Hybrid property, path dependence, market segmentation and financial exclusion: the case of the banking industry in China

Abstract

This paper investigates the role of the state in the liberalisation of the banking industry in China and the implications for the conventional convergence thesis of market segmentation and financial exclusion. I argue that the usefulness of the convergence thesis is constrained because it does not take region‐specific institutional systems into consideration. This limitation is clearly illustrated by the experience of Chinese banking reforms. As China is still undergoing a series of institutional reforms to create a functioning market economy, the banking reforms implemented in China have created a ‘hybrid property’. ‘Hybrid property’ refers to a mixed public–private ownership structure that has been adopted for previously wholly state‐owned commercial banks (SOCBs). This transformation of the property structure blurs the conventional boundaries between public and private property, while the state still plays an important role in the regulation and operation of these banks. I further argue that financial geographers have to account for the institutional path dependency of non‐market economies and the consequent state response to public–private initiatives of ‘hybrid property’ in transitional economies. The ‘region‐specific segmentation’ policy implemented by the Chinese state is a response to these public–private initiatives of ‘hybrid property’. Under this de facto rural–urban market segmentation policy, the state has to open up the banking industry to foreign banks in lucrative urban markets while maintaining much stronger control in rural areas to lower the level of financial exclusion. This intervention policy is inefficient but it is an acceptable compromise between the needs of corporate governance and private initiatives, and socio‐economic and political stability in China. This is an indication of the institutional path dependency of the planned economy. Therefore, liberalisation in the Chinese banking industry and the resultant rural–urban market segmentation is spatially contingent on the public–private initiatives of ‘hybrid property’ in the transitional economy.