The Effect of Foreign Bank Entry on the Operational Performance of Commercial Banks in the Chinese Transitional Economy

Abstract

This article undertakes an empirical examination of the impact of foreign bank entry on the operational performance of the Chinese banking sector, placing particular emphasis on the unique features of China's banking industry as it undergoes the process of transformation. Pooled cross-section (banks) and time series data are employed in the empirical estimation, with the sample comprising 14 Chinese banks and the period 1996–2004. Fixed effects and random effects models are estimated. The empirical results for the whole sample show that the return on assets (ROA) for those Chinese banks that have foreign shareholders is, on average, lower than the ROA for banks that do not have foreign shareholders. The longer a bank has been in existence, the lower its ROA will be, the main reason for this being that the older Chinese banks tend to have accumulated a lot of ‘legacy problems’. Non-interest income is found to have a negative impact on ROA, reflecting a continuing emphasis on traditional lending business. Moreover, an increase in the depth of foreign bank participation does not affect the operational performance of Chinese banks.