Study On The Credit Competition Between Foreign Banks And Chinese Banks

With the opening policy of Chinese banking industry, foreign banks enter into chinaand grow in assets and the number of branches, and then the monopoly of domestic bankis broken and the competition between Chinese banks and foreign banks come out. As weall know, credit is the traditional and core business of bank as well as the main source ofprofit of bank. In this credit business, Chinese banks and foreign banks have their ownadvantages, for instance, Chinese banks are more familiar with Chinese credit market andhave more branches and clients, however, foreign bank are superior on management andproduct innovation. In this circumstances of competition, how do foreign banks make thebest use of its’ advantages and avoid disadvantages to get more market share? How doChinese banks maintain the market share? These issues deserve our attention andresearch.Firstly, this paper describes the research background and the literature on the creditcompetition between domestic bank and foreign banks. Secondly, the advantages anddisadvantages of foreign banks and their competitive strategies in credit market aredescribed and analyzed in detail. Then, according to the previous research and the actualsituation of Chinese banks and foreign banks in credit market, this paper build a Bertrandmodel with assuming that foreign banks make lending decisions on projects and haveadvantages on screening technology and financing cost while Chinese banks makinglending decisions on credit history and have information advantage. With this theoreticalmodel, this paper makes detailed analysis on the impact that the payoff of successfulprojects, the probability of a project succeed, refinancing cost and screening technologyhave on market share and the critical value of entry barrier. Finally, the conclusions aremade and discussed if they correspond to empirical observations. The main results of thispaper as following: first, the increase of the payoff of a successful project, the probability of a project succeed will both decrease the critical value of entry barrier and increase themarket share of foreign banks; second, the decrease of refinancing cost of foreign bankswill decrease the critical value of entry barrier and increase the market share of foreignbanks, meanwhile the increase of refinancing cost of Chinese banks will increase themarker share of foreign banks. That imply that refinancing cost advantage will helpforeign banks enter and obtain market share, and refinancing cost advantage can make upinformation disadvantage. Third, the improvement of screening technology will increasethe market share of foreign banks and decrease the critical value of entry barrier whenthe probability of a project that succeed is below0.5. That imply screening technologyadvantage will help foreign banks enter and obtain market share, and screeningtechnology can make up information disadvantage. Fourth, under the situation of lowprobability of a project succeed and low payoff of a successful project, screeningtechnology advantage is more important than information advantage to the bank,therefore, foreign banks can enter more easily and get more market share.