The Effect Of Foreign Entry On Domestic Banking Markets

The entrance to WTO means that China has formally entered into the time of opening financial market. The basic theory of this paper is the theory of market structure and the theory of financial liberalization. In this paper, we will discuss the effect of market entry on the Chinese banking market.The first part summarizes the theory of market structure and financial liberalization., present the challenge Chinese commercial bank has to face. Part two construct the formulation which adopt the methodology proposed by Bresnahan and Reiss in a series of papers (1987,1990,1991). The third part empirically researches the relationship between HHI index of deposit and GDP in China., estimate entry threshold in commercial banking markets of province. The last part is the conclusion and reform suggestion.As following is the conclusion: As first, there is a relationship between HHI index of deposit and GDP in China, it means that more ardent competition is related to higher economic development level in banking market; Secondly, foreign banks could not enhance it's market share quickly in Chinese banking market, as the market capacity is not enough. Thirdly, at present, on the one side, Chinese government wished the entry of foreign bank could stimulate dominant bank enhance it's service level and improve it's ability of competition; on the other side, it is not acceptable for the government that the foreign bank take a great deal of market share in the banking market. Therefore, it is necessary for the government to stepwise open the dominant baking markets.The conclusion is benefit of knowing of competition structure in Chinese banking markets.