Aug 11, 2013

The Impact of Foreign Bank Penetration on the Domestic Banking Sector in China

Using a newly constructed disaggregated measure, the foreign bank branch influence index (FBBII), to proxy the domestic banks’ foreign exposure, this study investigates the influence of foreign entry on the performance of local banks based on a sample of 107 Chinese commercial banks during the period of 2002 to 2011. It was found that the increased presence of foreign banks has improved the profitability of domestic banks and that this might be due to the higher efficiency achieved by the latter. In addition, the domestic banks were also found to increase their non-interest income when faced with greater foreign exposure and such a positive relationship is found to be most significant among the joint stock banks. Finally, this study also found consistent evidence that foreign bank penetration could help the domestic banks improve their risk management capacity, in particular among banks with foreign strategic investors.
That is from a new paper by Luo et al (June 2013).  
From the conclusions:
Based on four performance indicators, it could be concluded that increased foreign entry has generated a significant positive impact on the Chinese banking sector and banks, with foreign strategic investors (FSI) tending to react more actively to the changing operational environment. Nevertheless, the state-owned banks are hardly influenced. Despite all the reforms, they retain the monopoly power over the whole industry and hence are less sensitive to the additional competitional pressure exerted by foreign banks. To enable the Chinese banking sector to continue to improve its efficiency, restrictions imposed on foreign banks should be further relaxed. Particularly in the case of the FSIs, they should be allowed to acquire a larger banking stake so as to gain more effective control. P. 28.

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