A Study On Effects Of Foreign Banks' Entry On Domestic Banking In China And Policy Recommendations

With the official execution of Regulations of People's Republic of China on Administration of Foreign Banks on Dec 11. 2006, China has finished five years` interim and completely fulfilled the promise of the banking open which was made when China joined the WTO. The entrance of the foreign banks will definitely and dramatically change the market structure and performance of the domestic banking. At the same time, there are many questions to be answered: What kind of organization will the foreign banks take? What kind of strategies for competition? What kind of impacts? What will domestic banks do when facing the opportunities and challenges? There are realistic meanings and academic values on the study of these questions, especially on suggesting countermeasures. This essay is just a try using the modern economics analysis method to answer these questions.This essay consists of five chapters. Chapter 1 focuses on the background and significance of the study, the brief introduction of the related literature at home and abroad, and the logic thought and the framework of this essay. Chapter 2 firstly looks backward three historical stages and the actual situation of foreign banks, then analyzes the ways of foreign banks'entry, especially the impacts of Regulations on Administration of Foreign-funded Banks. Finally, after the comparison of the competitive advantage between foreign and domestic banks, makes the detailed analysis the competitive strategies of foreign banks from four different aspects, including exploring strategy, clients exploring strategy, businesses exploring strategy, and investing strategy. Chapter 3, according to Chinese actual situation, studies the effects of foreign banks'entry on domestic banking in China from two aspects, academic and empirical analysis. For academic analysis, a Stackelberg model of banking is applied to analyze the impact of foreign banks'entry on welfare. Then analyze in depth what effects and how foreign banks'entry will affect domestic banking in China, from positive and negative aspects. And for empirical analysis, the econometric model of Claessens ,Demirgüc-Kunt & Huizinga(2001) and the data of 15 banks in China from 1997 to 2004 are applied to analyze the effects. Chapter 4, on the basis of the analysis above, gives policy recommendations in the all-round competition from foreign banks. The essay suggests that from the microcosmic part, the domestic banks, especially the state-owned bank, must cultivate and improve the core competency in order to compete with the foreign banks. And from the macroscopical part, the government should create a sound political environment by changing the obligation, optimizing the supervision of foreign entry, and encouraging the development of civil banks. Chapter 5 gives ideas and conclusions of this essay, then points out the direction for further study.