FOREIGN BANKS’ ENTRY INTO CHINA’S BANKING MARKET: AN EMPIRICAL STUDY
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Using a fix-effect modeling method, this study investigates the effect of foreign bank entry on the performance of indigenous banks in China during the post-deregulation period 1996-2004 Contrary to the results of Claessens’s etal(2001), this research shows that it is the loss of market share(as measured by the ratio of foreign bank assets to China’s entire bank assets) rather than the increase of bank branches which has a greater effect on China’s domestic banks. Moreover our results support the view of Lensink and Hermes(2004) that as China’s banking sector is not well developed, domestic banks have incurred higher costs and margins when learning banking techniques and practices from foreign banks due to the spill-over effect. As a result, China’s domestic banks may transfer their implementation costs to their consumers or clients by raising margins and thus gaining higher profits. It is therefore difficult to draw a conclusion as to whether the foreign bank entry has enhanced the competitiveness of Chinese domestic banks and thus improved the efficiency of financial sector
Abstract
Using a fix-effect modeling method, this study investigates the effect of foreign bank entry on the performance of indigenous banks in China during the post-deregulation period 1996-2004 Contrary to the results of Claessens’s etal(2001), this research shows that it is the loss of market share(as measured by the ratio of foreign bank assets to China’s entire bank assets) rather than the increase of bank branches which has a greater effect on China’s domestic banks. Moreover our results support the view of Lensink and Hermes(2004) that as China’s banking sector is not well developed, domestic banks have incurred higher costs and margins when learning banking techniques and practices from foreign banks due to the spill-over effect. As a result, China’s domestic banks may transfer their implementation costs to their consumers or clients by raising margins and thus gaining higher profits. It is therefore difficult to draw a conclusion as to whether the foreign bank entry has enhanced the competitiveness of Chinese domestic banks and thus improved the efficiency of financial sector