3 - Factors influencing the growth of foreign banks’ branches

Abstract

This chapter focuses on the factors influencing the Chinese government's allocation of branch licences to foreign banks. Because of the Chinese government's policy to effectively ration banking licences, the allocation of branch licences is due more to the objectives of the Chinese government than the objectives of foreign banks. Consequently, the chapter considers what factors have determined the supply of branch licences to foreign banks. This is in contrast with the existing literature that focuses almost exclusively on the demand for branch licences by foreign banks. The economic shortages and low efficiency faced by China's centrally planned economic system prior to 1979 created a need to promote economic development and to attract foreign investment. The Chinese government abandoned its self-sufficiency policy when the 11th Party Central Committee, in December 1978, proposed an “open door” policy. This policy was designed to broaden China's economic and financial integration with the rest of the world and to facilitate the inflow of foreign capital. As a result of the policy, the Chinese government permitted foreign banks to operate in China. The factors influencing the government's allocation of banking licences to foreign banks are in terms of the government's open door policy and its regulation over foreign banks.