Modern Economy, 2011, 2, 814-822
doi:10.4236/me.2011.25090 Published Online November 2011 (http://www.SciRP.org/journal/me)
The Impacts of Foreign Bank Entry on Credit Scale and
Business Structure of Chinese Commercial Banks*
Xiaoyan Huang, Yong Zeng
School of Management and Economics, University of Electronic Science and Technology of China, Chengdu,
China
Received May 16, 201 1; revised June 29, 2011; accepted July 18, 2011
Abstract
We employ a data set comprising 31 banks for the period 2002-2009 to investigate the impacts of foreign
bank entry on credit scale and business structure in China. In this paper, foreign bank entry means the entry
of both greenfield and strategic investment. The empirical results show that the foreign bank entry is not as-
sociated with the growth of credit scale, but significantly improves domestic banks’ business structure. Fur-
thermore, the network and informational advantages are the main considerations of foreign banks when en-
tering into China through the mode of “minority equity stake”.
Keywords: Foreign Bank Entry, Credit Scale, Business Structure, Chinese Commercial Banks, Foreign
Strategic Investors, Spillover Effect
1. Introduction
The banking system, as an essential part of Chinese fi-
nancial system, has experienced unceasing reforms over
the last three decades. It evidenced significant policy
shifts around 1990, and 2001 when China joined WTO
[1].
Before reforms begun in 1978, China had been very
conservative in allowing the entry of foreign banks. In
1979, the Export-Import Bank of Japan become the first
foreign bank allowed to open a representative office in
Beijing, which is the prologue to the reform and open-
ing-up of Chinese banking system [2]. In 1981, foreign
banks were allowed to open operational branches in Spe-
cial Economic Zones of China, which indicates the Chi-
nese banking system had made substantial progresses.
Then, Nanyang Commercial Bank, the first foreign bank
opening operational branches in China, opened an opera-
tional branch in Shenzhen. In a word, there were not
many foreign banks in China before 1990 because of the
strict policy.
Since 1990, Chinese government has begun to allow
foreign banks to enter more cities and to do business
with Chinese enterprises by taking deposits and making
loans in RMB. According to the Almanac of China’s
Finance and Banking, 190 operational branches had been
opened by the end of 20011. Besides, regulatory permis-
sion for foreign strategic investors to hold “minority eq-
uity stakes”2 in Chinese banks was forthcoming. The first
case was in 1996, when Asian Development Bank (ADB)
bought a 3.29% stake in China Everbright Bank [2,3]. In
1999, International Finance Corporation (IFC) bought a
5% stake in Bank of Shangh ai. This was followed by the
purchase of a 15% stake of Bank of Nanjing (Nanjing
City Commercial Bank) by IFC and acquisition of an 8%
stake in Bank of Shanghai by The Hong Kong and
Shanghai Banking Corporation Limited (HSBC) at the
end of 2001. To sum up, more foreign banks entered into
China through varying entry modes at a relatively slow
speed from 1990 to 2001.
On December 11, 2001, China gained entry into the
World Trade Organization (WTO). New policies at-
tracted more and more foreign banks and accelerated the
1Operational branches are defined by China Banking Regulatory Com-
mission (CBRC), including head offices, branches, sub-
b
ranches and
subsidiaries of stand-alone holding companies, and branches, sub-bran-
ches of foreign banks.
2“Administration of equity investment of overseas financial institutions
in Chinese-funded financial institutions procedures Foreign”issued by
CBRC rules that the percentage of equity investment of a signal over-
seas foreign institution in a Chinese-funded financial institution may
not exceed 20%, and the aggregate percentage of equity investment o
f
multiple overseas financial institutions may not exceeds 25%. We
regard this situation as “minority equity stake”.
*Supported by National Natural Science Foundation of China under
Grant No. 70872016.

X. Y. HUANG ET AL. 815
reform and opening-up of Chinese banking system. Ac-
cording to the Almanac of China’s Finance and Banking,
the number of greenfield banks had almost increased up
to 600 by the end of 2009, almost three times of that in
2001. The total assets of foreign banks reached RMB
1.35 trillion, accounting for 1.71 percent of total banking
assets in China. Meanwhile, according to the Annual
Report of China Banking Regulatory Commission (CBRC),
31 Chinese commercial banks had introduced foreign
strategic investors by the end of 2009.
After 1979, especially after WTO entry, policy shift
accelerates the opening-up of Chinese banking system.
More and more foreign banks have entered. However,
the impacts of foreign bank entry are debatable. There
are three kinds of viewpoints as follows. Firstly, foreign
banks are regarded as “wolves” which will threat the
existence of Chinese banks. Secondly, some people be-
lieve that the increasing number of foreign banks can
intensify the banking competition, and spillover effects
can be generated with the foreign bank entry. Both com-
petition and spillover effects can improve the efficiency
of Chinese banks. Thirdly, some people argue that, com-
pared with Chinese banks, foreign banks are still small in
scale, having little impact on China’s banking industry.
Aiming at this debatable situation, we make an empirical
study to test the impact of foreign banks.
Our main empirical focuses are on credit scale and
business structure. China’s credit market attracts foreign
banks because of its high interest spread. In addition,
credit scale has significant impacts on macroeconomic
and commercial banks. From the macroeconomic per-
spective, the flexible and controllable credit scale is the
key of monetary policy. From the financing perspective,
indirect financing accounts for a big share in China at
present, that is to say bank loans are the main funds for
enterprises. From the bank income str ucture, the shar e of
non-interest income ha d been low for a long time and the
income of banks mainly came from the interest spread.
In summary, it is significant to study the impact of for-
eign bank entry on credit scale and business structure.
Loans are the main parts of both businesses and assets
of Chinese commercial banks. However, with the devel-
opment of banking system, the fast developing interme-
diate businesses are more important to banks. Business
structure is defined as the ratio of credit to assets in this
paper, and will affect the profitability, risk status and
sustainability of banks. Therefore, we will also study the
impact of foreign bank entry on bu siness structur e.
The remainder of the paper is organized as follows.
Section 2 reviews literature. Section 3 discusses the de-
sign of our empirical study. Section 4 presents the em-
pirical results and analysis. Section 5 provides conclu-
sions. Section 6 and 7 are acknowledgement and refer-
ences, respectively.
2. Literature Review
Based on credit scale studies, there are two different
views on the impact of foreign bank entry on credit scale.
Reference [4] shows that the entry of foreign banks can
enlarge the total credit for 38 developing countries and
long-term loans are less rate-constrained in countries
with high fo reign bank pr esence. Reference [5] finds that
for East European countries the credit scales increase
quickly with the entry of foreign banks and foreign bank
entry improves access to credit for private sectors. Also,
reference [6] finds that for Central European and Baltic
countries, with the fierce competition on limited large
enterprises and the promotion of screening ability on
small and medium sized enterprises (SMEs), foreign
banks improve access to credit for SMEs and even retail
market. Reference [7] figures out that for countries with
high presence of foreign banks, both large companies
and SMEs face low financing obstacles.
However, the theoretic and empirical studies in [8]
show that the entry of fo reign banks reduces credit scale.
Reference [9] finds that foreign banks tend to lend to big
enterprises but not SMEs. Reference [10] shows that for
East Europe, Latin America, Middle East and Asia coun-
tries that multinational banks only lend to multinational
enterprises and high quality clients, and domestic banks
are not able to lend to SMEs in order to avoid risk.
As for business structure studies, References [11,12]
find that the entry of foreign banks reduces the ratio of
non-interest income to whole income. Reference [13]
shows that the same results based on panel data available
for the 1994-2004 period of 14 banks in China. These
studies suggest that for eign ban k entr y is no t good for th e
adjustment of business structure. However, [14] makes
an empirical test using monthly data available for the
1993-1995 period and finds that the ratio of loan to as-
sets decreases with the increase of fo rei gn bank presence,
that is to say, foreign bank entry improves the business
structure of domestic banks. Reference [15] finds that the
foreign bank entry makes Chinese banks pay more atten-
tion to businesses besides deposits and loans.
To sum up, foreign bank entry has ambiguous effects
on credit scale and business structure. Owing to a few
studies on China’s banking system, we make an empiri-
cal study on Chinese commercial banks.
3. Empirical Analysis
3.1. Sample
Since our focus is on China, we restrict our analysis to
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X. Y. HUANG ET AL.
816
the Chinese commercial banks. The number of samples
is 31. We divide the samples into two types, namely do-
mestic banks with and without foreign investment. Table
1 gives the abbreviations for sa mples and the years of the
first entry of foreign investment. More than 99 percent of
commercial banks’ assets are in the 31 samples, so the
samples can stand for the whole commercial banks.
The data set for the period from 2002 to 2009 in this
paper is provided by Bank-scope database, Almanac of
China’s Finance and Banking, China Statistical Year-
book and Annual Report of CBRC. Test indicators are
credit scale and business structure, measured by the
growth of loan and the ratio of loan to assets, respec-
tively.
We compare the difference of credit scale and busi-
ness structure between the Chinese banks with or without
foreign investment using the method of [1]. Table 2
gives the results of descriptive statistics. It can be found
that there is no significant difference in credit scale and
business structure between the two types of banks.
3.2. Variables and Models
In order to investigate the effects of foreign bank entry
on credit scale and business structure of domestic banks,
we need variables that measure the greenfield and strate-
gic investment. In line with [11], we use two different
variables to measure the presence of foreign banks th-
rough greenfield investment. First, we take the share of
foreign bank assets to total ban k assets of China (
F
BA).
This measure takes into account the size of foreign banks
as compared to their domestic counterparts. Second, we
adopt the ratio of the number of foreign banks to th e total
number of banks in China (
F
BN ). This measure basi-
cally looks at the sheer presence of foreign banks. Both
variables are calculated based on the data set provided by
the Almanac of China’s Finance and the Banking and
Annual Report of CBRC. Finally, we take a dummy
variable to measure foreign strategic invest-
ment. POST
Some foreign banks enter into China through green-
field approach as well as by “minority equity stake”.
That is to say, some of greenfield banks may be not only
greenfield banks but also foreign strategic investors.
Table 1. List of sample banks.
The abbreviations for banks with for eign investm ent and the years of
the first entry of foreign investment
Abbr.TimeAbbr.TimeAbbr. Time Abbr.Time
BSH2001BNJ2001SPDB 2002 CIB2003
BOCOM2004SDB2004QLB 2004 HZB2005
BOC2005BOB2005CCB 2005 HXB2005
CQB2006ICBC2006GDB 2006 NBB2006
CITIC2006BQD2007YTB 2008 XMB2008
The abbreviations for banks without f orei gn investm e nt
ABC PAB BNC QSB
CMBC BODG BODL CEB
CMB HKB BOW
Note: Foreign investment is regarded as strategic one when the percentage
of equity investment of foreign institution(s) in a Chinese financial institu-
tion is eq ual to or exceeds 5 % in thi s paper. BS H is Bank of Shan ghai. BNJ
is Bank of Nanjing Co., LTD. SPDB is Shanghai Pudong Development
Bank Co., Ltd. CIB is Industrial Bank Co., LTD. BOCOM is Bank of Com-
munication. SDB is Shenzhen Development Bank Co., Ltd. QLB is Qilu
Bank. HZB is Bank of Hangzhou. BOC is Bank of China. BOB is Bank of
Beijing Co., Ltd. CCB is China Construction Bank. HXB is Huaxia Bank
Co., Ltd. CQB is Bank of Chongqing. ICBC is Industrial and Commercial
Bank of China Limited. GDB is Guangdong Development Bank. NBB is
Bank of Ningbo Co., Ltd. CITIC is China CITIC Bank. BQD is Qingdao
Bank. YTB is Yantai Bank. XMB is Xiamen Bank. ABC is Agricultural
Bank of China. PAB is Pingan Bank. BNC is Bank of Nanchang. QSB is
Qishang Bank. CMBC is China Minsheng Banking Corp., Ltd. BODG is
Bank of Dongguan. BODL is Bank of Dalian. CEB is China Everbright
Bank. CMB is China Merchants Bank Co., Ltd. HKB is Hankou Bank.
BOW is Bank of Wenzhou.
Table 2. Descriptive statistics.
Indicator Variable Mean Median SE Maximum Minimum Samples
All 24.01 21.89 17.11 83.50 –36.61 233
First type 24.36 21.64 17.63 83.50 –24.27 154
Second type 23.34 22.09 16.15 70.69 –36.62 79
Loan growth
The difference 1.02
(0.67) –0.45 (0.91)
All 53.72 53.45 7.57 71.1989 31.99 237
First type 53.41 52.48 7.58 71.198 9 31.99 156
Second type 54.31 55.80 7.55 68.9186 37.22 81
Loans/assets
The difference –0.90
(0.39) –3.32 (0.27)
Note: The difference statistical tests of mean and median are analyzed by T test and Wilcoxon/Mann-Whitney rank test, respectively. The values i n brackets ar e
corresponding P values. “All” is the whole sample. “First type” is banks with foreign investment. “Second type” is banks without foreign investment. “The
difference” is the difference between the two types of bank.

X. Y. HUANG ET AL. 817
Thus, in order to separate the effect of foreign strategic
entry from that of the greenfield entry, and avoid multi-
colinearity, we use the residual () of the variable
Resid
F
B regressed on the dummy to replace POST
F
B
in the multinomial regression.
We first study the impact of foreign bank entry on the
credit scale and model the growth of credit as a function
of the presence of foreign banks or foreign strategic in-
vestors, as well as control for ownership, bank character-
istics, and macroeconomic environment. We construct
the following two random effect (RE) panel data models:
,12
3,4
itt ii
itti it
LFB FSIOwnership
Bank characteristicsMacro
 
,


 



,t
(1)
,1,23,
12
3,
itit iit
ii
tiit
LResidFSIPOST
OwnershipBank characteristics
Macro




 


(2)
where ,it is the credit scale—the credit growth of bank
i in year t; t
L
F
B is the presence of foreign banks, and
includes t
F
BA and t
F
BN ; i
F
SI is a dummy variable
that captures the difference of the two types of domestic
banks; ,it is a dummy variable that captures the
effect of foreign strategic investors; i are
dummy variables (i
POST Ownership
J
SCB
acteristics
SIZE
and i CCB ) that capture the
effect of bank ownership (state-owned, joint-stock or
city); , are variables that control
for bank assets scale (), risk level (), business
model (), capital constraint (), and growth of
deposit ( TD ) for bank i at t. i
char it Bank
NI NPL MREG
M
ac
2ro are variables that control for money supply (
M
—the growth of money
supply), the degree of market competition () at time
t. ,it is the substitution of the presence of foreign
banks, and includes ,it
4CR
Resid
F
BAResid and ,it
F
BNResid . i

is the panel-level random effect. ,it

is the random error
term.
Before conducting the test on the effect of foreign en-
try on business structure, we make a Granger Causality
Estimation between the presence of foreign banks and
the ratio of loans to assets to grasp the relationship be-
tween the greenfield banks and business structure. We
adopt a unit root test of the variables, and the results in-
dicate that they are stationary. Table 3 gives the results
Table 3. The results of Granger causality estimation.
Null hypothesis\P value Lag 1 Lag 2 Lag 3
B
S d oes not Granger Cause
F
BN 0.1867 0.6181 0.0620*
F
BN does not Granger Cause
B
S0.0798* 0.0223** 0.0022***
B
S does not G ranger Cause FBA 0.0139** 0.5666 0.5468
FBA does not Granger Cause
B
S0.0000*** 0.0001*** 0.0003***
Note: *** Significant at the 0.01 level. ** Significant at the 0.05 level. * Sig-
nificant at the 0.10 level.
of Granger Causality Estimation.
The results of Granger Causality Estimation show that
the entry of greenfield banks is the Granger cause of
business structure. We use one period lag of variables
and
BS
F
B, and construct the following models:
,1211
23
45,1i,
itt ti
ii
tit it
BSFB FBFSI
OwnershipBankcharacteristics
Macro BS
,t

 





 


(3)
,1,2,13
4,1
2,
4,1 i,
ititit i
it i
it t
it it
BSResid ResidFSI
POST Ownership
Bank characteristicsMacro
BS
 





 



3
(4)
where is the business structure—the ratio of loans
to assets; 1t
,it
BS
F
B

, ,1it
BS

and ,1it are lagged vari-
ables by one period of t
Resid 
F
B, and ,, respec-
tively. In Equations (3) and (4), ,it , i
,it
BSResid it Resid
F
SI
SIZE
, ,it
and are the same as t he ones in Equations (1)
and (2). ,it includes , ,
, and .
POST
NPL
i
rship
nk
REG
Owne
Ba ch
Maracteristics
i
NI
M
acro refers to 2
M
. i

is the
panel-level random effect. ,it

is the random error term.
All the variables in this paper are given in Table 4.
4. Empirical Results
We estimate Equations (1)-(4) using Eviews 6.0. Table 5
shows the estimation resu lts.
Compared with other Chinese banks, 5 state-owned
banks have such features as large size, high market share
and historical problems left behind. Therefore, we make
a robust test using samples except 5 state-owned banks,
and the results are consistent with Table 5. Therefore,
the empirical analysis is robust.
Table 5 suggests that the presence of foreign banks is
not associated with credit scale. The reason is that for-
eign banks have some competitive disadvantages in
China’s credit market. Although foreign banks have de-
veloped fast since China entered WTO, the assets scale
and number of foreign banks are small compared with
domestic banks, and foreign banks lack branch networks
and funds. According to the 2010 Report of Price
Waterhouse Coopers (PwC) “Foreign banks in China”,
the funds of foreign banks in China mainly come from
their parent banks, deposits and interbank lending. That
is to say, foreign banks’ funds are limited. For example,
according to the Shanghai Statistical Yearbook, during
2002-2009 the deposit market share of all foreign banks
in Shanghai, the city with the highest presence of foreign
banks in China, is still less than 10%. Branch networks
nd funds are the basement to engage in loans for banks. a
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818 X. Y. HUANG ET AL.
Table 4. List of variables.
Variable Definition or calculation formula
L
Growth of loan
B
S Ratio of loan to assets
Share of foreign bank a ss et s to t ot al bank assets of C hina
FBA
FB Ratio of the number of foreign banks to the total number of banks in China
F
BN
Resid Resid is the residual of regressed on. FB POST
F
SI
F
SI is 1 for banks with foreign investment, and 0 for other s.
POST POST is 0 be fore and in the year when Chinese banks intro duced foreign investment, and 1 other years.
J
SCB
J
SCB is 1 for joint-stock commercial banks, and 0 for others.
CCB CCB is 1 for city commercial banks, and 0 for others.
SIZE Ratio of bank assets t o the total assets of banking system1
NPL Ratio of impaired loans to gross l oans
R
EG
R
EG is 1 when the last year total capital ratio is below 8%, and 0 others.
NIM Denoting business model of banks
TD Growth of deposit
2
M
Growth of money supply
4CR Share of the largest 4 commercial banks’ deposits to the total deposits of banking sy s tem2
1. is calcul ated in line wit h [16]. 2 . The reaso n of ch oosing t he shar e of depo sits as market co ncent ration is that d eposits are the main business and the
basement of other businesses for banks.
SIZE
These disadvantages go against foreign banks. However,
foreign banks have much superiority on international
businesses. According to statistics, foreign banks in
China mostly come from the countries or areas fre-
quently trading with China such as Hong Kong, Japan,
Singapore, Korea, Britain, French, American and Canada,
etc. And they always enter into developed cities like
Shanghai, Shenzhen, Beijing, Guangzhou, Tianjin and
Xiamen, which are the earliest regions opened to foreign
banks and export-oriented economic regions. Table 6
lists the total volume of exp ort and import, the assets and
number of for eign banks durin g the per iod of 2002-2008.
It is obvious that they are positively correlated. From
Table 6, the distributions of original countries or areas
and objective cities, we can see that serving the multina-
tional enterprises and the trade with China are the main
motivation for foreign banks to enter into China. Refer-
ences [17-19] show that service for trade by following
their customers is an important factor for foreign banks
to decide whether or not to enter on e city. Weighting the
advantages and disadvantages, foreign banks will almost
lend to their home country enterprises and global enter-
prises in credit market, so the presence of foreign banks
has no significant effects on credit scale. PwC’s Report
also indicates that both global and home country enter-
prises remain significant to the loan portfolio of foreign
banks in Chin a.
Table 5 suggests that the presence of foreign banks is
associated with business structure. This could be attrib-
uted to spillover effects with the foreign bank entry.
Reference [12] finds that spillover effects come into be-
ing when foreign banks enter into less-developed coun-
tries, and the bigger the difference between the banking
systems of home and host countries is, th e more positive
the spillover effects are. It is obvious that the business
structure of foreign banks’ parents is superior to that of
Chinese banks, but we need to test whether the business
structure of greenfield banks is the same as their parents.
The left three columns of Table 7 give the test result,
which indicates that they are significantly different. The
features of Chinese banking system, such as attractively
high interest spread, investors’ lack of knowledge, and
constraint on business scope for foreign banks, make the
difference. In China, high interest spread attracts foreign
banks and makes them try their best to fight for loan
market share. Moreover, lack of knowledge and con-
straint of foreign banks’ business scope prevent foreign
banks from carrying out some businesses which are ma-
ture in their home countries. However, we cannot deny
that greenfield banks own the advantages in businesses,
such as advanced techniques, management ideas and
talents. Greenfield banks can attract customers by im-
proving service quality and supplying differential prod-
cts in the permitted busine ss range, so they do not com- u
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X. Y. HUANG ET AL. 819
Table 5. Foreign bank presence and credit scale and business structure in China.
Credit Scale Business Structure
Dependent
variable (1) (2) (3) (4)
Method Random-effects model, Panel EGLS Random-effects model, Pan e l EGLS
C –32.2169 –82.4452*** –47.9996 -84.1431*** 23.2136*** 14.2199*** 10.7589** 5.6680
FBA –8.2626 –4.4957*
FBAResid –8.5405 –4.5047*
F
BN –2.2398 –33.3535***
FBNResid –2.3213 –9.3460**
F
SI –2.5681 –2.6812 –3.0529 –2.9127 –0.3356 –0.2574 –0.0787 0.2428
POST –1.0251 –0.1874 –1.6694** –2.6611***
J
SCB –0.8838 –0.9119 –0.8226 –0.8813 1.0665 1.2079 1.0153 1.1847
CCB –1.6410 –1.7898 –1.5088 –1.7278 –0.9425 –1.1527 –1.0348 –1.3239
SIZE –0.3880 –0.3988 –0.3786 –0.3943 –0.2139 –0.2312 –0.2201 –0.2417
NPL –0.6168*** –0.6298*** –0.6217*** –0.6322*** 0.1116 0.1566** 0.1130 0.1515**
NIM 0.9478 0.7176 0.9188 0.7027 1.4776*** 1.7234*** 1.4665** 1.5969***
R
EG –1.7501 –1.6262 –1.6157 –1.5625 –0.4058 –0.6133 –0.4841 –0.6958
TD 0.5581*** 0.5411*** 0.5542*** 0.5390***
2
M
0.9880** 1.5233*** 0.9734** 1.5256*** 0.1395 0.0827 0.1359 0.4784***
4CR 0.7019* 1.1098*** 0.7212* 1.1237***
(1)FBA –2.4054
(1)FBAResid  –2.1345
(1)FBN 33.0192***
(1)FBNResid  1.9228
(1)BS  0.7061*** 0.6896*** 0.7087*** 0.6801***
2
.
A
dj R 0.6697 0.6652 0.6679 0.6631 0.7409 0.7442 0.7392 0.7342
*** Significant at the 0.01 level. ** Significant at the 0.05 level. * Signific ant at the 0.10 level.
Table 6. Foreign banks’ sc ale and total volume of e xport and import.
Item 2002 2003 2004 2005 2006 2007 2008
Total volume of export and import (billions)1 5137.8 7048.4 9553.9 11692.2 14097.2 16674.0 17992.2
Total assets of foreign banks in Chi na (billions) 324.08 415.97 582.29 715.45 927.87 1252.47 1344.78
The number of foreign banks in China 180 192 211 254 312 440 558
1. Total volume of export and import is the sum of goods actually crossing Chinese border. Source includes China Statistical Yearbook, Almanac of China’s
Finance and B anking and China Banking R egulatory Commission’s Annual Reports.
Table 7. Difference tests in business structure.
Variable Mean Median Variable Mean Median
Foreign banks’ parents 44. 628 43.999 Foreign strategic investor s 44.845 45.700
Foreign banks in China 61.498 64.450 Chinese banks with foreign equity 53.408 52.479
The difference between th e two types –16.870***
(0.000) –20.451*** (0.0000) T he difference between the t wo types –8.563*** (0.000) –6.779*** (0.000)
Note: The difference statistical tests of mean and median are analyzed by T test and Wilcoxon/Mann-Whitney rank test, respectively. The values i n brackets ar e
correspondin g P values. *** Significa nt at the 0.01 level.
pete with Chinese banks in all businesses but intermedi-ate businesses at first. Therefore, foreign bank entry en-
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820 X. Y. HUANG ET AL.
hances the quantity and diversity of financial product
supply. Advanced techniques and management ideas
enter into market with new financial service and products,
and then Chinese banks can learn and use them to speed
up financial product innovation and improve business
structure. Reference [20] shows that the ratio of non-
interest income to total operating income has been in-
creased during 2002-2007. That is to say, the income
structure of Chinese commercial banks has greatly
changed. And according to the annual reports of 4 state-
owned banks in 2009, the ratio of Bank of China (BOC)
is the highest among Chinese banks and reaches 31.58%.
PwC’s 2010 report also mentions that it is difficult to
distinguish the products between foreign banks and Chi-
nese banks. Thus, the development speed of intermediate
businesses and the adjustment effect of business structure
are fast and obvious, respectively.
We can see that dummy variable
F
SI is not signifi-
cantly correlative with dependen t variables from Table 5.
That means foreign strategic investors do not care the
credit scale and business structure of their partners. On
December 11, 2001, China joined WTO and promised to
open banking industry to foreign banks without limita-
tion from December 11, 2006. During the 5 transitional
years there are many advantages in “equity stake” entry
mode. Firstly, foreign strategic investors can avoid the
limitation of customers, geographical and operational
scope, and utilize the networks of domestic banks to in-
terfere in some areas not open to them yet in advance.
For example, the Pacific Credit Card Center of BOCOM
established according to the cooperation agreement be-
tween BOCOM and HSBC, makes HSBC avoid the con-
straint on customers and location in RMB, and enter
RMB retail market ahead of time. Secondly, foreign
banks enter into eastern developed regions at first
through greenfield investment. However, other regions
are also amazing, so they share domestic banks’ profit
through “minority equity stake”. Moreover, foreign stra-
tegic investors can gain the informational advantage by
cooperating with domestic banks, which is an important
factor researched by references such as [21]. To sum up,
foreign strategic investors consider the advantages of the
“minority equity stake” entry mode rather than the credit
scale and business structure of their copartners, so the
coefficient of dummy variable
F
SI is not significant
naturally.
We can also see that dummy variable is not
significantly correlative with credit scale from Table 5.
The coefficients of for credit scale are not sig-
nificant, that means the credit scale of Chinese banks
does not change significantly after foreign investment.
The reason is that the strategic cooperation agreements,
signed by Chinese banks and their foreign strategic in-
vestors, do not refer to loan. For instance, the strategic
cooperation agreement between CCB and Bank of
America (BOA) required BOA to provide strategic sup-
ports in risk management, corporate governance, credit
card, private bank, global service, information technol-
ogy, and so on. Obviously, foreign strategic investors are
not helpful in loans. Therefore, it is natural that th e credit
scale has no significant change after the cooperation.
POST
POST
From Table 5 we can know that dummy variable
is significantly correlative with business struc-
ture. Consistent findings are reported by [22]. The right
three columns of Ta b le 7 indicate that the business struc-
ture of foreign strategic investors is significantly better
than that of Chinese banks. It is the foreign strategic in-
vestors that affect the innovation ability and even busi-
ness structure of domestic banks through their strategic
cooperation agreements. According to the cooperation
agreements, foreign investors provide managers, experts,
resources and technology, etc., to their cooperators. On
the one hand, resources and technology can directly push
the innovation of domestic banks. On the other hand,
managers from foreign investors may shift management
ideas and business strategy of domestic banks by par-
ticipating in their management and decision. This indi-
rectly promotes the innovation ability o f domestic banks.
In short, the entry of foreign strategic investors is helpful
in improving the business structure of domestic banks.
POST
Finally, we analyze capital adequacy ratio, money sup-
ply and market concentration. If capital adequacy ratio is
below 8%, banks will feel pressure and limit the bu siness
scope to improve the capital adequacy ratio, so regula-
tory pressure is not good for the adjustment of business
structure or the gr owth of loan. Reference [23] also indi-
cates that capital constraint has negative effect on loan.
Money supply and market concentration both have sig-
nificantly positive co rrelation with credit scale. That is to
say, the factors affecting the credit scale are macro-eco-
nomic and bank characteristics rather than foreign bank
entry.
According to the empirical analysis above, we know
the impacts of greenfield banks and foreign strategic
investors are consistent. From the way of greenfield,
none of foreign or domestic banks have absolute advan-
tage. The comparative advantages of greenfield banks
make themselves avoid the fierce competition on credit
market and develop their advantage on other businesses.
From the way of “minority equity stake”, the strategic
cooperation between foreign strategic investors and do-
mestic banks is helpful to the promotion of business
structure of domestic banks. Summarily, Chinese banks
are not impacted in traditional credit market but they can
get help and learn from foreign banks in other markets.
Therefore, foreign bank entry is helpful in the improve-
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X. Y. HUANG ET AL. 821
ment of innovatio n ability an d the adj ustment of bu siness
structure of domestic banks.
5. Conclusions
This paper investigated the impacts of two different ways
of foreign bank entry on credit scale and business struc-
ture of Chinese commercial banks, based on the bank-
level panel data available for the 2002-2009 period. The
empirical results show that the foreign bank entry is not
associated with the growth of credit scale, but signifi-
cantly improves domestic banks’ business structure. In
short, the foreign bank entry is useful to the improve-
ment of innovatio n ability an d the adj ustment of bu siness
structure of Chinese commercial banks. This conclusion
also partially indicates the effect of the reform and
opening-u p of C hinese banking system.
6. Acknowledgements
This research has been supported by grants from the Na-
tional Natural Science Foundation of China (No. 70872-
016).
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