This paper investigates the relationship between market structure and performance in China’s banking system from 1985 to 2002, aperiod when this sector was subject to gradual but notable reform. Using panel data estimation techniques, both the market-power andefficient-structure hypotheses are tested. In addition, the model is extended to consider issues such as the impact of bank size/ownershipand whether the big four banks enjoy a ‘‘quiet life”. On average, X-efficiency declined significantly and most banks were operating belowscale efficient levels. Estimation of the structure–performance models lends some support to the relative market-power hypothesis in theearly period. The reforms had little impact on the structure of China’s banking sector, though the ‘‘joint stock”banks became relativelymore X-efficient. There was no evidence to support the quiet-life hypothesis, probably because strict interest rate controls prevented thestate banks from earning monopoly profits. Thus the ongoing liberalisation of interest rates should be accompanied by reduced concen-tration. Overall, to improve competitive structure, new policies should be directed at encouraging market entry and increasing the marketshare of the most efficient banks.