The Impact Of Foreign Banks Entry On Domestic Banking In China

Economic Globalization and trade in financial services are developing in the worldwide, making the foreign banks have entered in many countries'banking systems and become a crucial role in their banking system. Following its accession to the WTO China is realizing its commitments to the WTO. The rate of the foreign banks entering the Chinese banking market is significantly speeded up. More and more foreign banks are diversified into China's banking system, having a profound and far-reaching impact on the development of China's banking sector.Numerous research achievements show that if the foreign banks enter the markets, they will have a positive impact on the domestic banking through the effects of competition, technology spillover effect, the human capital effect, market reform effect, promote the domestic banking markets to improve its efficiency. But in the short term foreign banks entry may bring negative impact on the domestic banking markets, in result of the increase of the operating costs, reduce of SME loan and weakening of the domestic government's ability to control the economy.In this paper, the theoretical study showed that the foreign banks entry would make the Chinese banking have following gains: (1) to promote the state-owned commercial bank's reform; (2) to improve domestic banks'structure of corporate management; (3) to promote the competition of the domestic banking markets and the transfer of operating mode of banks; (4) to improve the quality and the availability of financial services and boost financial innovation. (5) To promote the development of the domestic financial markets; (6) to promote the construction of the Chinese infrastructure of financial system. However, the foreign banks entry might lead to "cherry-picking" behavior, so that the domestic banks would lose their top-quality clients and also bring challenges to the financial supervision of China.In demonstration, based on the panel data of the 10 representative domestic banks between 1997 and 2005, using the econometric methods of study, the results showed that the foreign banks entry had the positive and negative impact at different levels in China; further demonstration studies on the classification of the traditional state-owned commercial banks and joint-stock banks showed that two types of banks in the face of foreign banks would have different reactions, this showed the different influences on the banking business due to the different systems.At the last part of the paper, on the basis of the theoretical and demonstration analysis, I analyzed the competition of Sino-foreign banks and made corresponding policy recommendations.