Dissertation - Fdi Impact on Chinese Banks

China’s banking system is mainly run and operated by the People’s Bank of China (PBC). The People’s Bank of China Operates as the overarching authority through out China’s banking system (1). At the start of the early 1980’s china began to branch out the PBC’s power by creating four centralized banks. These four banks were known as the Industrial & Commercial Bank, China Construction Bank, Bank of China and Agricultural Bank of China (1). Over time China has continued to integrate more and more free market aspects into it’s economy. China has continued to allow many joint stock commercial banks and more then a hundred city banks to conduct business with in it’s country. International banks are also allowed to establish branches with in China and are also allowed invest in state owned banking institutions (2)..

Ping An, founded in 1988, is a private company that sits at the intersection of banking and insurance in China. It has taken advantage of China being the world’s fastest-growing insurance market and reductions of regulatory controls following China’s entry into the WTO in 2001. Ping An has built a highly profitable business and is exploring using the Bancassurance strategy, that is, selling its insurance products via banks in order to quickly and inexpensively develop market share without the need to develop agency relationships in the direct channel. While its largest shareholder is HSBC (16.13%), Ping An’s own foreign investments have been less than successful, with a failed $3.4 billion investment in large European bank Fortis in 2008. The global financial crisis was a major factor influencing this European failure, but the Chinese banking sector generally was largely insulated from the GFC due to its closed structure and no heavy investments in Europe. In 2009, Ping An acquired the Shenzhen Development Bank and is once again considering expanding the company abroad.

Since the reform and opening up, the economy of China grows significantly, as an emerging economy, China's economy has made tremendous contributions to the global economy, and Renminbi has become one of the most important currency in the world. According to the survey conducted by China National Bureau of Statistics found that from 1979 to 2012, China has attained an annual average growth rate of 9.8% for its national economy, while the annual average growth of the world economy is only 2.8 % during the same period. In past 30 years, China's GDP surpassed Japan’s, China became the world 's second largest economy, in addition, the huge total volume of trade makes China become the world 's largest trading nation. The contribution of China’s

In 2008, the Global Financial Crisis broke out; both the American economy and the economy in the West suffered a hard blow. However, a big economy system in the East emerged unexpectedly. China is now able to challenge the America’s decades-long dominant position in economic area. Started during the middle of 1990s, China’s manufacturing industry developed rapidly that billions of exports were floating out, and China was given the title of “the world’s factory”(BBC). By the end of 2010, China with a GDP of $5.8 trillion, surpassed Japan’s GDP of $5.48 trillion, became the world’s second largest economy system (BBC). China also exceeded Japan became America’s largest foreign securities holder. Since then, China has been seen as the US’s

the Chinese financial integration on C, S and I in the rest of the world?

Andras, 2010). This type of threat can leave businesses suffering in a marketplace for inappropriate reasons.

China’s recent rapid economic growth has astounded countries around the world, including the U.S. Domestic policies that improved incentives for economic competitiveness were one of the main reasons that China was so successful in increasing its Gross Domestic Product (GDP). “The combination of Chinese land and labor with the capital and expertise of Taiwan and Hong Kong industrialists provided a particularly important boost to exports and employment during the first decade of reform.” China attracted investments from multi-national corporations, which further contributed to China’s revival as a great trading nation.

The Chinese Banking Regulatory Commission seeks to open three to five new banks throughout the year. Their focus is to be responsible for their own risk as a tactic to open their institution to domestic and foreign capital for investing (CBRC). In doing so, the CBRC will need to “reduce the threshold for foreign banks to enter the banking sector” and ease currency operation requirements to make investing more ‘user-friendly’ to foreigners (CBRC).

I found this article "Foreign direct investment: Companies rush in with the cash" on the financial times website (www.FT.com) published December 11, 2002 written by John Thornhill. The reason for choosing this article is my personal interest in the Chinese economy and its attractiveness to the foreign investors. Apart from the foreign direct investment this topic has also helped me in understanding the impact of Chinese economy on the global market.

An Argument Against Citigroup in China Chinese regulations have historically limited the operations of foreign banks, but with the entry of China into the World Trade Organization (WTO), that is all slated to change- in theory. Geographic limitations for foreign banks are to be lifted by December 2006, along with a host of other restrictions that have retarded the growth of Western banks and the Chinese banking sector as a

According to empirical studies by Moshirian (2001), which discovered determinants of US FDI in banking industries, the primary factors which have influence on the activity of foreign banking in American includes the market volume of host country, the cost of investment capital cost, relative economic growth, bilateral trade, taxation, interest rates, exchange rates and FDI in non-finance industries. However, the study, which discriminates between the abroad activities of banks and FDI in banking by banks and non-banks, indicated that exchange rate is a crucial element of FDI expansion in banking because of currencies appreciates. In addition,

Although China has initiated market deregulation, foreign financial institutions are still facing intensive monitoring from Chinese authorities. Compared to the UK, the US and other developed countries, the degree of openness of Chinese financial market is still low. According to current Chinese law (Appendix I), foreign financial institutions experience difficulty in obtaining a controlling interest of more than 50% or in becoming a majority shareholder in target firms. This situation is similar to most M&A cases in Hong Kong, which are partial mergers or acquisitions (Cheng & Leung, 2004). Moreover, another unique characteristic of Chinese targets is that the majority are unlisted financial institutions. Therefore, it is more feasible for foreign financial institutions to enter the Chinese financial market by merging with or acquiring Chinese financial institutions.

It has experienced fast growth since the open door policy in 1978, especially over the past decade. According to Turner, G & Tan, N & Sadeghian, D (2012, p.53), the total assets in the banking system (including assets in Chinese banks’ foreign branches and subsidiaries) was around 240% of GDP at the end of 2011, a substantial increase from about 200% in the early 2000s. The growth is mainly attributed to an increasing domestic demand for banking services and activities associated with economic development. As a result, China did not suffer severely from the 2008-2009 global financial crisis. The top five banks in China by size, the big four mentioned previously and the Bank of Communications (BCOM), control around half of Chinese banking system assets and deposits (Turner, G & Tan, N & Sadeghian, D 2012, p.53). The ‘Big Five’ also account for nearly 50% market share in the banking industry. These leading banks are mostly state-owned and partially privatised through listing on the Hong Kong stock exchange (Turner, G & Tan, N & Sadeghian, D 2012, p.53). Compared with the stock markets, the banking system in China has considerably greater importance due to its size (Allen, F, Qian, J & Qian, M 2005, p.70) and the structure of its economy. However, the stock markets in China are considered to be comparatively more efficient than the banking system within the country

In recent years, the investment scales of foreign business are increasing stably. In 2001, the foreign direct investment was 46.8 billion dollars. In 2005, it has arrived at 85.5 billion dollars. At the same time, the form and field has changed diversification. With the China economy high speed developing and enlarging the industry field, the foreign investment will related to communication equipment, computer, bank service, insurance service, etc. so it will also increase for a long time.

FOREIGN BRANCHES – These are operating banks and are subject to local banking rules and the rules at home. These branches most of the time offer quality services and safety that are provided by a large bank to the customers in small countries.