Chinese Banking Market And Regulatory Policies: Analysis From The Theoretical Point Of View Of Industrial Organization

1, The angle and aim of the researchFinancial industrial organization is a subject studied in market economy in medium and long terms in the whole world. It is also a key problem in the development of financial industries that China has to solve, and the market orientation of banking industry is the focus in financial reforms. In market economy, the oligopoly market structure of the high concentration of state-owned commercial banks influences the resources allocation efficiency and the scale benefits. In the aspect of differences of products, owing to the administrative policies and regulations, the homogeneity of products makes the banks unable to obtain certain competition advantage and development space. The direct management of enterprises by government causes the market behavior of the state-owned commercial banks non-marketized.The application field of industrial organization policy consists of three aspects (Carlton. Wear Luo, 1998): first, the result of governmental behavior of increasing or reducing government welfare; second, anti-monopoly and legal provisions; third, how the government controls the conduct of business and market structure. Just because the government takes administrative means to manage banks directly and implements the strict market access policy, the state-owned commercial banks have formed the oligopoly market structure. Therefore, the market-orientation of the Chinese banking industry requires the government supervision policy to lay emphasis on perfecting market mechanism, giving the role of market full play, and supervising particularly the behavior of oligopoly enterprises, in order to reduce the defects of oligopoly market structure, the damages to competition made by oligopoly behavior, and the negative influence to market performance. Therefore, the marketization of Chinese banking industry has to be studied at the same time with the relating supervision policies. For this reason, this dissertation is entitled " Marketization of Chinese Banking Industry and Supervision Policy: Analysed from The Angle of Industrial Organization Theory". Regarding bank as an industry, we attempt to analyze the market structure of Chinese banking industry and its effect on banking behavior and performance, and the impact of the government supervision on market structure and behavior. Using the achievement and experience of western industrial economics, we explore that how does the industrial organization theory provide a theoretical foundation for the formulation of policy to control and influence market structure and market behavior in the background of market economy. Finally, we conclude that the key variable of themarketization of Chinese banking industry lies in the administrative supervision policy of government.2. The research route and approachIn the route of research, this dissertation is mainly based on industrial organization theory, analyses the main thread of banking marketization, beginning from the general theory of industrial organization and relevant theoretical analyses, and probes concretely into the market-orientation of Chinese banking industry. The research range involves the banking market corresponding to commercial banks. Through the analytical approach to market structure, we delineate the high concentration of Chinese banking market, which has the characteristics of distinct oligopoly market. Then according to the theoretical model, we analyze the behavior characteristic of Chinese banking industry. It is proved that the strict market access policy implemented by the supervision department of Chinese banking industry is the main reason for the formation of Chinese oligopoly market structure. In other words, the key variable influencing the marketization of Chinese banking industry is the administrative supervision policy implemented by the government. Therefore, we come to the conclusion that the key to the marketization of Chinese banking industry lies in the supervision on business behavior and market structure of banks, i.e., how the policy is favorable to market mechanism. Meanwhile, for the sound development of the banking market, we should also consider some other supplementary measures, such as bank deposit insurance system, etc..Following the research route of "theory, real example and policy" analysis, the theoretical foundation and research approach of this dissertation are first explained. By methodology, there are two normal forms of industrial organization: first is the Harvard form of "structure- conduct-performance" represented by Beirne; second is the Price Theory form that has prevailed since the mid-or-late 1980s, represented by Stigler. Among them, the most applications of the price theory form are the trading cost analysis, the game theory, and the competitive market analysis. In respect of research approach, this text follows the research routes of the traditional and new industrial organization theory separately, and adopts the market orientation of banking industry. It combines the theory with practice, the great financial environment with banking industry, the history with reality, the real examples with norm, and the quantitative analysis with qualitative analysis. The specific steps are as follows:(1) The research approach of traditional industrial organization theory, taking market structure as the centerIn the frame of the traditional Harvard School SCP analysis, the basic analytical procedure develops according to the order of market structure- market conduct-marketperformance-public policy. Here, there is causality among the structure, conduct and performance, that is, the market structure determines enterprise's behavior, and enterprise's behavior determines the economic performance of the market operation. So, in order to obtain the ideal market performance, the most important thing is to adjust and directly improve the unreasonable market structure through the public policy. The SCP analytical frame regards market structure as the focus of industrial organization, and puts the analysis of the relation between concentration degree and profit rate at the center. We think that industrial organization policy should concentrate on forming and maintaining the competitive and effective market structure, and implement policies to regulate the monopoly and oligopoly market structures in economic life.Market concentration degree is the most important factor to determine the market structure. Enterprises' behavior to pursue economic scale, product commercialization policy, barriers to enter some industries, enterprises' motive to strive for monopoly, policies and laws of the government, all these are the factors influencing market concentration degree. Among them the behavior to pursue economic scale and the motive to strive for monopoly are the main basic factors. The current banking market structure in our country is promoted by government administrative force, not by market force. It is a market structure highly oligopolized,, lowly differentiated, and severely hindered to access and withdraw. The real reason to cause the high concentration of banking industry in our country is neither the scale economy nor the differential products, but the special developing history of the banking industry in our country and the market access mechanism, i.e., the current approval system is not an approval system in market economy. In this monopolistic market structure, the banking industry in our country lost resource distribution efficiency as well as production efficiency. Therefore, the government discriminatory policy of opening up to the outside world and closing the domestic market is the decisive factor of forming highly monopolized market. Thus, adjusting the current supervision policy that hinders the Chinese banking industry from realizing marketization is the key to form the market structure of banking industry with effective competitive mechanism.(2) The research approach of the new industrial organization theory, taking market behavior as the center.The researchers of the new industrial organization theory use the analytical method of the new theory on the basis of game theory to reconstruct the analytical frame of the traditional industrial organization theory, and have almost produced a revolutionary influence on the industrial organization theory. This theory emphasizes the endogenous problem of market structure, and considers that enterprises' behavior isthe main decisive force to influence market structure and market performance. So, its research focus is transferred to market behavior, and the tactical behavior is the key content of studying market behaviors. The production of tactical behavior depends on the interdependent relation existing in the market decisions of firms, and this kind of interdependent relation can only exist in oligopoly market structure. So, the foundation of the tactical behavior is the oligopolistic or monopolistic market. Here, the leading firm can change the market environment through its tactical behavior, and influences the expectation of its rival through manipulating market environment, and creates a condition to establish for itself an unassailable position in market competition, in order to obtain profits. The working process of tactical behavior is a course of dynamic competition. New industrial organization theory introduces game theory, especially dynamic non-cooperative game theory and information economics, to carry on the most extensive and most exhaustive analysis.Tactical behavior theory offers the anti-monopoly policy a foundation of scientific economic theoretical analysis, and becomes the general theory of anti-monopoly analysis. Following the method of new industrial organization theory, and through the concrete analysis of market shares of banks, this text holds that high degree monopoly harms competition. The reason is that there are too many restrictions on the market access of banking industry in our country. Besides the general economic barriers, the administrative barrier, namely the administrative restrictions on market access, is most prominent, which causes very high costs for entering market. In this case, the new competitors are very difficult to enter. This is not only unfavorable to the perfection of competition mechanism, but also more difficult to withdraw from the market <>Because the highly monopolized market structure lacks competition mechanism, and because the supervision policy has many restrictions, in respect of the tactical behavior of brand diversification which raises competitiveness, Chinese banking industry lacks the motive and pressure to produce new products. The homogeneous bank products are unable to offer necessary basis and space for product combinations. Therefore, the market competitiveness of Chinese banking industry is not strong 0In industrial organization theory, the reputation and signal-manifesting models of restrictive pricing and predatory pricing, which are related to the barrier to access, have enlightening nature to the public policy of Chinese banking industry. The marketization of banking industry includes the marketization of interest rate, which needs the marketization of the People's Bank monetary policy tools. At the same time, we should also avoid the dynamic inconsistency of monetary policy.(3) Through the investigation of market structure and market behavior of Chinese banking industry, we can prove that the key factor that forms the monopolized marketstructure lies in the administrative barrier 01 supervision department, lhis kind or non-economic administrative barrier makes the marketization degree of Chinese banking industry relatively low, and males the banking industry lack competitive power. The state-run commercial banks are not real financial enterprises, whose economic performances are obviously lower than that of their international counterparts. For this reason, this text discusses the supervision policy of banking industry, and puts forward suggestions to adjust the market-oriented supervision policy of Chinese banking industry.3 Innovation and weak points(1) Main innovative view, research approach and research angleAttempting to start from the extensive demands in theory development and practice, and from the respect of industrial organization theory and public policy, through the analysis of the market structure of Chinese banking industry, this text studies and proves the relation between the marketization of Chinese banking industry and supervision policy.Chapter four uses the normal form of "structure-conduct-performance" to analyze the relations among the market structure, bank behavior and economic performance of Chinese banking industry, and points out that the high concentration in market of commercial banks in our country has the distinct characteristic of oligopoly. In the meantime, it emphasizes that, with the SCP normal form which stresses the positive ratio between the concentration and interests, it is difficult to explain the practical problems of the Chinese banking industry. The high concentration and low interests in the Chinese banking industry come from the key variable that administrative policy to hinder the entry and withdrawal of banks determines the market structure. This essay, therefore, tries to analyse and study in a completely new viewpoint and with practical principles of industrial organization theory, thus bringing about due function to the reform of machenism of the Chinese banking industry.When it analyzes the market behavior of the Chinese banking industry, Chapter five points out that the emergence of oligopoly is the major reflect of modern industry. The difference is: the western oligopoly market structure is the result of full function of market machenism while administrative barrier to hinder the entry and withdrawl is the main reason why Chinese banking oligopoly emerge. As a result, we cannot apply the oligopoly theory in industrial economy to analyze the market behavior of the Chinese banking industry: on the one hand, price policy is the major content of market behavior, and price competition is the most important competitive method. Before the marketization of interest rate in China, the capital interests of the state commercial banks are softered with restraint. On the other hand, the supervision policy should bepracticed by using administrative barrier to hinder the entry and withdrawl of banks, thus leading to the high cost of entry, weakened market competition and inefficient disposal of resources of state commercial banks. This chapter further verifise that the Chinese banking industry should realize marketization. The current administrative supervision policies of financial and banking industries should be theroughly adjusted. The analyisis method of this chapter is of certain theoretical significance to the deepening of industrial organization theories.Chapter seven discusses the supervisory system of Chinese financial and banking industries, and uses the analytical method to combine history and reality. It points out that the supervision of Chinese financial and banking industries has its own historical reason of development, and the supervision policy in planned economy has caused the forming of oligopoly market structure of Chinese banking industry. Because this is different from the structure of western oligopoly market, in which market mechanism has full play, the supervision policy of Chinese financial and banking industries should lay emphasis on establishing a sound market mechanism, and the administrative supervision should be implemented mainly on the behaviors of the oligopolistic financial enterprises.Chapter eight includes the consideration of the marketization of Chinese banking industry and supervision policy. It examines from the great environment of the whole finance, and emphasizes again the decisive influence of the banking supervision. On the one hand, the development of banking industry can not do without the great environment of finance. On the other hand, in western countries, bank supervision is equivalent to financial supervision. Therefore, investigating the developing trend of banking industry and relevant supervision policy must involve the whole financial market and the current supervision situation. It is proved that Chinese banking marketization can not leave the development of the whole financial circle, and that the formulation of the Chinese banking supervision policy can not do without the perfection of the whole financial supervision policy.In short, the content of this text is from theory to real example, and its method is from studying to reasoning. The theoretical foundations and angles of very chapter are different. But the emphatic point is placed on the decisive impact of bank supervision policy on the marketization of Chinese banking industry, so as to make its argument clear. The evidence is abundant, and the conclusion is convincing.(2) Problems needed to be further explored and weak points are as follows. The decisive impact of the administrative supervision policy on the marketization of Chinese banking industry embodies in the barrier to enter or withdraw from banking industry. This text fails to develop the analysis. In fact, this kind ofbarrier will make this industry keep its market structure in a steady state, and increase the difficulty of adjusting the market structure of industrial organization. Because the oligopoly market in western developed countries results from market mechanism, we must consider the reality of China while using practical experience of developed countries for reference. How to draw lessons from western countries and combine with our own reality is a problem deserving intensive discussion?The focus of administrative supervision is to supervise the behaviors of oligopoly banks. This problem has to be further studied. The market orientation of Chinese banking industry is contrardictory to its oligopoly market structure. The content and form of supervision on the behaviors of the oligopoly banks depend on whether the government can take the formation of market mechanism as the starting point of implementing the supervision policy. This problem is closely related to the economic system reform and even to the whole political structure reform. This text involves less.As to the range of content, because this text does not have enough data of foreign countries, comparisons between foreign and domestic banking industries are insufficient. If such comparisons can be made, the research result of this text will be more convincing.