Foreign Banks in China:Has liberalisation and deregulation of the financial sector

encouraged foreign banking in China.

Jonathan James Yee

11th September 2015

Words: 9825

List of Abbreviations

ABC- Agricultural Bank of China

BIS- Department for Business Innovation and Skills

BOC- Bank of China

CCB- China Construction Bank

CCP- Chinese Communist Party

CRBC- China Regulatory Banking Commission

FDI- Foreign Direct Investment

GDP- Gross Domestic Product

ICBC- Industrial Commercial Bank of China

IFDI- Inward Foreign Direct Investment

IPO- Initial Public Offering

OFDI- Outward Foreign Direct Investment

RBS- Royal Bank of Scotland

ROAA- Return on Average Assets

ROAE- Return on Average Equity

ROA- Return on Assets

ROE- Return on Equity

SFTZ- Shanghai Free Trade Zone

USD- United States Dollars

WFOB- Wholly Foreign Owned Banks

WTO- World Trade Organisation

Table of Contents

Abstract……………………………………………………………………………..……………Page 2

1. Introduction……………………………………………………………………………..…….Page 3

1.1 Research Question, Objectives and Hypothesis……………………………………..Page 6

1.11 Objectives.....................................................................................................Page 6

1.12 Hypothesis…………………………………………………….…..……….Page 6

1.2 Reasons and implications of Research…………………………………………...….Page 7

2. Foreign banking in China……………………………………………………………….….Page 10

3. Review of Chinese banking system………………………………………………………...Page 16

3.1 Brief History……………………………………………………………………..…Page 16

3.2 Current Environment……………………………………………………….………Page 18

3.3 5-year plan and foreign banking……………………………………………………Page 23

3.31 10th 5-year plan……………………………………………………...……Page 24

3.32 11th 5-year plan………………………………………………….………..Page 25

3.33 12th 5-year plan……………………………………………………..…….Page 26

4. Methodology…………………………………………………………………………………Page 28

4.1 Data…………………………………………………………………...…………….Page 29

4.2 Variables……………………………………………………………………...…….Page 30

4.3 Method………………………………………………………...……………………Page 31

5. Results………………………………………………………………………………………..Page 34

5.1 Foreign Banking isolated……………………………………………………...……Page 34

5.11 Analysis of foreign banking isolated……………………………….…….Page 41

5.2 Comparison of foreign banking and Chinese banking……………………………..Page 42

5.21 Analysis of comparison of foreign banking and Chinese banking……….Page 43

5.3 Correlation between foreign banks and Chinese Banks………………………...… Page 44

5.31 Analysis correlation of foreign banks and Chinese Banks…………….…Page 46

6. Conclusion and Limitations…………………………………………………….………..…Page 47

6.1 Conclusion …………………………………………………………………………Page 47

6.2 Limitations …………………………………………………………………………Page 49

Appendix…………………………………………………………………………….………….Page 50

References………………………………………………………..………………………..……Page 54

Abstract

The gradual deregulation of the financial sector in China has been an invitation for

foreign banks to gain their first steps into the market. There have been multiple waves of

liberalisation and deregulation targeting foreign banks in particular. Using data from

Bankscope, to identify the penetration of banks since deregulations occurred, we have been

able to assess whether this is the case and if there has been a large inflow of foreign banks as

was expected.

It was found, that despite common logic, due to the lowering of barriers to a much

sought after market that the increase in foreign banks has been unsubstantial and that foreign

banking growth was in line with the rest of the sector.

Therefore, despite efforts of deregulation and liberalisation, little progress has been

made by foreign banks in China and they have fallen short of the opportunities available.

1) Introduction

In the past few decades, China has made great efforts to become competitive on a

global scale, and has successfully done so in terms of their GDP, as it set to become the

largest economy by 2024 (HIS,2015). However, economic growth in the long run is highly

dependent on financial development, as it aids investment, spreads risk and provides

liquidity. (UN, 2006). The role of the financial sector within countries is to optimise the

allocation of scarce funds where they are demanded, while maximising returns for investors

by spreading risk (Elliot, D and Yan, K, 2013).

China has failed at doing this effectively, consequently leading to its financial sector

as being categorised as ‘deep but narrow’. This is due to the ratio of financial assets to GDP

increasing, but being primarily concentrated in the banking sector. The banking sector has an

80% concentration of all financial services in China, with the top 5 banks holding half of the

loan market (Naughton, 2007). Hence, China’s financial system has come under scrutiny not

only abroad but domestically due to the lack of diversity in the sector.

Much research has been focused on how the country has liberalised their banks and

transitioned from a state owned monopolistic structure. It has made efforts to further diversify

the financial sector, in order to make it a more competitive, market orientated, commercial

structure.

There has been extensive news coverage of the reforms guided by the 5-year plans

and China’s ‘big four’ banks. These top four banks have become the top four banks globally

in terms of pre-tax profit. ICBC also holds the position of the world’s largest bank in terms of

assets while the other three still lie within the top ten. This result has arisen at an incredible

pace, as the market mechanisms in the banking sector were only introduced in 1986.

(Bankerdatabase, 2015)

Prior to 2001 foreign banks were only allowed to conduct businesses in two cities and

were only to provide services to foreign firms and individuals. Since the 10th 5-year plan the

government has made efforts to loosen controls over the banking sector and introduce more

foreign competition into the economy. (He and Fan, 2004)

In this short space of time the Chinese Communist Party (CCP), has introduced

multiple waves of reform and liberalisation, to achieve more competition by selling shares of

the state owned banks and allowing more foreign banks to compete in China. Although the

presence of the state is slowly dissolving away from the large banks, they still play a major

role in almost every aspect of finance in China, including the outward movements of Chinese

banks as they try to gain market share abroad. (Martin, 2012)

The CCP’s liberalisation of banks has allowed the Chinese banks to venture abroad,

which has been a widely discussed topic of study due to the impact the banks could have

abroad, stemming from their sheer size, political clout and the uncertainty they bring along

with them. (Allen et al, 2005)

The majority of Chinese banks are expanding primarily into the Middle East, Asia and

Latin America, in order to facilitate the large number of Chinese firms already present there,

(follow the client). They are slowly making inroads into Europe and North America in order

to gain internationalisation of assets for stability. An example being the purchase of The

Bank of East Asia’s US subsidiary in 2012, by ICBC, resulting in it becoming the majority

shareholder. This was seen as a big turning point as ICBC became the first Chinese institution

to assume control of an American bank. (Calkins, 2013) This occurred as a result of the

‘going out policy’, which was instated in the early 2000’s, resulting in a huge surge of OFDI.

OFDI now exceeds IFDI in China. (The Economist, 2009) The sum of Chinese banking

abroad is now in the sum of USD1.2Trillion, with 18 Chinese institutions having set up 1127

branches in 57 different countries by the end of 2013. (CRBC, 2013)

With the rapid expansions of Chinese banks abroad reciprocal treatment for foreign

banks in China is of course to be expected. (economist.com, 2009) However, there are only

41 foreign banks present in China, which currently span 69 cities in 27 provinces. Despite

this somewhat impressive figure, only 6 are able to issue RMB financial bonds and a meagre

3 have the authorisation to issue credit cards. (EY, 2014)

This paper aims to assess the Chinese banking sector and compare foreign banking

performance to Chinese banks performance in order to see whether the regulations have

helped foreign banks specifically. If regulations have been successful foreign banks in China

should thrive, and make gains in terms of market saturation in China.

1.1) Research Question, Objective and Hypothesis

Has liberalisation and deregulation of the financial sector specifically encouraged

foreign banking in China?

1.11) The Objectives of this paper are:

1) To analyse the changes to the economic environment of foreign banking in China.

2) To collect quantitative data, showing foreign banks in China, and whether or not they

have been successful in entering the market.

3) To analyse whether or not government regulations have specifically allowed foreign

entry of banks.

1.12) Hypothesis

Hypothesis 1: The success of foreign banking has grown from the year 2001 onwards.

Hypothesis 2: The government has specifically encouraged foreign banking in China.

A fully defined null and alternative hypothesis has not been outlined here as the paper aims to

take a more inductive approach.

1.2) Reasons and implications of research

The highly important composition of foreign banking has gone mostly unnoticed due

to the rapid expansion of Chinese banks abroad. The details of the reforms concerning

foreign banks are also rather vague and therefore, at present, the literature is somewhat

scarce. Therefore, to further advance future literature and discover the effects of the

liberalisation of the banking sector in China, additional research must be undertaken.

As the banking sector is so large and plays such a vital role in China, further study

must be made into the advances made by foreign banks in China. While initial research has

been undertaken on the motivations and modes of entry of the foreign banks into China, very

few have followed up on their success or failures. Most actions in the economic planning of

China, would all point to the viability of more foreign banks in the market. These actions

include, the ascension to the WTO, the content of the past and current 5 years plans, the

movement of Chinese banks abroad and availability of Chinese banks to foreigners on the

stock exchange. (Hess, 2014)

In theory, the power of the Big Four state owned banks should be diluted with the

movement of foreign entrants. This is due to foreign banks having the skills to operate with

efficiency and quality, whilst offering a complete range of products. As discussed before,

China has been subject to a great amount of FDI and therefore foreign firms doing business in

China will also, most likely, opt for foreign services; due to their familiarity and trust

worthiness. This in turn, should push local banks to provide a more complete service and

raise its efficiency. (Lin, Cai, Li, p290).

The importance of foreign banks increasingly grows, as the RMB is gaining

momentum in its internationalisation and it will be these institutions, which help the

transition of this historic move. (Reuters, 2012)

The financial sector in China is one of the few areas in the economy where reform is

in its relative infancy and is still undergoing major changes. Therefore, further research is

needed to follow up on whether or not foreign banks have gained momentum over the past

years. This will primarily be in terms of their total assets, net income, equity and their volume

of deposits and loans. The research aims to show whether new regulations, from 2001 to

2014, have been effective in increasing competition in China, as was their goal.(Fu and

Heffernan, 2006) Or was it just a façade to show cooperation to the international markets,

while still maintaining tight controls over the financial sector?

The paper does not aim to prove that the liberalisation of the banking sector is the

definitive reason for any movements in the composition of banks in the financial sector. As

current reforms are still in progress and therefore no definitive answer can be given.

However, by looking at past trends and analysis of the compiled data, it may provide us with

some implication of its role, past, present and give us some insights to the future of banking

in Chin

The following section will be a review of the literature, which questions the

importance of internationalisation of foreign banks to the economic environment. This, along

with a brief history of the financial sector, will help us to understand clearly the obstacles and

pressures placed upon the government to open up the banking sector to the international

market. The methodology of the research will be clarified and the interpretation of the results

will be explored further. Finally, the limitations and the future areas of research will be

explored as a conclusion to the paper.

2) Foreign Banking in China

To understand why this topic is of great importance we must assess the

importance of companies going global and the importance of having foreign banks competing

in the local market.

With increasing globalisation comes the need for increased international capital

markets to help facilitate international trade. This helps aid the investment required when

firms wish to venture abroad and help provide liquidity to the domestic market. However this

can only be achieved if countries lower their barriers and loosen their rules, in order to aid

target markets. (Hill, 2014)

China’s loosening and restructuring of economic legislation through the 5-year plan

should therefore encourage, to a certain extent, entrants of foreign entities. Economic

legislation refers to direct legislation and administrative regulations of entry into a specific

market or industry. (Joskow and Rose, 1989)

The department for Business Innovation and Skills (BIS), also states that, ‘ high

quality and efficient economic infrastructure plays a vital role in supporting a competitive

and growing economy, by providing services on which all businesses and citizens depend

on’. Continued improvement of economic regulation is vital for infrastructure investment

and can facilitate more investment than through privatisation. This aids a countries

infrastructure growth and its international competitiveness. (BIS, 2011)

In relation to an oligopolistic market, such as China’s banking sector, BIS states that it

limits effective competition, and therefore regulation needs to be adapted in order to promote

fairness and protect consumers’ interest. (BIS, 2011)

Having added competition from foreign firms is advantageous as it increases the

supply of capital in the country and therefore, the cost of borrowing is usually lower. This can

be done using indirect commercial banking methods or direct investment banking methods. If

the investment banking system is needed, having an international firm present, allows for a

wider range of opportunities therefore, spreading the risk in a portfolio. (McKinsey, 2011)

Foreign banks in China can deliver this by providing greater professionalism, wider

product knowledge, a customer-centric service, managers trained internationally, wider

product selection, a global network and a strong reliable brand name. These are all key

components, which demonstrate the importance of foreign banking growth in China. Of

course it simultaneously brings added pressures to domestic banks, however if introduced

correctly this added pressure could result in higher quality products at a cheaper price and a

push in innovation. (PWC, 2012)

If the investment opportunities are limited to just the domestic field, this will place

pressure on supply, in turn making the rate of return lower on investment. Also, if a financial

crisis were to happen domestically, a trickle effect could impact other investments, as the risk

have not been spread across multiple arenas. (Hill, 2014)

This is the problem that the Shanghai stock exchange is currently facing (August,

2015), as the majority of the stocks listed are A-shares, which can only be sold to domestic

investors. Therefore, when the shock slump in the stock market, caused by the devaluation of

the RMB occurred, it sent the value spiralling downwards. (Economist, 2015)

Diversifying across multiple stock markets helps reduce the risk, as different stock

markets responding to different factors. Therefore, a crisis on the Shanghai stock exchange

may not necessarily affect the stock on the New York Stock exchange. Of course, as the

world becomes more integrated through globalisation, technology and further deregulation

continues, the relationship between stock markets, are becoming more interdependent. As the

2008 financial crisis exhibited, an impact in one country can dissipate extremely quickly

around the world. (Hill, 2014)

Other costs caused by foreign entrants into the Chinese financial markets are that to

domestic banks. Domestic banks need to lower costs to compete with foreign banks, which

have a better reputation, in turn making them unprofitable. (PWC, 2012)

Therefore, overall the benefits are great, especially to a country like China, which

wishes to have more political clout in the global economic stage. However, rightly so, the

government should keep a close watch on the firms entering the economy, especially large

foreign firms which sometimes have more economic power than some national governments.

Deregulation must be monitored and controlled to have its desired effects.

As it is beneficial to open up a country to foreign banks, the foreign banks themselves

must also have an incentive for venturing into overseas territories.

In a research paper by Claessens, Demirguc-Knut and Huzinga, they empirically

tested the effects of foreign banking in 80 countries using data from Bankscope. Their

research came to the conclusion that in developing countries, foreign banks have higher

interest margins, profitability and tax payments than their domestic counterparts. Therefore,

their research shows that it is consistent with other literature and that in the long run more

foreign banks may improve the domestic climate, especially for customers. They also found

that it was the number of banks, which entered that, was deemed to be important to

competition in the domestic market. This is an important point and therefore will be further

explored in regards to the research undertaken in this paper. (Claessens et al,2000)

Foreign banks would be favourable in China as they provide global networks and

trading expertise, which although Chinese banks, are gaining strength in, they are still far

behind in terms of global scale. However, foreign banks have been able to provide this as

funding highly depends on deposits, which are difficult to come by due to domestic

competition. Consequently, foreign banks require strong support from home. 30 out of 35

banks stating that the parent company as the main source. Other methods of funding are

highly restricted in China, as only a few foreign banks have been given approval to issue

bonds. (PWC, 2013)

As well as typical deposit and loan banking, foreign banks can utilise their

comparative advantage abroad by tapping into niche markets. China’s undiversified banking

sector provides foreign banks to utilise their expertise in areas such as wealth management,

investment banking, Internet banking and credit cards. According to KPMG’s report on

foreign banking, by the end of 2004 foreign banks were able to introduce three times the

amount of new products than domestic banks. This competition is also expected to increase

banking efficiency and will create spill overs. (KPMG, 2014)

As the banks tend to all be in close proximity of one another, hiring and firing of staff

will cause innovation, knowledge and technology transfers from one bank to another. This

has been demonstrated to be true with many knowledge parks, for example Silicon Valley.

The Shanghai Free Trade Zone may also grow into a knowledge park if its goal of becoming

an international financial centre (IFC) is realised. (EY,2014)

Although, in the short run foreign banks may increase domestic banks cost, it is

shown that in the long run they may reduce them. This has been attributed to the spill over

effects strengthening the competition, which will force banks to lower costs to be

competitive, and therefore be beneficial to consumers. (Allen, et al, 2011)

In recent surveys of foreign banks in China the regulatory environment is seen as the

most difficult aspect of doing business in China with finding good personnel and competition

from domestic banks being additional hurdles. (PWC, 2013) Further domestic competition in

China increased in 2014 when regulators further approved 5 new privately owned banks. This

was followed by the loosening of regulations for RMB licenses for foreign banks. (EY, 2014)

This may set to change however, with the new 12th five year plan pointing towards

favourable firms in biotechnology, new energy, high tech manufacturing and computing

innovation. Foreign banking expertise in these fields may be needed and therefore

readjustment to the regulations may need to change. Foreign banks have a proven track

record with risk management and corporate governance, which will help strengthen banking

regulations in China. This is a goal of the most recent 5-year plan and therefore would be

interesting to see if these have come into any effect. Much of the regulatory change has been

driven by the US and EU, such as the Dodd Frank, Basel III and the Recovery and Resolution

Planning. This will simultaneously help the Chinese banking environment and create

opportunities for foreign banks. (PWC, 2012)

The literature suggests, in a magnitude of ways that allowing foreign banking in

China would be a benefit for the Chinese economy, foreign banks themselves and for

consumers. The evidence suggests that Chinese has made a great deal of effort to liberalise

the banking sector and allow foreign entrants. This may be from a great deal of pressure from

the WTO however, as there are still many provisions in place which, discourage foreign

entrants. The aim is to discover whether foreign banks or the Chinese government has

prevailed.

3) Review of Chinese Banking System

To understand how foreign banks can achieve the internationalisation goals they wish

to, we must assess China’s past history to understand why the financial sector’s environment

has arrived at its current destination. We must also assess the present environment and the 5-

year plans to uncover the opportunities available to foreign banks currently and in the future.

3.1) Brief History

On the 1st of October 1949, after decades of civil war, China finally established itself

as a new country with a new leader. The People’s Republic of China, under the leadership of

Mao Zedong, transformed the economy into one which aimed to become an independent

country utilising communist methods. To do so, Mao insisted that the route of heavy industry

was the preferred method, due to most of the world’s most powerful economies at that time

adopting this path. (Lin et al, 2003)

As it was not in China’s comparative advantage to adopt this method, all decisions

needed to be enforced by the central government. In order to channel funds into heavy

industries the financial sector was nationalised. Nationalising the financial sector, including

foreign banks, which had established themselves in China, was completed by 1952 when the

People’s Bank of China became the national bank, channelling funds into industries based on

political goals rather than market orientation. (Lin, 2011)

In 1953, the first 5-year plan was devised with much of the focus being on collective

ownership in agriculture and in industry, with continual focus on investment to heavy

industry, which accounted for 85% of all investment. Mao’s persistence, even through

catastrophic events such as the Great leap forward continued till his death in 1978.

(Naughton, 2011)

After Mao’s death, China’s leadership was undertaken by Deng Xiaoping, who

looked to create more economic growth. In order to do so, he slowly transitioned the

economy from a command economy to one with more market characteristics. In light of this,

financing could no longer be purely allocated from one bank and therefore special banks were

set up in order to fund specific industries. (Lin et al, 2003, Zhang, 2006))

In 1979 the government diversified the banking industry by placing China

Construction Bank under the control of the state council thus assuming more commercial

banking functions. Along with this, the establishment of The Bank of China (foreign

exchange) and The Agricultural Bank of China (agricultural sector), further diversified the

sector. The final establishment of a task specific state bank took place in 1984, with the

establishment of The Industrial Commercial Bank of China (ICBC), to fund industrial and

commercial businesses. All the banks came under the supervision of the People’s Bank of

China, which now acted as the central bank and therefore had control over monetary and

banking policy. (Turner et al, 2012)

To further increase competition the specialisation of banks was abolished allowing the

banks to assume other forms of credit accumulation in 1986. This, along with the introduction

of interbank lending to aid liquidity, further commercialised the banks, while in turn leaving

them with an oligopolistic nature. After this point there was not much movement in terms of

foreign banks until the 10th 5-year plan in 2001, the year China ascended to the WTO.

3.2) Current Environment

Prior to China’s admittance into the WTO, lengthy negotiations were undertaken with

the US and the European Union, where by an agreement was made that China would fully

allow foreign banks into the domestic market. China took this in their stride and allowed

gradual entry by foreign banks into China before it had even reached the agreed 5-year

period. In the same year China entered into the WTO, 157 foreign bank branches were

already authorised to conduct business within China and the number increased to 192 by

2004. Foreign banks were only allowed to operate branches if they had a minimum deposit of

RMB 1 Million, and were only allowed to serve corporate clients. (He and Fan, 2004)

Over time, to further release the stresses of the People’s Bank of China, regulatory

commissions were set up to supervise different sectors. The China Banking Regulatory

Commission (CBRC) being formed in 2003, to regulate the banking sector. Not only was this

to release the stresses to the central bank but to also prove to the WTO that the country could

abide by international rules and regulations and further strengthen their financial sector. With

the WTO agreement, came the further inclusion of foreign banks allowing them to open up

branches in China other than special economic zones such and Shanghai and Shenzhen. (Xu,

2011)

Now facing immense pressure from competition, the state owned banks now started

restructuring and listing on the stock exchange, to gain more capital and gain foreign

expertise rather than going into direct competition with them. They have controlled the

amount of foreign investors by listing the shares in Hong Kong (H-shares), which are

available to foreign investors and in Shanghai (A-shares) only available to domestic

investors. (Naughton, p471, 2011)

Despite the listings the government still owns the majority of shares for all 4 of the

banks, with the lowest (CCB) still being nearly 60%. (Bankerdatabase, 2015)

By listing on the stock exchange, many foreign banks have bought a large amount of

shares in the Chinese banks, which may in turn indirectly influence entrances of foreign

banks as a whole entity and result in partnerships with Chinese banks instead.

For example, after listing in 2005, Bank of America owns 11.4% of CCB, followed

by listings in 2006 by BOC and ICBC, resulting in a 10% ownership to RBS and 15.9% by

Goldman Sachs respectively. Finally, after one of the largest IPO’s in stock market history

Goldman Sachs now has a 3.3% share of ABC. (dbsreasearch, fas.ord, goldmansachs,

jonathan yee)

As well as foreign branches, foreign acquisitions of banks were becoming more

regular after the ascension to the WTO. Although, the equity could only amount to a

maximum of 25% many foreign banks preferred this method rather than setting up branches

in the early years of the WTO ascension. This may be due to the foreign banks trying to

target banks, which already have a strong gain of a local market instead of pitting themselves

directly against them. This is turn builds their business networks, complementary public

relations and access to market information. In a period where full access to foreign banks was

still restricted, this method seemed to be a more viable option to foreign banks. (He and Fan

2004)

Despite this, only one bank (Hang Seng Bank) went close to the 25% limit, by

acquiring 24.8% of Fujian Industrial Bank LTD. All acquisitions were on average around

10%, showing that foreign banks did not make much movement in the years prior to it being

fully open. (He and Fan, 2004)

On the 11th of December 2006, China officially allowed foreign institutions the same

rights as domestic banks. Foreign banks were now allowed to extend the bank branches

across China if they followed the previous rule of RMB 1million minimum deposits and were

also a wholly foreign owned enterprise or a banking subsidiary. Along with this in order to

obtain a license, the banks also needed approval from home regulators, international track

record, evidence of profit making ability and have established a comprehensive policy and

procedure guideline. (EY, 2014)

However, as a stipulation, wholly foreign owned banks (WFOB), must ensure that

registered capital should be equivalent to RMB 1 Billion and those branches should have a

working capital of RMB 100 million. The application for approval also takes 6 months with a

further 2 months for a formal approval, where a list of key executives, accounting manuals,

capital verification, financial statements and other documents must be provided to the CBRC.

(KPMG, 2006) Foreign banks can also only accept fixed deposits of more than RMB 1

million putting them at a clear disadvantage, as this is far above average of a typical saver.

Although, theoretically it is within the WTO guidelines, it does put domestic banks at an

advantage. (Jeffries, 2011)

This carries on to date, with the granting of and RMB license taking up to 3 years and

the CRBC restricts foreign banks opening multiple branches at the same time.

This process is arduous and very drawn out and hence will take a number of

months or even years to prepare and obtain a licence, and therefore we see that the increase in

bank branches is very minimal. (PWC, 2012)

After the 5-year grace period had finished and foreign banks were allowed to enter as

WFOBs the composition of the banking sector started to change. This, in turn, was the start

of the new 11th 5-year plan in which the new government’s goal was to reform the banking

sector as a whole, rather than giving special privileges to just foreign banks.

A major set up is the New Shanghai Free Trade Zone (SFTZ), which will allow open

trade in in international goods and services along with more open foreign investments. This

pilot scheme is then set to extend later to Tianjin and Guangdong. (Deloitte, 2015)

However, many foreign banks have still not chosen to set up here due to the lengthy

procedures and the extreme costs. Some banks are said to have spent US$2million to

US$10million in order to set up a mandatory accounting systems required by regulators. The

products firms can offer in the SFTZ are still unclear and have not been able to reach its

potential due to the RMB internationalisation and interest rate liberalisation still being an on

going process. (EY, 2014)

As it stands the current form of the banking sector is shown in the diagram below:

Diagram 1

Source: (Queen’s business review, 2013 and Jonathan Yee,2014)

3.3) 5 -year plan and banking

As much of the liberalisation policies to target industries are outlined in the 5-year

plan, a brief summary of each plan and its financial goals will be briefly explored. As

previously mentioned the first 5-year plan occurred in 1953, as an outline for the CCP’s

economic goals.

It is officially known as the 5-year plan for National Economic and Social

Development. Its goals are to, ‘map the direction of future development and set targets’. This

is aimed at providing key infrastructure projects, distribution of production and to contribute

to the national economy. (NDRC, 2006)

Until recently the 5-year plans have been primarily focused on export-import growth,

and other primary and secondary sectors, due to China’s competitive advantage, thus holding

back on the service sector. The financial sector has been heavily guarded by the Chinese

government and no significant implications for foreign firms were made prior to the

ascension to the WTO in 2001. Therefore the short extract will be from the 10th 5-year plan

as this is the start of the dataset used in the research (2001).

3.31) 10th 5-year plan (2001-2005)

Delivered on the 5th March 2001, Zhu Rongji delivered the outline of the 10th 5-year

plan. The government’s main goals in the 10th 5-year plan were not focused on the financial

sector but however it did provide some foundations in order to tackle this in the future. As

2001 was the year China finally ascended into the WTO, the government took steps to

improve the legal environment and government administration. (NDRC, 2006)

The attention at the time was still primarily on the export-import side of trade and

economic growth, however they were aware that in order to accelerate this, developing

services such as banking, accounting and law needed to be improved. As this period was a

time of high FDI, the emphasis was on how they could better utilise the foreign funds and

investment, was a key issue, in particular making it more attractive to investors to turn their

attention to Central and Western China. (China.org.cn)

In order to perform the macroeconomic policies they had to divert the change in

wholly owned state owned banks to a more commercial function to support the economic

situation. Thus, they simultaneously had to encourage small and medium banks to have a

more active role while fully utilising the new policy banks, in order for the state owned banks

to have a more commercial presence. (NDRC, 2001)

To make this viable another key element of the tenth 5-year plan was the safety of

financial institutions and their supervision. Zhu Rongji states that a system of evaluation and

accountability are to be implemented and diffuse any potential financial risks that may occur.

(Gov.cn, 2001)

3.32) 11th 5-year plan (2006-2010)

The time period from 2006 onwards is extremely important for this research due to

the agreement with the WTO to allow inclusion of foreign banks in China to have the same

national treatment as domestic banks.

This particular 5-year plan was seen as ‘revolutionary’, as it veered away from the

typical fast economic growth plans which allowed ‘some people to get rich first’. (Asia

Times, 2005) Instead under Hu Jintao the aim was to close the gap between the rich and poor

as the inequalities between the two classes grew extremely wide. The new administration

now saw it as the time to implement the ‘common prosperity’ once talked about by Deng

Xiaoping. (Fan, C, 2006)

Within the 11th five year plan statement given by Ma Kai, the chairman of China’s

National Development and Reform Commission, one of the key points was the further

deepening of the market economy system. He emphasized that in order to do so, further

reforms in the areas of, ‘administrative governance, state owned enterprises, taxation,

finance, science and technology, education and public health,’ were the main criteria. He

further reiterated this point by emphasising that it would be the government’s top priority to

speed up the improvement of these areas to facilitate the socialist market economic system.

(NDRC, 2006)

There is only a minute mention of small and medium financial enterprises to have

new ownership types, primarily private banks. This, along with other wide-ranging

governmental reforms mostly in the form of reducing red tape and bureaucracy. This is in

order to assist tax reforms, which are due to take place however there were no specific

implications to the extent to the reforms.

Therefore, in essence, this is the first time the government was not trying to directly

enforce ideals onto any priority sectors but rather allow more market forces to play a bigger

role. They were aiming to do this more domestically through the forces of demand and supply

and rely less on foreign investment due to its huge reliance on foreign trade to the amount of

70% of GDP at the time (2005). (Naughton, The New Common Economic Programme)

The contradiction of less foreign investment at the same time allowing more

foreign banking entities into China will be interesting to observe, and to see which one has

more prevalence.

3.33) 12th 5-year plan (2011-2015)

In the 12th 5-year plan released by the State Council, the financial sector

clearly played a big role as the plan for the development and reform of the financial sector

were jointly undertaken by the People’s bank of China, The Chinese Banking Regulatory

Commission, the China Securities Regulatory Commission, China Insurance Regulatory

Commission and the State Administration for Foreign Exchange. (China Briefing, 2012)

The importance of protecting and developing a strong and stable financial

sector became paramount after the global financial crisis. China endured the global financial

crisis and in light of the meltdown abroad further enhanced their risk prevention and

additional strengthened control and supervision of the financial sector. China saw itself now

having a critical role in the international field of finance and it was one of the few countries

able to absorb such a critical blow to worldwide banking. (CSRC, 2011)

By this reform period, all the Big Four banks had successfully listed on the stock

exchange, improving shareholder reform and improving corporate governance. This allowed

for the government to establish the banking sector into ‘layers’, dependant on their goals,

such as policy banks, commercial banks, national joint stock commercial banks and other

small and medium sized banks. (Martin, 2012)

The focus was to also push the commercial banks into the international markets to

increase global competitiveness and establish a wider portfolio by ‘going out’.

Simultaneously domestic banks were encouraged to cooperate with foreign institutions by

accepting low-interest foreign loans to improve external debts in cross border activities. This

is also to facilitate China being more vocal in the global financial arena. China wishes to

interact in global economic governance by enhancing macroeconomic and financial policy

with other major economies. (British Chamber of Commerce, 2011)

New and further banking reforms were put in place during this 5-year plan,

through new regulatory standards, instruments and risk identification. The capital adequacy

ratio was to be strictly obeyed to follow international levels. (CRSC, 2011)

By assessing the content of each 5-year plan we should expect that there was little

movement from the 10th 5-year plan, moderate movement from the 11th 5-year plan and a

big leap from the 12th 5-year plan.

4) Methodology

This paper has utilised a qualitative method with an inductive approach following a

positivist paradigm. A qualitative method uses information that may not be immediately

quantifiable unless coded and is usually not descriptive (Sekaran, Bougie, 2009)

The positive approach uses data, which can be obtained using neutral observations.

This research achieves its goal by using data from Bankscope. (Gill and Johnson, 2012) This

approach has been employed as the banking sector in China is extremely large and the data is

particularly sensitive. Trying to obtain the data oneself would be time consuming, costly and

unreliable and therefore using secondary data is appropriate.(Saunders, Lewis et al, 2012)

Bankscope is a comprehensive database used by 90% of the world’s top 1000 banks,

containing financial information for more than 29,000 banks globally. Its reputable name and

data therefore allows for others to continue the research post this paper if desired.

(Bankscope, 2015)

4.1) Data Collection

As previously mentioned the data collected was secondary data from Bankscope, to

give an impartial and reliable interpretation of the results. The data from Bankscope is

aggregate data and separated into each individual bank. Therefore, for the purpose of my

research and have compiled the data to form a separate compilation of results for foreign

banks and all other banks in China. All information is compiled from the year 2001 to 2014,

as 2001 is the start of the 10th year plan and 2014 being the last available and recent year of

data. Foreign banks in China in this study are classified as banks that have a foreign

shareholder which holds at least 51% of the stake. A full list of foreign banks can be seen

in the appendix.

According to Joskow and Rose there are four empirical methods for measuring the

effects of regulation; Comparing regulated and unregulated firms or markets, using variations

of the intensity of regulation, using controlled environment experiments and creating

structural simulation of models for a regulatory environment. (Joskow and Rose, 1989)

In this study we shall be adopting the approach of comparing the more regulated

foreign banking sector with the less regulated domestic competitors. This method is

appropriate as the nature of regulatory constraints the firms are subject to, are attributed to

regulation and the differences between in performance are attributed to regulation.

This will take place on a time series scale as we wish to look at the time period

ranging from 2001-2014. Time series can identify regulatory change over time or time

periods.

The variables chosen to demonstrate the change over time are typical accounting

calculations which are globally used to show business performance. The list and definitions

of the variables are shown below.

4.2) Variables

Equity- is the amount left over when the liabilities have been subtracted from the assets. In

essence it is the ownership of the asset once the debt has been paid off. (Investopedia.com)

Total Assets- are an economic value of all the assets the entity has at a particular time. The

assets are exploited over time into order to receive a return for the entity. This may include,

cash, inventory, fixed assets and so on. (Accountingtools.com)

Net Income- are a company’s total earnings minus any expenses paid in a given time period.

It can be used to show how profitable a company is over time. (Investopedia.com)

Return on Assets (ROA) – or return on investment, illustrates how profitable a company is

in relation to its assets, by showing how much investment has been converted into income. It

is usually calculated as Net Income divided by Total Assets and displayed as a percentage.

(Investopedia.com)

Return on Equity (ROE) – is similar to ROA but instead shows how much money has been

returned in turn for the investment received. It is useful for comparing profitability and is

displayed as a percentage. (Investopedia.com)

Return on Average Assets (ROAA) and Return on Average Equity (ROAE) - is also

shown here to give a comparable view of profitability which is easier to gauge. They show

the average return of the time period. (Investopedia.com)

Net Loans – is the total amount of loans given to out to customers minus any unearned

interest and possible losses. (Santander.com)

This paper has compiled the data from each year to compare foreign banks to domestic banks

to show how much each group possesses in terms of-

• Share of Total Assets

• Share of Net Income

• Share of Equity

4.3) Method

To display this and form the data analysis Microsot Excel, SigmaXL and SPSS

software will be used in order to examine the results. First, the preliminary results will be

given to show foreign banking’s growth isolated from the market. Secondly the proportion of

each group’s market share of Total Assets, Net Income and Equity will be shown to

demonstrate if foreign banking has depleted any of the domestic markets hold. Finally, the

results of the two sectors will be compared and correlated in order to show their relationship

with each other. This will be done using Pearson’s correlation to show if the two are in line or

whether foreign banking growth has deviated from the rest of the market.

Pearson’s Correlation measures the strength between two variables by its linear

association. The strength of the correlation is shown by the coefficient ‘r’ ranging from -1 to

1. For a positive relationship the coefficient ‘r’ should be above 0.5.

To show whether or not, it is statistically significant or not, I have chosen a

significance level of 0.01. If the resulting value is above the significance value, than the

results are statistically insignificant. (Leard.com)

The formula for the Pearson Correlation is show below where ‘x’ is foreign banks, ‘y’ is

Chinese banks and ‘n’ is the number observations.

(stat.mwich.edu)

The assumptions of the data for a Pearson Correlation are that the data is interval or

ratio data. For the data set in this paper we are using interval data therefore making the

Pearson Correlation appropriate. The Pearson Correlation is also appropriate for this paper as

it does not require a dependant or independent variable. As we are using data which is to be

compared and not dependant on each other it further justifies the use of the Pearson

correlation.

However, the requirement of normal distribution is not fulfilled and therefore we must

transform our data in order to form normality. Therefore, we have utilised the SigmaXL

program in order to transform the data into Normal distribution using the Box-Cox Method.

The Box Cox method transforms data to form a normal distribution by applying a

Lambda value to identify the power to which the data should be raised. This was achieved by

using the SigmaXL software in combination with Microsoft Excel.

(http://www.isixsigma.com/)

In order to get a fairer result as the values from foreign banking and Chinese banking

are vastly different I have also Logged both results to 10 (Log10), before applying the Box-

Cox Method.

After the Box-Cox method was applied, I further checked the distribution of all results

in SPSS, using the Shapiro-Wilks method. The Shapiro-Wilks is a test of normality which is

suitable for a small sample. As our sample was of 14 observations it is an appropriate

method. All variables passed the normality test with a significance value of 0.5. (Leard.com)

After the variables were transformed and normally distributed all requirements of the

Pearson correlation test were fulfilled and therefore applicable for use with our data, to show

the correlation between foreign banking and Chinese banking.

5) Results

First the preliminary results will be given to show foreign banking’s growth isolated

from the market. Secondly the proportion of each group’s market share of Total Assets, Net

Income and Equity will be shown to demonstrate if foreign banking has depleted any of the

domestic markets hold. Finally the results of the two sectors will be compared and correlated

in order to show their relationship with each other. This will be done using Pearson’s

correlation to show if the two are in line or whether the 5-year plan has not specifically

targeted foreign banking growth but just the growth of banking in general.

5.1) Foreign banking isolated results

In this section we will cover the progress of foreign banks in China, by isolating and

displaying only their results away from the rest of the banking sector in China. This will give

a rough guideline to their development and will give clarity to the results later in the paper.

This will be shown using the variables described above, with all results being shown in

United States Dollars (USD) thousands or in percentages.

Graph 1

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

100000000

200000000

300000000

400000000

500000000

600000000

Foreign Banking Total Assets USD (thousands)

Year

Tota

l Ass

ets U

SD (t

hous

ands

)

(Source: Bankscope)

Graph 2

(Source; Bankscope)

Graph 1 and 2 are time series graphs showing the trend of total assets and equity

respectively, of all 41 foreign banks in China combined. From the graph we can see that

during the early 2000’s when China first eased in new regulations, the total assets and equity

of foreign firms barely grew. Growth only takes place from 2006 onwards, when the foreign

banks were granted the same rights as Chinese banks. (Xu, 2011)

From then onwards it has been a steady upward rise for foreign banks in terms of their

assets and equity in China showing healthy progression. The steepest areas of growth are also

in 2006 and 2011, the years in which a new 5 year plan was implemented. This may be

evidence of the 5-year plan’s power in foreign banking policy. The total amounts of both

assets and equity are also very similar reaching a high of US$543018451.2 thousand of assets

and US$48662267.71 thousand of equity.

Graph 3

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

Foreign Banking Net Income USD (thousands)

Year

USD

(tho

usan

ds)

(Source; Bankscope)

Graph 3 illustrates the net income of the foreign banks in China from 2001. We can

see that similarly to assets and equity, that there was little movement from 2001-2006, when

China first entered into the WTO. Furthermore, like assets and equity, a steep positive jump

of net income came after 2006 when the WTO regulations stipulating equal treatment

occurred.

However, unlike assets and equity, net income has shown more volatility with spikes

and crashes. Much of it is in line with the global financial crisis, showing the vulnerability of

foreign banks to external pressures. This may be due to the foreign banks performance abroad

affecting their worldwide operations, displaying the dangers of globalisation. Despite the

global financial crisis, a rapid recovery was made and the increase from 2010 to 2011 was the

largest in the whole time series. This may also be due to the 5-year plan, as seen in previous

results. If it were as a result of the 5- year plan, from the net income perspective, the 12 th 5-

year plan has been the most successful.

Graph 4

(Source; Bankscope)

Graph 5

(Source; Bankscope)

Graph 4 and 5 display the Return on Equity and Return on Average Equity of foreign

banks in China. From the Return on Equity Graph 4 we can see that the returns from the early

years were quite great with a sharp dip and then levelling off. This doesn’t seem to be healthy

but when looking on the Return on Average Equity that it does follow the market trend and

that therefore, on average there are returns being made to the equity in each time period.

Overall however, the cumulative return to equity has been slow.

Graph 6

(Source; Bankscope)

Graph 7

(Source; Bankscope)

Graph 6 and 7 display the Return on Assets and Return on Average Assets of foreign

banks in China. From the Return on Assets Graph 6, we can see that it is extremely erratic

and that there is no real trend. However, as time goes on it does seem to be transforming into

an area of more stability with results stabilising from 2011 onwards; the start of the 12 th 5-

year plan.

When assessing the Return on Average Assets, the results seem more consistent with

the other results with it following market trends. We can see that year on year the Return on

Average Assets are improving, proving to investors, that their investment is being put to good

use.

Graph 8

20012002

20032004

20052006

20072008

20092010

20112012

20132014

050000000

100000000150000000200000000250000000300000000350000000400000000450000000500000000

Net Loan and Deposits of Foreign Banks

Net LoansDeposits

Year

USD

(tho

usan

ds)

(Source; Bankscope)

Graph 8 displays the commercial ability of the foreign banking sector in China. We

can see that net loans and the deposits are rising year on year since 2006, when foreign banks

were allowed more prevalence in China. This is a key indicator showing they are increasing

competition in the market by providing and accepting funds from customers, which is one of

the key functions of commercial banking. This increase in competition is vital for the

efficiency in China, as the top four banks have such an oligopolistic strangle hold on the

commercial banking market.

5.11) Analysis of Foreign Banking Isolated

The foreign banks isolated results show that in terms of all variables, that from 2001

to 2006, there were almost no improvements made by foreign banks in China. All the growth

has been since the mandatory WTO requirement of treating foreign firms at the same level as

Chinese firms. Therefore, we can see that the influence of the WTO has been extremely

powerful.

However, other aspects must have also contributed to the successful growth of foreign

banks in China as there is still continued growth in foreign banking in China. This has been

seen even despite the global financial crisis of 2008. Although affected by the crisis the

foreign banking sector was able to bounce back soon after and have seen the biggest growth

since the 12th 5-year plan started in 2011.

From these results we can see that foreign banking is making continuous gains in the

Chinese banking market and that they are improving competition in China as Loans and

Deposits into the market are also increasing.

5.2) Share of Market Results

Table 1

Total AssetsYear 2001 2002 2003 2004 2005 2006 2007Percent Foreign 0.032998737 0.035383817 0.02624105 0.067660726 0.236062337 0.467827431 1.424185276Percent China 99.96700126 99.96461618 99.973759 99.93233927 99.76393766 99.53217257 98.57581472

Year 2008 2009 2010 2011 2012 2013 2014Percent Foreign 1.334558824 1.301781109 1.46134047 1.797403763 1.684302571 1.747204817 1.759813343Percent China 98.66544118 98.69821889 98.5386595 98.20259624 98.31569743 98.25279518 98.24018666

(Source; Bankscope)

Table 2

Net IncomeYear 2001 2002 2003 2004 2005 2006 2007Percent Foreign 0.035105888 0.076154263 0.02815934 0.004610775 0.269993615 0.942883237 1.032086562Percent China 99.96489411 99.92384574 99.9718407 99.99538922 99.73000639 99.05711676 98.96791344

Year 2008 2009 2010 2011 2012 2013 2014Percent Foreign 1.727589701 0.973738456 0.91475248 1.74051187 1.519038031 1.287139401 1.475430118Percent China 98.2724103 99.02626154 99.0852475 98.25948813 98.48096197 98.7128606 98.52456988

(Source; Bankscope)

Table 3

EquityYear 2001 2002 2003 2004 2005 2006 2007Percent Foreign 0.572783252 1.718910622 1.54150046 1.639727234 0.683988701 0.900019806 4.511899992Percent China 99.42721675 98.28108938 98.4584995 98.36027277 99.3160113 99.09998019 95.48810001

Year 2008 2009 2010 2011 2012 2013 2014Percent Foreign 2.907909908 3.287794857 3.00978802 3.259306292 2.949101345 2.895842033 2.817649362Percent China 97.09209009 96.71220514 96.990212 96.74069371 97.05089865 97.10415797 97.18235064

(Source; Bankscope)

5.21) Analysis of Share of Market Results

In this section we will now compare the foreign banks to the rest of the Chinese

banking sector, in order to uncover the extent of their success observed, when the result were

isolated. We have done so by revealing the total market share of total assets, equity and net

income. The results of all three are extremely similar, and therefore they will be analysed

together.

In 2001 we can see that the percentage of foreign banks in China was almost non-

existent. As time progresses we do see improvement of foreign banks share of the market in

all three of the results, especially the sharp rise in 2006. However, the results and growth in

relation to the isolated growth is extremely minute.

The market share in all three areas is still extremely dominated by the Chinese banks.

The foreign banks have gained less than two per cent of market share in terms of total assets

and net income and just under three per cent in equity. This result is extremely small showing

that foreign banks, although growing are just keeping up with the growth of all other firms in

the market.

The market share of the foreign banks also dropped in 2011, which is contrary to the

results shown when isolated. Therefore, this must mean that the 12 th 5-year plan has allowed

for growth of the whole sector but Chinese banks have taken advantage of the opportunity to

outperform foreign banks in China.

To further test whether or not this is true we shall perform the Pearson correlation test.

If the results of both the foreign banks and Chinese banks are highly correlated it would mean

that the liberalisation and deregulation of the financial sector and aided all banks in China

and not specifically the foreign banks. If however, there is no correlation between the two

than we would be possible to show that the positive results shown from the foreign banking

isolated section is a result of the change is regulations and liberalisation, are a result of them

targeting just foreign banks, opposed to affecting the whole industry.

5.3) Pearson Correlation Results

Pearson correlation of Assets results

CorrelationsForeign Assets China Assets

Foreign Assets Pearson Correlation 1 .978**

Sig. (2-tailed) .000N 14 14

China Assets Pearson Correlation .978** 1Sig. (2-tailed) .000N 14 14

**. Correlation is significant at the 0.01 level (2-tailed).

Pearson correlation of Net Income results

CorrelationsForeign Net Income China Net Income

China Net Income Pearson Correlation 1 .961**

Sig. (2-tailed) .000N 14 14

China Net Income Pearson Correlation .961** 1Sig. (2-tailed) .000N 14 14

**. Correlation is significant at the 0.01 level (2-tailed).

Pearson correlation of Equity results

CorrelationsForeign Equity China

Foreign Equity Pearson Correlation 1 .977**

Sig. (2-tailed) .000N 14 14

China Equity Pearson Correlation .977** 1Sig. (2-tailed) .000N 14 14

**. Correlation is significant at the 0.01 level (2-tailed).

Pearson Correlation of Net Loans Results

CorrelationsForeign Loans China Loans

Foreign Loans Pearson Correlation 1 .966**

Sig. (2-tailed) .000N 14 14

China Loans Pearson Correlation .966** 1Sig. (2-tailed) .000N 14 14

**. Correlation is significant at the 0.01 level (2-tailed).

CorrelationsForeign Deposits China Deposits

Foreign Deposits Pearson Correlation 1 .972**

Sig. (2-tailed) .000N 14 14

China Deposits Pearson Correlation .972** 1Sig. (2-tailed) .000N 14 14

**. Correlation is significant at the 0.01 level (2-tailed).

Analysis of Pearson Correlations

In the same way that the shares of markets results were all extremely similar to each

other, so are all the Pearson correlation results. Therefore, we have also grouped all of them

together in the analysis. The Pearson correlations are comprised of assets, net income, equity,

net loans and deposits.

All the results show that there is a positive relationship between each of the variables,

and that they all have a strong correlation. All the ‘r’ values are extremely close to 1, with 1

being the perfect correlation. They all satisfy the 0.01 level of significance too, as the ‘a’ is

below it, hence showing the results are significant. (Leard.com)

As all the results show a positive correlation for all the variables, it displays that the

deregulation and liberalisation of the financial sector has not specifically targeted foreign

banks to develop and increase competition in the sector but has instead allowed for the

growth of the banking sector in general.

The close correlation of both sectors through years also shows that they have followed

similar paths from 2001-2014, and there has not been much deviation between the two

sectors. This is further backed up by the market share results where we see the market share

and composition has not changed much since 2001.

So despite the positive results and growth shown by the foreign banks in China, it

must be true that domestic banking has also followed suit, for the results of the correlation to

be so similar. If foreign banking were to being making greater progress due to the

deregulations and liberalisation of the market, there would have been a negative correlation

between the two in the Pearson correlation results.

6) Conclusion and Limitations

6.1) Conclusions

This paper examines the role of regulation in China and whether or not the deregulation

and liberalisation of the financial sector has specifically allowed foreign banks in China to

enter and grow in the market. By comparing and following both the trends of foreign banks in

China and the domestic banks, we are able to evaluate the extent of growth in foreign

banking. Once shown in correlation with the domestic banks we were also able to gauge

whether or not the change in the regulatory environment has aided the foreign banks, as was

the intention.

From the initial findings the results were found to be extremely optimistic, and the growth

rate from 2006 onwards, of almost every variable was positive. This was very much in line

with most of the literature, which supported that foreign banking in China would be

beneficially and hence once China, has deregulated the financial environment that many

waves of foreign banks would pursue the huge market. The literature also suggests the added

competition would dilute the powers of domestic banks, and in particular the ‘Big Four’ state

owned banks. If this were the case the growth of foreign banks must grow, as the initial

results show, while the domestic strangle hold of the market decreases. However, when

further investigations were carried out it was found that foreign banks, in reality, did not

make much progress in terms of market share. Over the 13-year period the increase in market

share in terms of net income was just over 1%. Therefore, the extent of the deregulation and

liberalisation, although has allowed for growth of foreign banks, has not put it at any further

advantage compared to the rest of the market.

This is further reiterated when the Pearson correlation is applied to both foreign banks

and domestic banks. The results show that through the years the foreign banks have not

deviated from domestic banks much, as the correlation between the two is extremely strong.

The results imply that the growth of both the foreign banks and domestic banks are closely

related and are growing at the same rate. In essence, foreign banks have not made

improvements, as they should, due to the deregulation and in nominal terms. Foreign banks

now make up 41 out of a total 241 banks, which is a 17% proportion of the market. Therefore

the 1.48% of total assets in the market is quite disappointing and goes against most of the

literature, which would support their growth in the Chinese market.

As most globalisation theories such as the Ricardian and Hecsher-Ohlin models, along

with much of the literature in this paper, support and encourage internationalisation, China

must ensure that further deregulation and liberalisation occurs as the current practices have

still not enabled foreign banks in China to reach their full potential. (Feenstra et al, 2014)

This is not just a benefit for the domestic and global economies growth as a whole, but also to

the countries consumers. Especially as the wealth of the people continually grows, they will

demand new investment opportunities and more sophisticated banking to keep their money

safe. Foreign banks are the key for this transition and will intensify more global financial

innovations. (IMF, 2011)

6.2) Limitations

Due to the liberalisation and deregulation of the financial sector being rather recent,

the study is limited. The total number of samples is also quite low due to the economic

environment of China and the oligopolistic nature of the banking sector.

Another limitation is that the economic environment of a dual state and market

mechanisms is quite unique. Therefore using a comparative method such as that suggested by

Jaskow and Rose may not provide the same results. The study also does not take into account

other forms of foreign entry such as subsidiaries, mergers, acquisitions and minority

shareholdings. These have a substantial impact of the activity of foreign banks in China

For future research, a longer time frame with a larger sample would allow for greater

results, as well as combining the results for mergers, acquisitions, minority shareholdings and

subsidiaries. The results of the findings will also be interesting when the new 5- year plan

will commences in 2016 and when the Shanghai Free Trade Zone and the other planned

zones such as Tianjin and Guangdong, have evolved to their full extent.

Appendix

List of foreign banks used in the study

Bank Name

China Zheshang Bank Co Ltd

City

HANGZHOU

Shanghai Rural Commercial Bank SHANGHAI

HSBC Bank (China) Co Ltd SHANGHAI

Bank of East Asia (China) Ltd SHANGHAI

Standard Chartered Bank (China) Ltd SHANGHAI

Citibank (China) Co Ltd SHANGHAI

Bank of Tokyo Mitsubishi UFJ (China) Ltd SHANGHAI

Hang Seng Bank (China) Limited SHANGHAI

Sumitomo Mitsui Banking Corporation (China)

Limited

SHANGHAI

DBS BANK (China) Limited SHANGHAI

Mizuho Bank (China) Ltd SHANGHAI

Deutsche Bank (China) Co Ltd BEIJING

Fubon Bank (China) Co., Ltd SHANGHAI

BNP Paribas (China) SHANGHAI

OCBC Bank (China) Limited SHANGHAI

United Overseas Bank (China) Limited SHANGHAI

Australia and New Zealand Bank (China) Company

Limited

SHANGHAI

Hana Bank (China) Company Ltd BEIJING

JP Morgan Chase Bank (China) Co Ltd BEIJING

Toyota Motor Finance (China) Company Limited BEIJING

Wing Hang Bank (China) Ltd SHENZHEN

Volkswagen Finance (China) Co. Ltd BEIJING

Shinhan Bank (China) Limited BEIJING

Societe Generale (China) Limited BEIJING

Woori Bank (China) Ltd BEIJING

Bangkok Bank (China) Co Ltd SHANGHAI

Industrial Bank of Korea (China) Limited TIANJIN

Royal Bank of Scotland (China) Co Ltd (The) SHANGHAI

Minsheng Securities Co., Ltd BEIJING

KEB Bank (China) Co, Ltd. TIANJIN

Credit Agricole CIB (China) SHANGHAI

Bank of Montreal (China) Co Ltd BEIJING

Metropolitan Bank (China) Ltd JIANGSU

East West Bank (China) Limited SHANGHAI

Bank Sinopac (China) Ltd NANJING

Morgan Stanley Bank International (China) Limited ZHUHAI

UBS (China) Limited BEIJING

VOLVO AUTOMOTIVE FINANCE (China)

LIMITED

BEIJING

Allied Commercial Bank XIAMEN

Lujiazui International Trust Co., Ltd

Shaanxi Fuping BEA Rural Bank Corporation.

(Source: bankscope)

Aggregate Statistics of Box-Cox Transformation

Assets

Plan foreignassets foreignlog10 foreignboxcox chinaassets chinalog10 chinaboxcox2001 283018.95 5.45 1029.10 857382981.20 8.93 56889.002002 515550.97 5.71 1245.50 1456509192.00 9.16 64604.002003 736444.35 5.87 1389.50 2805723210.00 9.45 75285.002004 2242839.84 6.35 1921.20 3312589837.00 9.52 78203.002005 9906571.89 7.00 2853.80 4186684887.00 9.62 82470.002006 24387924.39 7.39 3565.10 5188629263.00 9.72 86542.002007 110159820.80 8.04 5046.00 7624776267.00 9.88 94248.002008 139941574.60 8.15 5318.00 10346038660.00 10.01 100741.002009 168473582.90 8.23 5536.50 12773301476.00 10.11 105429.002010 232832652.00 8.37 5933.60 15699980850.00 10.20 110186.002011 354489555.00 8.55 6481.30 19367821161.00 10.29 115202.002012 400258879.10 8.60 6646.30 23363813330.00 10.37 119836.002013 481872459.40 8.68 6904.70 27097748124.00 10.43 123604.002014 543018451.20 8.73 7075.00 30313575137.00 10.48 126516.00

Deposits

Plan foreigndeposits foreignlog10 foreignboxcox chinadeposits chinalog10 chinaboxcox2001 142573.40 5.15 873.31 522203629.00 8.72 50355.002002 320764.53 5.51 1147.40 1044092283.00 9.02 59666.002003 461361.20 5.66 1289.50 2260921240.00 9.35 71623.002004 1744558.27 6.24 1925.70 2570627135.00 9.41 73783.002005 8702312.91 6.94 2983.50 2977666096.00 9.47 76320.002006 18700621.15 7.27 3619.10 3657168527.00 9.56 79984.002007 93578703.08 7.97 5288.00 5663564649.00 9.75 88249.002008 117928744.80 8.07 5568.60 7654502132.00 9.88 94329.002009 140965227.80 8.15 5792.80 9816197925.00 9.99 99598.002010 197215426.30 8.29 6233.00 12300083317.00 10.09 104577.002011 303254059.40 8.48 6833.70 15370203669.00 10.19 109689.002012 338031515.20 8.53 6992.00 18761541512.00 10.27 114431.002013 404910599.50 8.61 7261.30 21707378727.00 10.34 118002.002014 461424491.00 8.66 7461.00 24394059524.00 10.39 120923.00

Equity

Plan foreignequity foreignlog10 foreignboxcox chinaequity chinalog10chinaboxcox2001 78847.81 4.90 652.89 13686884.13 7.14 18508.002002 189985.73 5.28 886.99 10862696.72 7.04 17243.002003 263003.51 5.42 987.88 16798522.69 7.23 19691.002004 444932.81 5.65 1169.00 26689629.45 7.43 22588.002005 1030309.21 6.01 1509.00 149602181.20 8.17 36511.002006 2010072.86 6.30 1829.00 221326441.70 8.35 40471.002007 10485921.58 7.02 2839.30 221919974.00 8.35 40499.002008 13705188.31 7.14 3036.10 457601996.00 8.66 48721.002009 18388195.60 7.26 3263.80 540898390.10 8.73 50798.002010 22682086.96 7.36 3434.20 730928693.40 8.86 54716.002011 31752160.39 7.50 3721.10 942447793.50 8.97 58209.002012 37223644.60 7.57 3862.80 1224979319.00 9.09 61997.002013 43670870.91 7.64 4009.30 1464383450.00 9.17 64687.002014 48662267.71 7.69 4110.90 1678389663.00 9.22 66805.00

Loans

Plan foreignloans foreignlog10 foreignboxcox chinaloans chinalog10 chinaboxcox2001 116702.69 5.07 2052.90 285114193.00 8.46 43209.002002 307772.08 5.49 2987.70 566908131.40 8.75 51394.002003 446971.53 5.65 3425.50 1254519459.00 9.10 62351.002004 1244534.48 6.10 4890.80 1453466449.00 9.16 64572.002005 6430977.33 6.81 8227.60 1642756441.00 9.22 66468.002006 15986009.17 7.20 10728.00 1963004100.00 9.29 69304.002007 62370165.85 7.79 15543.00 2989419341.00 9.48 76389.002008 75777468.53 7.88 16351.00 3954676969.00 9.60 81415.002009 88854985.31 7.95 17037.00 5338515119.00 9.73 87094.002010 119611247.50 8.08 18377.00 6616256786.00 9.82 91347.002011 163279604.10 8.21 19867.00 8110644460.00 9.91 95535.002012 184448934.80 8.27 20477.00 9862338808.00 9.99 99699.002013 217109501.10 8.34 21314.00 11646049944.00 10.07 103353.002014 234205195.40 8.37 21713.00 12828743815.00 10.11 105528.00

Net Income

Plan foreignnetincome foreignlog10 foreignboxcox chinanetincome chinalog10 chinaboxcox2001 753.72 2.88 32.02 2146240.14 6.33 10176.002002 3133.61 3.50 60.66 4111678.91 6.61 12657.002003 3544.46 3.55 63.76 12583602.74 7.10 18040.002004 771.72 2.89 32.40 16736437.79 7.22 19669.002005 55008.76 4.74 164.70 20319086.82 7.31 20843.002006 253554.09 5.40 253.12 26637802.40 7.43 22575.002007 523717.07 5.72 304.81 50219804.67 7.70 27083.002008 1251903.19 6.10 376.11 71213404.16 7.85 29858.002009 861420.48 5.94 344.25 87603862.61 7.94 31608.002010 1147218.18 6.06 368.49 124265743.80 8.09 34746.002011 3026342.66 6.48 459.38 170850245.80 8.23 37817.002012 3313038.31 6.52 468.58 214788039.10 8.33 40156.002013 3361717.56 6.53 470.07 257815708.70 8.41 42103.002014 4097136.55 6.61 490.68 273593856.90 8.44 42753.00

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