastal and interior
regions. The provinces’ and municipalities’ performances of the ABC in terms of renminbi
loans and deposits performed better in branches of the coastal region, especially in the Yan-
gtze River Delta and Bohai Sea Region during this period. On the other hand, those provinces
were mostly located in the western and north-east region with lower economic growth.
Branches in the two regions benefited little from the Open and Reform Policy. Branches’
performances in the western region are the worst.
It is noteworthy that branches in Shanghai, Jiangsu and Zhejiang consistently outperformed
others in terms of both renminbi loans and deposits. This can be easily observed from the
dark grey areas (68%) in both Figures 4 and 5 with the LISA approach. These three together
obviously formed the best-performed region of all during this period. The results confirm the

TABLE 8
16
Relative Presence of Provinces and Municipalities in Four Quadrant Loans According to Moran I (Renminbi yuan)
Quadrant Years
1997 2002 2007 2008 2010 2011
I (high–high) Shanghai* Shanghai* Shanghai** Shanghai** Shanghai** Shanghai**

Beijing Jiangsu* Jiangsu* Jiangsu** Jiangsu** Jiangsu*
Jiangsu Fujian* Fujian* Fujian* Fujian* Fujian*
Zhejiang Shandong* Beijing Beijing Zhejiang* Zhejiang*
Shandong Beijing Tianjin Tianjin Beijing Beijing
Guangdong Zhejiang Zhejiang Zhejiang Tianjin Tianjin
Hebei Hebei Shandong Shandong Shandong Shandong
Yunnan Yunnan Guangdong Guangdong Guangdong Guangdong
Henan Henan Hebei Hebei Hebei Hebei
Hunan Yunnan Yunnan Yunnan Yunnan
Jilin Henan Guangxi Guangxi Guangxi
Hubei Guangxi Chongqing Chongqing
Guangxi Hubei
II (low–high) Anhui* Anhui* Anhui* Anhui* Anhui** Anhui**
Jiangxi* Jiangxi* Jiangxi* Jiangxi* Hainan** Hainan**
Fujian* Hainan** Hainan** Hainan** Guizhou Guizhou
Hainan** Guizhou Guizhou Guizhou Hunan Hunan
Guizhou Chongqing Chongqing Chongqing Henan Henan
Chongqing Hunan Hunan Hunan Jiangxi Jiangxi
Shanxi Shanxi Shanxi Henan
Tianjin Guangxi
Y.-C. LIU, W. YANG AND C.-C. MAI
Tianjin Jilin
III (low–low) Gansu** Gansu** Gansu** Gansu* Gansu* Gansu**
Xinjiang** Xinjiang* Xinjiang* Xinjiang* Xinjiang* Xinjiang*
Shaanxi Shaanxi Shaanxi Inner Mongolia* Inner Mongolia* Inner Mongolia*
Inner Mongolia Inner Mongolia Inner Mongolia Shanxi Shanxi Shanxi
Ningxia Ningxia Ningxia Shaanxi Shaanxi Shaanxi
Qinghai Qinghai Qinghai Ningxia Liaoning Liaoning
Jilin Qinghai Ningxia Ningxia
Heilongjiang Jilin Qinghai Qinghai
Heilongjiang Jilin Jilin
Heilongjiang Heilongjiang

TABLE 8 Continued
Quadrant Years
1997 2002 2007 2008 2010 2011
IV (high–low) Sichuan* Sichuan* Sichuan Hubei Sichuan Sichuan Sichuan

Liaoning Hubei Liaoning Hubei Hubei
Heilongjiang Liaoning Liaoning
Guangdong
Heilongjiang
Notes:
(i) The italic values indicate there are significant correlations.
(ii) *Significant at the level 0.05; **Significant at the level 0.01.
IDENTIFYING DETERMINANTS OF BRANCH PERFORMANCES
17
18
TABLE 9
Relative Presence of Provinces and Municipalities in Four Quadrants Deposits according to Moran I (Renminbi yuan)
Quadrant Years
1997 2002 2007 2008 2010 2011
I (high–high) Shanghai* Shanghai* Shanghai** Shanghai* Shanghai* Shanghai**

Jiangsu* Jiangsu* Jiangsu** Jiangsu* Jiangsu* Jiangsu*
Fujian* Fujian* Zhejiang* Fujian* Shandong* Shandong*
Shandong Shandong* Tianjin* Zhejiang Zhejiang Anhui*
Zhejiang Zhejiang Shandong* Shandong Beijing Fujian
Beijing Beijing Fujian Beijing Hebei Zhejiang
Hebei Hebei Beijing Hebei Yunnan Beijing
Yunnan Yunnan Hebei Yunnan Guangxi Hebei
Henan Guangxi Yunnan Anhui Henan Yunnan
Hunan Henan Anhui Shanx Shanxi Guangxi
Hunan Shanxi Henan
Shanxi
II (low–high) Anhui* Anhui* Hainan** Hainan** Hainan** Hainan**
Hainan** Hainan** Jiangxi Tianjin Anhui** Jiangxi*
Jiangxi* Jiangxi* Guangxi Jiangxi Fujian* Tianjin
Tianjin Tianjin Henan Guangxi Tianjin Chongqing
Chongqing Chongqing Henan Chongqing Guizhou
Guizhou Guizhou Guizhou Hunan
Guangxi Shanxi Jiangxi
Shanxi Hunan
III (low–low) Gansu* Gansu* Gansu* Gansu* Gansu* Gansu*
Y.-C. LIU, W. YANG AND C.-C. MAI
Xinjiang* Xinjiang** Xinjiang* Xinjiang* Xinjiang* Xinjiang*

Inner Mongolia Inner Mongolia Inner Mongolia Inner Mongolia Inner Mongolia Inner Mongolia
Qinghai Qinghai Qinghai Qinghai Qinghai Qinghai
Ningxia Ningxia Ningxia Ningxia Ningxia Ningxia
Shaanxi Shaanxi Shaanxi Shaanxi Shaanxi Shaanxi Jilin
Jilin Jilin Jilin Jilin Guizhou Jilin Liaoning Liaoning
Guizhou Hunan Heilongjiang Heilongjiang
Chongqing Chongqing
Hubei Hunan

TABLE 9 Continued
Quadrant Years
1997 2002 2007 2008 2010 2011
IV (high–low) Sichuan* Sichuan* Heilongjiang Heilongjiang Guangdong Guangdong

Heilongjiang Heilongjiang Liaoning Liaoning Sichuan Sichuan
Liaoning Liaoning Guangdong Guangdong Hubei Hubei
Guangdong Guangdong Sichuan Sichuan
Hubei Hubei Hubei
Notes:
(i) The italic values indicate there are significant correlations.
(ii) *Significant at the level 0.05; **Significant at the level 0.01.
IDENTIFYING DETERMINANTS OF BRANCH PERFORMANCES
19
FIGURE 4
Provinces or Municipalities with Significant Moran I Loans in
1997, 2002, 2007, 2008, 2010 and 2011 (Renminbi)
HIGH-HIGH HIGH-HIGH
LOW-LOW LOW-LOW
HIGH-LOW HIGH-LOW
LOW-HIGH Loan1997 LOW-HIGH Loan2002
HIGH-HIGH HIGH-HIGH
LOW-LOW LOW-LOW
HIGH-HIGH HIGH-HIGH
LOW-LOW LOW-LOW
recent strategy of the bank focusing on economically better-developed region: East China
coastal region as mentioned in Section 1.
a. Results Estimated Using the Spatial Lag Model With Fixed Effects
Results of spatial lag models on LR and DR in Tables 4 and 5, respectively, show that spa-
tial and time-period fixed effects models on LR and DR are more appropriate than the three
other (no spatial and time-specific fixed, spatial fixed and time-period fixed effects) models

FIGURE 5
Provinces or Municipalities with Significant Moran I Deposits in
1997, 2002, 2007, 2008, 2010 and 2011 (Renminbi)
HIGH-HIGH HIGH-HIGH
LOW-LOW LOW-LOW
HIGH-LOW HIGH-LOW
LOW-HIGH Deposit1997 LOW-HIGH Deposit2002
HIGH-HIGH HIGH-HIGH
LOW-LOW LOW-LOW
HIGH-HIGH HIGH-HIGH
LOW-LOW LOW-LOW
because, by judging, the values of log-likelihood (80.7244) on LR and (119.3605) on DR

for spatial and time-period fixed effects models are the largest of all in Tables 4 and 5,
respectively.
Table 4 displays the results of using the spatial lag model for the amounts of loans (LR)
with fixed effects into four models. Model I shows estimation results for the model with nei-
ther region nor time-specific fixed effects. The results come from the geographical features
with spatial homogeneity. Model II shows results of the model with spatial-specific fixed

effects but not time-specific fixed effects. Model III shows results of the model with time-spe-
cific fixed effects but not spatial-specific fixed effects. Model IV shows results of the model
with both spatial and time-specific fixed effects. Regarding PI coefficients of provinces or
municipalities, the four models exhibit the same negative sign and all appear to be very sig-
nificant. Thus, the provincial PI coefficient decreased by 1 per cent, and LR increased by
0.2439 per cent. Regarding SI coefficients of provinces or municipalities, the provincial SI
has inconsistent effects on bank branch performances. Different from other models, model IV
exhibits the positive sign and is very significant. It implies that the development of the sec-
ondary industry of the provinces has positive effects on LR with the spatial and time-period
effects taken into account. With respect to the provincial TI coefficients, these four models
show consistent results: positive sign and all appear to be very significant. Thus, the provin-
cial tertiary industry output has very significant and positive effects on LR. Regarding the UE
coefficients of provinces or municipalities, there are mixed results. Taking spatial effects into
consideration, results show positive sign. It becomes even more significant in model IV. On
the other hand, the result of the other model with no spatial but time-specific effects has very
significant impact, but with the opposite sign: negative. This can be attributed to the observa-
tion that the industrialisation leads to urbanisation. With continuous rapid economic develop-
ment and industrialisation during the period of this study, urbanisation deepens. The number
of urban employees who tend to work in the tertiary industry plays a more important role on
branch performance: LR. Therefore, provincial UE is the most significant determinant of all
of branch performances with positive and very significant effects. LR increased by 0.7128 per
cent with adding up UE by 1 per cent of the province. Regarding the POP coefficients of
provinces and municipalities, these four models all show positive signs with great signifi-
cance. Model IV appears to be the most significant and has the largest coefficient. In model
IV, time-period fixed effects enhance the impact of spatial-specific fixed effects because the
coefficient of this factor increases from 0.3753 in model II to 0.6984 in model IV. In other
words, the provincial spatial characteristics have a significant effect. Evidence of this is
reflected in the process of China’s economic and financial development. The population
increased in cities and towns versus rural areas. Urbanisation deepened greatly during the pro-
cess of industrial development (since the Reform and Open Economic Policy in 1978). Work-
ers moved towards manufacturing hubs to obtain jobs in factories as agricultural sector
provided less job opportunities and less income. Therefore, Table 4 shows that TI, UE and
POP are the three most important factors to bank branch performances in terms of LR. This
confirms that the bank branch is theoretically and practically located in a populated area –
concentrated in the centre of the city in particular.
Results in Table 5 are similar to those in Table 4. However, TI becomes more significant
and has a stronger impact on DR than UE is. POP is still a significant factor.
b. Results Estimated Using the Spatial Error Model With Fixed Effects
The estimation results of spatial error models on LR and DR, again models with spatial
and time-period fixed effects, have the largest values of log-likelihood: 82.1206 in Table 6
and 119.2617 in Table 7. These results indicate that the spatial and time-specific fixed models
are more convincing than the other three models for the panel data analysis. We therefore
focus on interpreting results of the spatial and time-period fixed effects model.
Table 6 displays the estimation results of the spatial error model with fixed effects. The
patterns illustrated from the first to the fourth models are very similar to those in the spatial

lag model in Table 4. The estimation results of each type of model are approximately the
same as those of the spatial lag model. It indicates that TI is the most significant and has the
highest effects on LR. Meanwhile, provincial POP is the second most significant and has a
slightly higher impact on LR than UE does.
Similarly, provincial TI again has the largest coefficient value and is the most significant
determinant of DR in Table 7. The provincial POP has a slightly stronger impact than UE
does on DR, although to a less significant degree.
c. Comparisons
Comparisons of empirical results using the spatial lag model and spatial error model reveal
some intriguing similarities and some differences. The estimation results of each type of
model in Table 4 are approximately the same as in Table 6. Provincial SI, TI, UE and POP
all have positive sign and are at very significant level. UE has the largest coefficient in
Table 4, while TI has slightly higher coefficient than UE does in Table 6. Provincial PI is
very significant but has negative impacts on LR in both Tables 4 and 6. On the other hand,
provincial SI is not significant on DR in Tables 5 and 7, but it is very significant on LR in
Tables 4 and 6.
In comparing estimation results in Tables 5 and 7, the provincial TI has the largest positive
coefficient and is the most significant factor on DR in both tables. The provincial UE and
POP are both at significant level and have positive effects on DR in both tables. In addition,
the provincial PI is at significant level but has negative impacts on DR in both tables. The
provincial SI is insignificant and has smaller coefficient.
Summarising results from Tables 4–7, we identify that the provincial TI, UE and POP are
all consistently very significant and have positive impacts on LR and DR. TI has the largest
coefficient in most models, while UE is the second largest and POP is the third. On the other
hand, the provincial PI is very significant but has a negative sign in all models, while the pro-
vincial SI has mixed signs in different models but is mostly at a less significant level.
Thus, these indicate that loans from ABC are no longer made to the agriculture sector and for
the government policy.
Reasons of PI and SI that are the negative or less significant contributing factors can be
well explained as follows. The ABC was resurrected to support the development of rural
infrastructure, particularly key sectors such as transport, telecommunication, public utilities
and power in 1979 (Nanto and Sinha, 2002), due to The Opening and Reform policy starting
from 1978. The ABC and other three main banks: Bank of China, China Construction Bank
and Industrial and Commercial Bank of China, started to play leading roles in China’s bank-
ing system from the mid-1980s. The functions of these four state-run banks on policy financ-
ing were removed in the reform in 1993. Three new banks were set up to take over the above
four banks’ functions in implementing government policies in 1994. These three so-called pol-
icy banks include the China Development Bank, the Export–Import Bank of China and the
Agriculture Development Bank of China. At the same time, shareholding banks and various
types of financial institutions such as trust and investment companies, and credit cooperatives
were allowed to be established. With the introduction of the Commercial Bank Law of 1995,
the four state-run banks began to operate more commercial banks oriented. Loans were to be
made on a profitable and no longer government policy basis. The four state-owned banks
started to engage consumer credit for purchases of motor vehicles and provide financial sup-
port to all-sizes enterprises (Nanto and Sinha, 2002). In other words, the role and the function

of the ABC were replaced by the Agriculture Development Bank and the deregulation and the
rapid development of local banking system. The PI and SI were not the main sources to the
performances of ABC after the government reforms on financial industry.
According to the empirical results above, businesses and profits of the ABC have greatly
changed before and after listing in the stock exchanges. It derived from more populated espe-
cially urban areas and focused more on tertiary industry during the period of this study. This
transformation may also be attributed to the major structural changes and rapid consolidation
among China’s banking industry to allure domestic and foreign investment in the past two
decades. State-owned commercial banks were required to close or merge their small subsidi-
ary saving branches, especially those in lagging rural areas where local savings are small.
These changes have greatly influenced the distribution of bank branches, both in number and
in location. In the case of the ABC, it had 23,461 branches in 2011. The number was down
from 56,539 in 1999.
The research of Hashiguchi and Chen (2012) stated that the remarkable China’s economic
growth has not been geographically uniform. The regional inequality has generated large
industrial agglomerations including the banking industry as well. With accumulated huge for-
eign investment, China now has three major areas of industrial and economic agglomeration:
the Bohai Sea Region centred on Beijing and Tianjin; the Yangtze River Delta extending
across Shanghai, Zhejiang and Jiangsu provinces centred on Shanghai; and the Pearl River
Delta centred on Guangzhou of Guangdong province.
In the light of the research result of Hashiguchi and Chen (2012), and the consolidation of
the location and the number of branches, it does show that branches along the coastal regions
– the Yangtze River Delta, Bohai Sea Region, and Pearl River Delta with Shanghai and Beij-
ing cities – play the central-place roles and Guangzhou city, to a lesser degree, outperformed
others in inland regions (mostly in central region and especially in the Western region) in
terms of loans and deposits. This also applies to the three significant independent variables:
TI, UE and POP. Thus, the farther away from the three major central places mentioned above,
the less significant the branches’ performances become.
By employing the spatial lag and error models, three major determinants were identified:
TI, UE and POP of branch performances of the ABC during this period. We suggest that TI
implies the strength of domestic consumption while UE is the proxy for the urbanisation.
POP is the fundamental factor for configuration of the bank branch network. In other words,
TI reflects the demand side of urbanised economies. The degree of urbanisation of branch effi-
ciency is affected by the demand side urbanised economies, according to Bos and Kool
(2006). Thus, TI is also related to urbanisation to certain degree.
5. CONCLUSIONS
Geographical dimensions and spatial territorial features of China’s financial sector have
been omitted in the previous literature. Despite the trend of financial globalisation, however,
banking services occur at regional or branch levels, still displaying considerable differences
from one to another. This leads to the need for better understanding of spatial territorial per-
formances of China’s banking industry. We focus the investigation on the ABC from 1997 to
2011 due to the data availability.
The results of Moran’s I tests clearly indicate that the spatial autocorrelation exists signifi-
cantly. These results also highlight spatial effects cannot be ignored. There will be bias if the
econometric model excludes spatial effects. Thus, it is important to apply spatial econometric

methods that consider the possibility of spatial effects to obtain more appropriate empirical
results. Previous studies related to China’s banking industry have never taken the impacts
caused by spatial association effects and the urbanisation into account. It would be the first
research to evaluate performances of one of China’s largest banks at branch level with empiri-
cal evidences obtained from employing a spatial econometric model and by underlining the
impacts of factors related to urbanisation.
Our empirical results assist management in establishing branches goals, evaluating perfor-
mances and planning new locations. Spatial lag and error models are employed to produce a
set of equations that effectively identify how urbanisation and other factors affect various
dimensions of branch performances.
Spatial econometric models are the first time to be applied to identify the determinants of
bank branch performances, particularly in the case of the mainland China. It reveals that the
models are useful management tools in allocating resources between the branches to achieve
higher efficiencies.
Empirical results indicate that spatial effects and urbanisation have statistically significant
impacts on branches’ performances. Interestingly, the ABC was resurrected to support rural
economic development in 1979, however empirical evidence indicate that its performances
were significantly and negatively related to agricultural businesses of rural areas but were
highly and positively related to the service industry of populated urban areas. This signals that
the ABC has evolved from a state-owned specialised bank to a listed commercial bank.
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The World Economy

The World Economy (2014)

Identifying Determinants of Branch

© 2014 John Wiley & Sons Ltd

3. SPATIAL ECONOMETRIC MODELS

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

Variable Names Definitions

LRi,t The total amount of loans in renminbi of the province i in year t

Name of the Regions Provinces and Municipalities Included

Yangtze River Delta Shanghai city, Jiangsu and Zhejiang provinces

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

1997 0.2388** 0.2185** 0.1805* 0.2918*** 0.3360*** 0.2849*** 0.2151**

ln Yit ¼ a þ b1 ln PIit þ b2 ln SIit þ b3 ln TIit þ b4 ln UEit þ b5 ln POPit þ eit ; (1)

where Xit denotes PIit, SIit, TIit, UEit and POPit.

© 2014 John Wiley & Sons Ltd

ID = Henan ID = Zhejiang ID = Hainan ID = Hubei ID = Hunan

© 2014 John Wiley & Sons Ltd

ID = Anhui ID = Ningxia ID = Shandong ID = Shanxi ID = Guangdong

ID = Guangxi ID = Xinjiang ID = Jiangsu ID = Jiangxi ID = Hebei

ID = Henan ID = Zhejiang ID = Hainan ID = Hubei ID = Hunan

ID = Gansu ID = Fujian ID = Guizhou ID = Liaoning ID = Chongqing

ID = Shaanxi ID = Yunnan ID = Qinghai ID = Heilongjiang ID = Inner Mongolia

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

Types of Model Model I Model II Model III Model IV

PIi,t 0.2734*** 0.3126*** 0.2163*** 0.2439***

© 2014 John Wiley & Sons Ltd

Types of Model Model I Model II Model III Model IV

PIi,t 0.2949*** 0.0184 0.1582*** 0.1577**

© 2014 John Wiley & Sons Ltd

Types of Model Model I Model II Model III Model IV

PIi,t 0.1525*** 0.2344*** 0.1360*** 0.2387***

© 2014 John Wiley & Sons Ltd

Types of Model Model I Model II Model III Model IV

PIi,t 0.1346*** 0.1347* 0.1741*** 0.1636**

© 2014 John Wiley & Sons Ltd

1997 2002 2007 2008 2010 2011

I (high–high) Shanghai* Shanghai* Shanghai** Shanghai** Shanghai** Shanghai**

© 2014 John Wiley & Sons Ltd

1997 2002 2007 2008 2010 2011

IV (high–low) Sichuan* Sichuan* Sichuan Hubei Sichuan Sichuan Sichuan

1997 2002 2007 2008 2010 2011

I (high–high) Shanghai* Shanghai* Shanghai** Shanghai* Shanghai* Shanghai**

Xinjiang* Xinjiang** Xinjiang* Xinjiang* Xinjiang* Xinjiang*

© 2014 John Wiley & Sons Ltd

1997 2002 2007 2008 2010 2011

IV (high–low) Sichuan* Sichuan* Heilongjiang Heilongjiang Guangdong Guangdong

© 2014 John Wiley & Sons Ltd

because, by judging, the values of log-likelihood (80.7244) on LR and (119.3605) on DR

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

Berger, A. N. and D. B. Humphrey (1997), ‘Efficiency of Financial Institutions: International Survey

© 2014 John Wiley & Sons Ltd

© 2014 John Wiley & Sons Ltd

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1997 0.2388 0.2185 0.1805* 0.2918* 0.3360* 0.2849* 0.2151

PIi,t 0.2734* 0.3126* 0.2163* 0.2439*

PIi,t 0.2949* 0.0184 0.1582* 0.1577**

PIi,t 0.1525* 0.2344* 0.1360* 0.2387*

PIi,t 0.1346*** 0.1347* 0.1741* 0.1636

I (high–high) Shanghai* Shanghai* Shanghai Shanghai Shanghai Shanghai