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Institutional Development, Ownership Structure, and Business Strategies: A New Era in the Chinese Banking Industry

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China’s Emerging Financial Markets

Abstract

This chapter traces the structural changes in the Chinese banking industry since the 1990s and explores the role of governance in influencing the banking strategies and performance of local financial institutions. Specifically, the chapter focuses on the increasing openness to foreign ownership in local banks, the asset–liability and geographical diversification strategies undertaken by the financial institutions during these deregulatory and changing environments, and the institutional developments in the economy. Finally, the chapter links these changes with bank performance. The evidence suggests that banks with minority foreign ownership are associated with better performance, all types of diversification – captured in four dimensions: loans, deposits, assets, and geography – are associated with reduced profits and higher costs, while banks with minority foreign ownership are associated with fewer diseconomies of diversification, suggesting that foreign ownership plays an important mitigating role. We also observe a significant impact from institutional developments; gradual dominance of the market economy, growth of the private sector, and establishment of secure property rights and rule of law are important factors associated with higher bank performance.

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Notes

  1. 1.

    See Berger et al. (2008a) and Garcia-Herrero and Santabarbara (2008) for some empirical studies of the role minority foreign ownership in effecting bank performance in China.

  2. 2.

    See Stulz (2005) and Kho et al. (2006) for discussion on how agency problems of domestic firms allow insiders to own large equity stakes of firms in developing nations, which limits the role of foreign investors or institutions.

  3. 3.

    Source: Aims to diversify revenue sources, Shanghai Daily, July 18, 2008.

  4. 4.

    While we recognize that there may be some inconsistencies in financial data using different accounting standards, given that most of the sample banks follow Chinese Accounting Standards (CAS) while a few also prepared annual reports based on International Accounting Standards (IAS), we do not find a material difference between the financial statements of the same bank while reporting under both CAS and IAS respectively.

  5. 5.

    All the city commercial banks in China, along with the joint venture and foreign banks and other banking institutions, make up the “third-tier” banks in the industry, and they take up about 30% of the total banking assets in China in 2006.

  6. 6.

    We are less concerned with the insignificance of the minority foreign ownership dummy coefficients in the even numbered columns because those columns include the interaction terms between minority foreign and other variables, and when higher order terms are present in the regression, significance of the lower order terms becomes less relevant. The same rule also applies to the coefficients of Focus Index and the institutional variables in the even numbered columns.

  7. 7.

    When comparing Tables 8 and 9, please note that the lower costs/assets ratio in Table 8 corresponds roughly to the higher cost efficiency in Table 9, therefore, in general, the signs of the coefficients of the independent variables in these two tables are expected to be opposite to each other.

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Author information

Authors and Affiliations

  1. Moore School of Business, University of South Carolina, Columbia, SC, USA

    Allen N. Berger

  2. Wharton Financial Institutions Center, Philadelphia, PA, USA

    Allen N. Berger

  3. Lally School of Management and Technology, Rensselaer Polytechnic Institute, Troy, NY, USA

    Iftekhar Hasan

  4. School of Management, University of Alaska Fairbanks, Fairbanks, AK, USA

    Mingming Zhou

Authors
  1. Allen N. Berger
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  2. Iftekhar Hasan
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  3. Mingming Zhou
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Corresponding author

Correspondence to Allen N. Berger .

Editor information

Editors and Affiliations

  1. Director of Capital Studies, Milken Institute, Fourth Street 1250, Santa Monica, 90401, U.S.A.

    James R. Barth

  2. Networks Financial Institute, N. Meridian St. 2902 , Indianapolis, 46208, U.S.A.

    John A. Tatom

  3. Senior Fellow, Milken Institute, Fourth Street 1250, Santa Monica, 90401, U.S.A.

    Glenn Yago

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Berger, A.N., Hasan, I., Zhou, M. (2009). Institutional Development, Ownership Structure, and Business Strategies: A New Era in the Chinese Banking Industry. In: Barth, J., Tatom, J., Yago, G. (eds) China’s Emerging Financial Markets. The Milken Institute Series on Financial Innovation and Economic Growth, vol 8. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-93769-4_11

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