Does Foreign Bank Entry Make Chinese Banks Stronger?

Abstract

China has encouraged its domestic banks to introduce foreign investment since the early 2000s. In the meantime, China has gradually fulfilled its World Trade Organisation (WTO) accession commitment to give foreign banks the same treatment as their Chinese counterparts in the last decade. This research has examined the effects of the two modes of foreign bank entry, namely, minority ownership participation, and setting up branches and subsidiaries, on the performance of Chinese banks. Our results suggest that there is no systematically significant impact of the minority ownership participation on the performance indicators of Chinese banks. However, it appears that the physical presence of foreign banks has been a significant driver for domestic banks to improve profitability and efficiency. Opening the country to foreign banks appears to have made Chinese banks stronger and more competitive.