A Study Of The Effects Of Introducing Foreign Strategic Investors On Chinese Banks’ Performance And Innovation

In accordance with the treaty signed by China to become a WTO member in2001, theChinese banking industry offered full access to foreign banks in the end of2006,granting them full citizenship. Facing this challenging situation, in order to establish amodern commercial banking system and become more internationally competent, theChinese banking industry conducted a series of reforms. Of these reforms, thepiece-de-resistance was the one aimed at reshaping the property rights system, whichwas intended to attract foreign strategic investors, with the objective of absorbingforeign capital as an intermediary for introducing advanced intelligence andinstitutions that served the higher purpose of improving the core competency of theChinese banking industry. With the trend having lasted for a multi-year period andongoing, such critical questions, viewed as debate-worthy topics by both the practicaland the academic realms, should be asked: has the introduction of foreign strategicinvestors improved Chinese banks’ performance and core competency? What factorsdo foreign strategic investors have that will influence Chinese banks’ performance?This paper is an attempt at answering these questions.The methodology adopted covers such dimensions as theory, empiricism, quality andquantity, using the relevant data of78Chinese banks over the2002~2011period toassess empirically the affects of introducing foreign strategic investors on Chinesebanks’ various characteristics, such as profitability, asset quality and financialinnovation. The result shows four findings: first, the introduction of foreign strategicinvestors has not improved Chinese banks’ performance in terms of averageReturn-on-Assets(ROAA), evidenced by the statistical non-significance of thecoefficient of Foreign strategic investors’ share-holding-ratio on the ROAA, which isnoticeably influenced by the macro-economic environment. An ancillary piece ofevidence for the above argument is that state-owned banks performed less good thansmall-scale banks. Second, Chinese banks have not undergone the expectedimprovement in innovation, either. The main source of profit for Chinese banksremains interest revenues. Third, the quality of Chinese banks’ assets has beenelevated because introducing foreign strategic investors helps shape better riskmanagement and diminish the volume of bad-debts. Last but not least, commercial banks are superior foreign strategic investors to international organizations andinvestment banks. But the merits of introducing foreign strategic investors lie notsimply in the number, in addition to the arguable absence of foreign strategic investorsfrom the de facto decision-making corridors, resulting in the loss of ‘positive effects’.Overall, this paper proposes that the introduction of foreign strategic investors hasonly a rather limited improving effect on Chinese banks’ performance.In order to redress the identified shortcomings, a package of policies is suggested.1.Improve Chinese banks’ financial innovation and operation.2. Limit governmentalintervention.3. Establish an efficient disclosure mechanism to diminish informationasymmetry and principal-agent conflict.4. Introduce legal measures to form afunctional financial market environment.5. Formulate a tailored stepwise program forexpanding industrial access and promoting cooperative competition.6. Build adouble-facet mechanism governing foreign strategic investors both to provideincentives and to impose restraints.