1. Foreign Banks in China:
Has liberalisation and deregulation of the financial sector
encouraged foreign banking in China.
Jonathan James Yee
11th
September 2015
Words: 9825

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List of Abbreviations
ABC- Agricultural Bank of China
BIS- Department for Business Innovation and Skills
BOC- Bank of China
CCB- China Construction Bank
CCP- Chinese Communist Party
CRBC- China Regulatory Banking Commission
FDI- Foreign Direct Investment
GDP- Gross Domestic Product
ICBC- Industrial Commercial Bank of China
IFDI- Inward Foreign Direct Investment
IPO- Initial Public Offering
OFDI- Outward Foreign Direct Investment
RBS- Royal Bank of Scotland
ROAA- Return on Average Assets
ROAE- Return on Average Equity
ROA- Return on Assets
ROE- Return on Equity
SFTZ- Shanghai Free Trade Zone
USD- United States Dollars
WFOB- Wholly Foreign Owned Banks
WTO- World Trade Organisation

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Table of Contents
Abstract……………………………………………………………………………..……………Page 2
1. Introduction……………………………………………………………………………..…….Page 3
1.1 Research Question, Objectives and Hypothesis……………………………………..Page 6
1.11 Objectives.....................................................................................................Page 6
1.12 Hypothesis…………………………………………………….…..……….Page 6
1.2 Reasons and implications of Research…………………………………………...….Page 7
2. Foreign banking in China……………………………………………………………….….Page 10
3. ReviewofChinese banking system………………………………………………………...Page 16
3.1 Brief History……………………………………………………………………..…Page 16
3.2 Current Environment……………………………………………………….………Page 18
3.3 5-year plan and foreign banking……………………………………………………Page 23
3.31 10th
5-year plan……………………………………………………...……Page 24
3.32 11th
5-year plan………………………………………………….………..Page 25
3.33 12th
5-year plan……………………………………………………..…….Page 26
4. Methodology…………………………………………………………………………………Page 28
4.1 Data…………………………………………………………………...…………….Page 29
4.2 Variables……………………………………………………………………...…….Page 30
4.3 Method………………………………………………………...……………………Page 31
5. Results………………………………………………………………………………………..Page 34
5.1 Foreign Banking isolated……………………………………………………...……Page 34
5.11 Analysis of foreign banking isolated……………………………….…….Page 41
5.2 Comparison of foreign banking and Chinese banking……………………………..Page 42
5.21 Analysis of comparison of foreign banking and Chinese banking……….Page 43
5.3 Correlation between foreign banks and Chinese Banks………………………...…Page 44
5.31 Analysis correlation of foreign banks and Chinese Banks…………….…Page 46
6. Conclusion and Limitations…………………………………………………….………..…Page 47
6.1 Conclusion …………………………………………………………………………Page 47
6.2 Limitations …………………………………………………………………………Page 49
Appendix…………………………………………………………………………….………….Page 50
References………………………………………………………..………………………..……Page 54

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Abstract
The gradual deregulation of the financial sector in China has been an invitation for
foreign banks to gain their first steps into the market. There have been multiple waves of
liberalisation and deregulation targeting foreign banks in particular. Using data from
Bankscope, to identify the penetration of banks since deregulations occurred, we have been
able to assess whether this is the case and if there has been a large inflow of foreign banks as
was expected.
It was found, that despite common logic, due to the lowering of barriers to a much
sought after market that the increase in foreign banks has been unsubstantial and that foreign
banking growth was in line with the rest of the sector.
Therefore, despite efforts of deregulation and liberalisation, little progress has been
made by foreign banks in China and they have fallen short of the opportunities available.

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1) Introduction
In the past few decades, China has made great efforts to become competitive on a
global scale, and has successfully done so in terms of their GDP, as it set to become the
largest economy by 2024 (HIS,2015). However, economic growth in the long run is highly
dependent on financial development, as it aids investment, spreads risk and provides liquidity.
(UN, 2006). The role of the financial sector within countries is to optimise the allocation of
scarce funds where they are demanded, while maximising returns for investors by spreading
risk (Elliot, D and Yan, K, 2013).
China has failed at doing this effectively, consequently leading to its financial sector
as being categorised as ‘deep but narrow’. This is due to the ratio of financial assets to GDP
increasing, but being primarily concentrated in the banking sector. The banking sector has an
80% concentration of all financial services in China, with the top 5 banks holding half of the
loan market (Naughton, 2007). Hence, China’s financial system has come under scrutiny not
only abroad but domestically due to the lack of diversity in the sector.
Much research has been focused on how the country has liberalised their banks and
transitioned from a state owned monopolistic structure. It has made efforts to further diversify
the financial sector, in order to make it a more competitive, market orientated, commercial
structure.

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There has been extensive news coverage of the reforms guided by the 5-year plans
and China’s ‘big four’ banks. These top four banks have become the top four banks globally
in terms of pre-tax profit. ICBC also holds the position of the world’s largest bank in terms of
assets while the other three still lie within the top ten. This result has arisen at an incredible
pace, as the market mechanisms in the banking sector were only introduced in 1986.
(Bankerdatabase, 2015)
Prior to 2001 foreign banks were only allowed to conduct businesses in two cities and
were only to provide services to foreign firms and individuals. Since the 10th 5-year plan the
government has made efforts to loosen controls over the banking sector and introduce more
foreign competition into the economy. (He and Fan, 2004)
In this short space of time the Chinese Communist Party (CCP), has introduced
multiple waves of reform and liberalisation, to achieve more competition by selling shares of
the state owned banks and allowing more foreign banks to compete in China. Although the
presence of the state is slowly dissolving away from the large banks, they still play a major
role in almost every aspect of finance in China, including the outward movements of Chinese
banks as they try to gain market share abroad. (Martin, 2012)
The CCP’s liberalisation of banks has allowed the Chinese banks to venture abroad,
which has been a widely discussed topic of study due to the impact the banks could have
abroad, stemming from their sheer size, political clout and the uncertainty they bring along
with them. (Allen et al, 2005)

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The majority of Chinese banks are expanding primarily into the Middle East, Asia and
Latin America, in order to facilitate the large number of Chinese firms already present there,
(follow the client). They are slowly making inroads into Europe and North America in order
to gain internationalisation of assets for stability. An example being the purchase of The
Bank of East Asia’s US subsidiary in 2012, by ICBC, resulting in it becoming the majority
shareholder. This was seen as a big turning point as ICBC became the first Chinese institution
to assume control of an American bank. (Calkins, 2013) This occurred as a result of the
‘going out policy’, which was instated in the early 2000’s, resulting in a huge surge of OFDI.
OFDI now exceeds IFDI in China. (The Economist, 2009) The sum of Chinese banking
abroad is now in the sum of USD1.2Trillion, with 18 Chinese institutions having set up 1127
branches in 57 different countries by the end of 2013. (CRBC, 2013)
With the rapid expansions of Chinese banks abroad reciprocal treatment for foreign
banks in China is of course to be expected. (economist.com, 2009) However, there are only
41 foreign banks present in China, which currently span 69 cities in 27 provinces. Despite
this somewhat impressive figure, only 6 are able to issue RMB financial bonds and a meagre
3 have the authorisation to issue credit cards. (EY, 2014)
This paper aims to assess the Chinese banking sector and compare foreign banking
performance to Chinese banks performance in order to see whether the regulations have
helped foreign banks specifically. If regulations have been successful foreign banks in China
should thrive, and make gains in terms of market saturation in China.

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1.1) ResearchQuestion, Objective and Hypothesis
Has liberalisation and deregulation of the financial sector specifically encouraged
foreign banking in China?
1.11) The Objectives of this paper are:
1) To analyse the changes to the economic environment of foreign banking in China.
2) To collect quantitative data, showing foreign banks in China, and whether or not they
have been successful in entering the market.
3) To analyse whether or not government regulations have specifically allowed foreign
entry of banks.
1.12) Hypothesis
Hypothesis 1: The success of foreign banking has grown from the year 2001 onwards.
Hypothesis 2: The government has specifically encouraged foreign banking in China.
A fully defined null and alternative hypothesis has not been outlined here as the paper aims to
take a more inductive approach.

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1.2) Reasons and implications of research
The highly important composition of foreign banking has gone mostly unnoticed due
to the rapid expansion of Chinese banks abroad. The details of the reforms concerning
foreign banks are also rather vague and therefore, at present, the literature is somewhat scarce.
Therefore, to further advance future literature and discover the effects of the liberalisation of
the banking sector in China, additional research must be undertaken.
As the banking sector is so large and plays such a vital role in China, further study
must be made into the advances made by foreign banks in China. While initial research has
been undertaken on the motivations and modes of entry of the foreign banks into China, very
few have followed up on their success or failures. Most actions in the economic planning of
China, would all point to the viability of more foreign banks in the market. These actions
include, the ascension to the WTO, the content of the past and current 5 years plans, the
movement of Chinese banks abroad and availability of Chinese banks to foreigners on the
stock exchange. (Hess, 2014)
In theory, the power of the Big Four state owned banks should be diluted with the
movement of foreign entrants. This is due to foreign banks having the skills to operate with
efficiency and quality, whilst offering a complete range of products. As discussed before,
China has been subject to a great amount of FDI and therefore foreign firms doing business in
China will also, most likely, opt for foreign services; due to their familiarity and trust
worthiness. This in turn, should push local banks to provide a more complete service and
raise its efficiency. (Lin, Cai, Li, p290).

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The importance of foreign banks increasingly grows, as the RMB is gaining
momentum in its internationalisation and it will be these institutions, which help the
transition of this historic move. (Reuters, 2012)
The financial sector in China is one of the few areas in the economy where reform is
in its relative infancy and is still undergoing major changes. Therefore, further research is
needed to follow up on whether or not foreign banks have gained momentum over the past
years. This will primarily be in terms of their total assets, net income, equity and their volume
of deposits and loans. The research aims to show whether new regulations, from 2001 to
2014, have been effective in increasing competition in China, as was their goal.(Fu and
Heffernan, 2006) Or was it just a façade to show cooperation to the international markets,
while still maintaining tight controls over the financial sector?
The paper does not aim to prove that the liberalisation of the banking sector is the
definitive reason for any movements in the composition of banks in the financial sector. As
current reforms are still in progress and therefore no definitive answer can be given. However,
by looking at past trends and analysis of the compiled data, it may provide us with some
implication of its role, past, present and give us some insights to the future of banking in Chin

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The following section will be a review of the literature, which questions the
importance of internationalisation of foreign banks to the economic environment. This, along
with a brief history of the financial sector, will help us to understand clearly the obstacles and
pressures placed upon the government to open up the banking sector to the international
market. The methodology of the research will be clarified and the interpretation of the results
will be explored further. Finally, the limitations and the future areas of research will be
explored as a conclusion to the paper.

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2) Foreign Banking in China
To understand why this topic is of great importance we must assess the
importance of companies going global and the importance of having foreign banks competing
in the local market.
With increasing globalisation comes the need for increased international capital
markets to help facilitate international trade. This helps aid the investment required when
firms wish to venture abroad and help provide liquidity to the domestic market. However this
can only be achieved if countries lower their barriers and loosen their rules, in order to aid
target markets. (Hill, 2014)
China’s loosening and restructuring of economic legislation through the 5-year plan
should therefore encourage, to a certain extent, entrants of foreign entities. Economic
legislation refers to direct legislation and administrative regulations of entry into a specific
market or industry. (Joskow and Rose, 1989)
The department for Business Innovation and Skills (BIS), also states that, ‘ high
quality and efficient economic infrastructure plays a vital role in supporting a competitive
and growing economy, by providing services on which all businesses and citizens depend on’.
Continued improvement of economic regulation is vital for infrastructure investment and can
facilitate more investment than through privatisation. This aids a countries infrastructure
growth and its international competitiveness. (BIS, 2011)

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In relation to an oligopolistic market, such as China’s banking sector, BIS states that it
limits effective competition, and therefore regulation needs to be adapted in order to promote
fairness and protect consumers’ interest. (BIS, 2011)
Having added competition from foreign firms is advantageous as it increases the
supply of capital in the country and therefore, the cost of borrowing is usually lower. This can
be done using indirect commercial banking methods or direct investment banking methods. If
the investment banking system is needed, having an international firm present, allows for a
wider range of opportunities therefore, spreading the risk in a portfolio. (McKinsey, 2011)
Foreign banks in China can deliver this by providing greater professionalism, wider
product knowledge, a customer-centric service, managers trained internationally, wider
product selection, a global network and a strong reliable brand name. These are all key
components, which demonstrate the importance of foreign banking growth in China. Of
course it simultaneously brings added pressures to domestic banks, however if introduced
correctly this added pressure could result in higher quality products at a cheaper price and a
push in innovation. (PWC, 2012)
If the investment opportunities are limited to just the domestic field, this will place
pressure on supply, in turn making the rate of return lower on investment. Also, if a financial
crisis were to happen domestically, a trickle effect could impact other investments, as the risk
have not been spread across multiple arenas. (Hill, 2014)

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This is the problem that the Shanghai stock exchange is currently facing (August,
2015), as the majority of the stocks listed are A-shares, which can only be sold to domestic
investors. Therefore, when the shock slump in the stock market, caused by the devaluation of
the RMB occurred, it sent the value spiralling downwards. (Economist, 2015)
Diversifying across multiple stock markets helps reduce the risk, as different stock
markets responding to different factors. Therefore, a crisis on the Shanghai stock exchange
may not necessarily affect the stock on the New York Stock exchange. Of course, as the
world becomes more integrated through globalisation, technology and further deregulation
continues, the relationship between stock markets, are becoming more interdependent. As the
2008 financial crisis exhibited, an impact in one country can dissipate extremely quickly
around the world. (Hill, 2014)
Other costs caused by foreign entrants into the Chinese financial markets are that to
domestic banks. Domestic banks need to lower costs to compete with foreign banks, which
have a better reputation, in turn making them unprofitable. (PWC, 2012)
Therefore, overall the benefits are great, especially to a country like China, which
wishes to have more political clout in the global economic stage. However, rightly so, the
government should keep a close watch on the firms entering the economy, especially large
foreign firms which sometimes have more economic power than some national governments.
Deregulation must be monitored and controlled to have its desired effects.

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As it is beneficial to open up a country to foreign banks, the foreign banks themselves
must also have an incentive for venturing into overseas territories.
In a research paper by Claessens, Demirguc-Knut and Huzinga, they empirically
tested the effects of foreign banking in 80 countries using data from Bankscope. Their
research came to the conclusion that in developing countries, foreign banks have higher
interest margins, profitability and tax payments than their domestic counterparts. Therefore,
their research shows that it is consistent with other literature and that in the long run more
foreign banks may improve the domestic climate, especially for customers. They also found
that it was the number of banks, which entered that, was deemed to be important to
competition in the domestic market. This is an important point and therefore will be further
explored in regards to the research undertaken in this paper. (Claessens et al,2000)
Foreign banks would be favourable in China as they provide global networks and
trading expertise, which although Chinese banks, are gaining strength in, they are still far
behind in terms of global scale. However, foreign banks have been able to provide this as
funding highly depends on deposits, which are difficult to come by due to domestic
competition. Consequently, foreign banks require strong support from home. 30 out of 35
banks stating that the parent company as the main source. Other methods of funding are
highly restricted in China, as only a few foreign banks have been given approval to issue
bonds. (PWC, 2013)

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As well as typical deposit and loan banking, foreign banks can utilise their
comparative advantage abroad by tapping into niche markets. China’s undiversified banking
sector provides foreign banks to utilise their expertise in areas such as wealth management,
investment banking, Internet banking and credit cards. According to KPMG’s report on
foreign banking, by the end of 2004 foreign banks were able to introduce three times the
amount of new products than domestic banks. This competition is also expected to increase
banking efficiency and will create spill overs. (KPMG, 2014)
As the banks tend to all be in close proximity of one another, hiring and firing of staff
will cause innovation, knowledge and technology transfers from one bank to another. This
has been demonstrated to be true with many knowledge parks, for example Silicon Valley.
The Shanghai Free Trade Zone may also grow into a knowledge park if its goal of becoming
an international financial centre (IFC) is realised. (EY,2014)
Although, in the short run foreign banks may increase domestic banks cost, it is
shown that in the long run they may reduce them. This has been attributed to the spill over
effects strengthening the competition, which will force banks to lower costs to be competitive,
and therefore be beneficial to consumers. (Allen, et al, 2011)
In recent surveys of foreign banks in China the regulatory environment is seen as the
most difficult aspect of doing business in China with finding good personnel and competition
from domestic banks being additional hurdles. (PWC, 2013) Further domestic competition in

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China increased in 2014 when regulators further approved 5 new privately owned banks. This
was followed by the loosening of regulations for RMB licenses for foreign banks. (EY, 2014)
This may set to change however, with the new 12th five year plan pointing towards
favourable firms in biotechnology, new energy, high tech manufacturing and computing
innovation. Foreign banking expertise in these fields may be needed and therefore
readjustment to the regulations may need to change. Foreign banks have a proven track
record with risk management and corporate governance, which will help strengthen banking
regulations in China. This is a goal of the most recent 5-year plan and therefore would be
interesting to see if these have come into any effect. Much of the regulatory change has been
driven by the US and EU, such as the Dodd Frank, Basel III and the Recovery and Resolution
Planning. This will simultaneously help the Chinese banking environment and create
opportunities for foreign banks. (PWC, 2012)
The literature suggests, in a magnitude of ways that allowing foreign banking in
China would be a benefit for the Chinese economy, foreign banks themselves and for
consumers. The evidence suggests that Chinese has made a great deal of effort to liberalise
the banking sector and allow foreign entrants. This may be from a great deal of pressure from
the WTO however, as there are still many provisions in place which, discourage foreign
entrants. The aim is to discover whether foreign banks or the Chinese government has
prevailed.

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3) Review of Chinese Banking System
To understand how foreign banks can achieve the internationalisation goals they wish
to, we must assess China’s past history to understand why the financial sector’s environment
has arrived at its current destination. We must also assess the present environment and the 5-
year plans to uncover the opportunities available to foreign banks currently and in the future.
3.1) Brief History
On the 1st of October 1949, after decades of civil war, China finally established itself
as a new country with a new leader. The People’s Republic of China, under the leadership of
Mao Zedong, transformed the economy into one which aimed to become an independent
country utilising communist methods. To do so, Mao insisted that the route of heavy industry
was the preferred method, due to most of the world’s most powerful economies at that time
adopting this path. (Lin et al, 2003)
As it was not in China’s comparative advantage to adopt this method, all decisions
needed to be enforced by the central government. In order to channel funds into heavy
industries the financial sector was nationalised. Nationalising the financial sector, including
foreign banks, which had established themselves in China, was completed by 1952 when the
People’s Bank of China became the national bank, channelling funds into industries based on
political goals rather than market orientation. (Lin, 2011)

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In 1953, the first 5-year plan was devised with much of the focus being on collective
ownership in agriculture and in industry, with continual focus on investment to heavy
industry, which accounted for 85% of all investment. Mao’s persistence, even through
catastrophic events such as the Great leap forward continued till his death in 1978. (Naughton,
2011)
After Mao’s death, China’s leadership was undertaken by Deng Xiaoping, who
looked to create more economic growth. In order to do so, he slowly transitioned the
economy from a command economy to one with more market characteristics. In light of this,
financing could no longer be purely allocated from one bank and therefore special banks were
set up in order to fund specific industries. (Lin et al, 2003, Zhang, 2006))
In 1979 the government diversified the banking industry by placing China
Construction Bank under the control of the state council thus assuming more commercial
banking functions. Along with this, the establishment of The Bank of China (foreign
exchange) and The Agricultural Bank of China (agricultural sector), further diversified the
sector. The final establishment of a task specific state bank took place in 1984, with the
establishment of The Industrial Commercial Bank of China (ICBC), to fund industrial and
commercial businesses. All the banks came under the supervision of the People’s Bank of
China, which now acted as the central bank and therefore had control over monetary and
banking policy. (Turner et al, 2012)
To further increase competition the specialisation of banks was abolished allowing the
banks to assume other forms of credit accumulation in 1986. This, along with the introduction
of interbank lending to aid liquidity, further commercialised the banks, while in turn leaving

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them with an oligopolistic nature. After this point there was not much movement in terms of
foreign banks until the 10th 5-year plan in 2001, the year China ascended to the WTO.
3.2) Current Environment
Prior to China’s admittance into the WTO, lengthy negotiations were undertaken with
the US and the European Union, where by an agreement was made that China would fully
allow foreign banks into the domestic market. China took this in their stride and allowed
gradual entry by foreign banks into China before it had even reached the agreed 5-year period.
In the same year China entered into the WTO, 157 foreign bank branches were already
authorised to conduct business within China and the number increased to 192 by 2004.
Foreign banks were only allowed to operate branches if they had a minimum deposit of RMB
1 Million, and were only allowed to serve corporate clients. (He and Fan, 2004)
Over time, to further release the stresses of the People’s Bank of China, regulatory
commissions were set up to supervise different sectors. The China Banking Regulatory
Commission (CBRC) being formed in 2003, to regulate the banking sector. Not only was this
to release the stresses to the central bank but to also prove to the WTO that the country could
abide by international rules and regulations and further strengthen their financial sector. With
the WTO agreement, came the further inclusion of foreign banks allowing them to open up
branches in China other than special economic zones such and Shanghai and Shenzhen. (Xu,
2011)
Now facing immense pressure from competition, the state owned banks now started
restructuring and listing on the stock exchange, to gain more capital and gain foreign

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expertise rather than going into direct competition with them. They have controlled the
amount of foreign investors by listing the shares in Hong Kong (H-shares), which are
available to foreign investors and in Shanghai (A-shares) only available to domestic investors.
(Naughton, p471, 2011)
Despite the listings the government still owns the majority of shares for all 4 of the
banks, with the lowest (CCB) still being nearly 60%. (Bankerdatabase, 2015)
By listing on the stock exchange, many foreign banks have bought a large amount of
shares in the Chinese banks, which may in turn indirectly influence entrances of foreign
banks as a whole entity and result in partnerships with Chinese banks instead.
For example, after listing in 2005, Bank of America owns 11.4% of CCB, followed
by listings in 2006 by BOC and ICBC, resulting in a 10% ownership to RBS and 15.9% by
Goldman Sachs respectively. Finally, after one of the largest IPO’s in stock market history
Goldman Sachs now has a 3.3% share of ABC. (dbsreasearch, fas.ord, goldmansachs,
jonathan yee)
As well as foreign branches, foreign acquisitions of banks were becoming more
regular after the ascension to the WTO. Although, the equity could only amount to a
maximum of 25% many foreign banks preferred this method rather than setting up branches
in the early years of the WTO ascension. This may be due to the foreign banks trying to
target banks, which already have a strong gain of a local market instead of pitting themselves
directly against them. This is turn builds their business networks, complementary public
relations and access to market information. In a period where full access to foreign banks was

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still restricted, this method seemed to be a more viable option to foreign banks. (He and Fan
2004)
Despite this, only one bank (Hang Seng Bank) went close to the 25% limit, by
acquiring 24.8% of Fujian Industrial Bank LTD. All acquisitions were on average around
10%, showing that foreign banks did not make much movement in the years prior to it being
fully open. (He and Fan, 2004)
On the 11th of December 2006, China officially allowed foreign institutions the same
rights as domestic banks. Foreign banks were now allowed to extend the bank branches
across China if they followed the previous rule of RMB 1million minimum deposits and were
also a wholly foreign owned enterprise or a banking subsidiary. Along with this in order to
obtain a license, the banks also needed approval from home regulators, international track
record, evidence of profit making ability and have established a comprehensive policy and
procedure guideline. (EY, 2014)
However, as a stipulation, wholly foreign owned banks (WFOB), must ensure that
registered capital should be equivalent to RMB 1 Billion and those branches should have a
working capital of RMB 100 million. The application for approval also takes 6 months with a
further 2 months for a formal approval, where a list of key executives, accounting manuals,
capital verification, financial statements and other documents must be provided to the CBRC.
(KPMG, 2006) Foreign banks can also only accept fixed deposits of more than RMB 1
million putting them at a clear disadvantage, as this is far above average of a typical saver.
Although, theoretically it is within the WTO guidelines, it does put domestic banks at an
advantage. (Jeffries, 2011)

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This carries on to date, with the granting of and RMB license taking up to 3 years and
the CRBC restricts foreign banks opening multiple branches at the same time.
This process is arduous and very drawn out and hence will take a number of
months or even years to prepare and obtain a licence, and therefore we see that the increase in
bank branches is very minimal. (PWC, 2012)
After the 5-year grace period had finished and foreign banks were allowed to enter as
WFOBs the composition of the banking sector started to change. This, in turn, was the start
of the new 11th 5-year plan in which the new government’s goal was to reform the banking
sector as a whole, rather than giving special privileges to just foreign banks.
A major set up is the New Shanghai Free Trade Zone (SFTZ), which will allow open
trade in in international goods and services along with more open foreign investments. This
pilot scheme is then set to extend later to Tianjin and Guangdong. (Deloitte, 2015)
However, many foreign banks have still not chosen to set up here due to the lengthy
procedures and the extreme costs. Some banks are said to have spent US$2million to
US$10million in order to set up a mandatory accounting systems required by regulators. The
products firms can offer in the SFTZ are still unclear and have not been able to reach its
potential due to the RMB internationalisation and interest rate liberalisation still being an on
going process. (EY, 2014)

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As it stands the current form of the banking sector is shown in the diagram below:
Diagram 1
Source: (Queen’s business review, 2013 and Jonathan Yee,2014)

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3.3) 5 -year plan and banking
As much of the liberalisation policies to target industries are outlined in the 5-year
plan, a brief summary of each plan and its financial goals will be briefly explored. As
previously mentioned the first 5-year plan occurred in 1953, as an outline for the CCP’s
economic goals.
It is officially known as the 5-year plan for National Economic and Social
Development. Its goals are to, ‘map the direction of future development and set targets’. This
is aimed at providing key infrastructure projects, distribution of production and to contribute
to the national economy. (NDRC, 2006)
Until recently the 5-year plans have been primarily focused on export-import growth,
and other primary and secondary sectors, due to China’s competitive advantage, thus holding
back on the service sector. The financial sector has been heavily guarded by the Chinese
government and no significant implications for foreign firms were made prior to the
ascension to the WTO in 2001. Therefore the short extract will be from the 10th 5-year plan
as this is the start of the dataset used in the research (2001).

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3.31) 10th 5-year plan (2001-2005)
Delivered on the 5th March 2001, Zhu Rongji delivered the outline of the 10th 5-year
plan. The government’s main goals in the 10th 5-year plan were not focused on the financial
sector but however it did provide some foundations in order to tackle this in the future. As
2001 was the year China finally ascended into the WTO, the government took steps to
improve the legal environment and government administration. (NDRC, 2006)
The attention at the time was still primarily on the export-import side of trade and
economic growth, however they were aware that in order to accelerate this, developing
services such as banking, accounting and law needed to be improved. As this period was a
time of high FDI, the emphasis was on how they could better utilise the foreign funds and
investment, was a key issue, in particular making it more attractive to investors to turn their
attention to Central and Western China. (China.org.cn)
In order to perform the macroeconomic policies they had to divert the change in
wholly owned state owned banks to a more commercial function to support the economic
situation. Thus, they simultaneously had to encourage small and medium banks to have a
more active role while fully utilising the new policy banks, in order for the state owned banks
to have a more commercial presence. (NDRC, 2001)
To make this viable another key element of the tenth 5-year plan was the safety of
financial institutions and their supervision. Zhu Rongji states that a system of evaluation and
accountability are to be implemented and diffuse any potential financial risks that may occur.
(Gov.cn, 2001)

27. Jonathan James Yee
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3.32) 11th 5-year plan (2006-2010)
The time period from 2006 onwards is extremely important for this research due to
the agreement with the WTO to allow inclusion of foreign banks in China to have the same
national treatment as domestic banks.
This particular 5-year plan was seen as ‘revolutionary’, as it veered away from the
typical fast economic growth plans which allowed ‘some people to get rich first’. (Asia
Times, 2005) Instead under Hu Jintao the aim was to close the gap between the rich and poor
as the inequalities between the two classes grew extremely wide. The new administration
now saw it as the time to implement the ‘common prosperity’ once talked about by Deng
Xiaoping. (Fan, C, 2006)
Within the 11th five year plan statement given by Ma Kai, the chairman of China’s
National Development and Reform Commission, one of the key points was the further
deepening of the market economy system. He emphasized that in order to do so, further
reforms in the areas of, ‘administrative governance, state owned enterprises, taxation, finance,
science and technology, education and public health,’ were the main criteria. He further
reiterated this point by emphasising that it would be the government’s top priority to speed up
the improvement of these areas to facilitate the socialist market economic system. (NDRC,
2006)
There is only a minute mention of small and medium financial enterprises to have
new ownership types, primarily private banks. This, along with other wide-ranging
governmental reforms mostly in the form of reducing red tape and bureaucracy. This is in

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order to assist tax reforms, which are due to take place however there were no specific
implications to the extent to the reforms.
Therefore, in essence, this is the first time the government was not trying to directly
enforce ideals onto any priority sectors but rather allow more market forces to play a bigger
role. They were aiming to do this more domestically through the forces of demand and supply
and rely less on foreign investment due to its huge reliance on foreign trade to the amount of
70% of GDP at the time (2005). (Naughton, The New Common Economic Programme)
The contradiction of less foreign investment at the same time allowing more
foreign banking entities into China will be interesting to observe, and to see which one has
more prevalence.
3.33) 12th 5-year plan (2011-2015)
In the 12th 5-year plan released by the State Council, the financial sector
clearly played a big role as the plan for the development and reform of the financial sector
were jointly undertaken by the People’s bank of China, The Chinese Banking Regulatory
Commission, the China Securities Regulatory Commission, China Insurance Regulatory
Commission and the State Administration for Foreign Exchange. (China Briefing, 2012)
The importance of protecting and developing a strong and stable financial
sector became paramount after the global financial crisis. China endured the global financial
crisis and in light of the meltdown abroad further enhanced their risk prevention and
additional strengthened control and supervision of the financial sector. China saw itself now

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having a critical role in the international field of finance and it was one of the few countries
able to absorb such a critical blow to worldwide banking. (CSRC, 2011)
By this reform period, all the Big Four banks had successfully listed on the stock
exchange, improving shareholder reform and improving corporate governance. This allowed
for the government to establish the banking sector into ‘layers’, dependant on their goals,
such as policy banks, commercial banks, national joint stock commercial banks and other
small and medium sized banks. (Martin, 2012)
The focus was to also push the commercial banks into the international markets to
increase global competitiveness and establish a wider portfolio by ‘going out’.
Simultaneously domestic banks were encouraged to cooperate with foreign institutions by
accepting low-interest foreign loans to improve external debts in cross border activities. This
is also to facilitate China being more vocal in the global financial arena. China wishes to
interact in global economic governance by enhancing macroeconomic and financial policy
with other major economies. (British Chamber of Commerce, 2011)
New and further banking reforms were put in place during this 5-year plan,
through new regulatory standards, instruments and risk identification. The capital adequacy
ratio was to be strictly obeyed to follow international levels. (CRSC, 2011)
By assessing the content of each 5-year plan we should expect that there was little
movement from the 10th 5-year plan, moderate movement from the 11th 5-year plan and a
big leap from the 12th 5-year plan.

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4) Methodology
This paper has utilised a qualitative method with an inductive approach following a
positivist paradigm. A qualitative method uses information that may not be immediately
quantifiable unless coded and is usually not descriptive (Sekaran, Bougie, 2009)
The positive approach uses data, which can be obtained using neutral observations.
This research achieves its goal by using data from Bankscope. (Gill and Johnson, 2012) This
approach has been employed as the banking sector in China is extremely large and the data is
particularly sensitive. Trying to obtain the data oneself would be time consuming, costly and
unreliable and therefore using secondary data is appropriate.(Saunders, Lewis et al, 2012)
Bankscope is a comprehensive database used by 90% of the world’s top 1000 banks,
containing financial information for more than 29,000 banks globally. Its reputable name and
data therefore allows for others to continue the research post this paper if desired. (Bankscope,
2015)

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4.1) Data Collection
As previously mentioned the data collected was secondary data from Bankscope, to
give an impartial and reliable interpretation of the results. The data from Bankscope is
aggregate data and separated into each individual bank. Therefore, for the purpose of my
research and have compiled the data to form a separate compilation of results for foreign
banks and all other banks in China. All information is compiled from the year 2001 to 2014,
as 2001 is the start of the 10th year plan and 2014 being the last available and recent year of
data. Foreign banks in China in this study are classified as banks that have a foreign
shareholder which holds at least 51% of the stake. A full list of foreign banks can be seen
in the appendix.
According to Joskow and Rose there are four empirical methods for measuring the
effects of regulation; Comparing regulated and unregulated firms or markets, using variations
of the intensity of regulation, using controlled environment experiments and creating
structural simulation of models for a regulatory environment. (Joskow and Rose, 1989)
In this study we shall be adopting the approach of comparing the more regulated
foreign banking sector with the less regulated domestic competitors. This method is
appropriate as the nature of regulatory constraints the firms are subject to, are attributed to
regulation and the differences between in performance are attributed to regulation.

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This will take place on a time series scale as we wish to look at the time period
ranging from 2001-2014. Time series can identify regulatory change over time or time
periods.
The variables chosen to demonstrate the change over time are typical accounting
calculations which are globally used to show business performance. The list and definitions
of the variables are shown below.
4.2) Variables
Equity- is the amount left over when the liabilities have been subtracted from the assets. In
essence it is the ownership of the asset once the debt has been paid off. (Investopedia.com)
Total Assets- are an economic value of all the assets the entity has at a particular time. The
assets are exploited over time into order to receive a return for the entity. This may include,
cash, inventory, fixed assets and so on. (Accountingtools.com)
Net Income- are a company’s total earnings minus any expenses paid in a given time period.
It can be used to show how profitable a company is over time. (Investopedia.com)
Return on Assets (ROA) – or return on investment, illustrates how profitable a company is
in relation to its assets, by showing how much investment has been converted into income. It
is usually calculated as Net Income divided by Total Assets and displayed as a percentage.
(Investopedia.com)

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Return on Equity (ROE) – is similar to ROA but instead shows how much money has been
returned in turn for the investment received. It is useful for comparing profitability and is
displayed as a percentage. (Investopedia.com)
Return on Average Assets (ROAA) and Return on Average Equity (ROAE) - is also
shown here to give a comparable view of profitability which is easier to gauge. They show
the average return of the time period. (Investopedia.com)
Net Loans – is the total amount of loans given to out to customers minus any unearned
interest and possible losses. (Santander.com)
This paper has compiled the data from each year to compare foreign banks to domestic banks
to show how much each group possesses in terms of-
• Share of Total Assets
• Share of Net Income
• Share of Equity
4.3) Method
To display this and form the data analysis Microsot Excel, SigmaXL and SPSS
software will be used in order to examine the results. First, the preliminary results will be
given to show foreign banking’s growth isolated from the market. Secondly the proportion of
each group’s market share of Total Assets, Net Income and Equity will be shown to
demonstrate if foreign banking has depleted any of the domestic markets hold. Finally, the
results of the two sectors will be compared and correlated in order to show their relationship

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with each other. This will be done using Pearson’s correlation to show if the two are in line or
whether foreign banking growth has deviated from the rest of the market.
Pearson’s Correlation measures the strength between two variables by its linear
association. The strength of the correlation is shown by the coefficient ‘r’ ranging from -1 to
1. For a positive relationship the coefficient ‘r’ should be above 0.5.
To show whether or not, it is statistically significant or not, I have chosen a
significance level of 0.01. If the resulting value is above the significance value, than the
results are statistically insignificant. (Leard.com)
The formula for the Pearson Correlation is show below where ‘x’ is foreign banks, ‘y’ is
Chinese banks and ‘n’ is the number observations.
(stat.mwich.edu)
The assumptions of the data for a Pearson Correlation are that the data is interval or
ratio data. For the data set in this paper we are using interval data therefore making the
Pearson Correlation appropriate. The Pearson Correlation is also appropriate for this paper as
it does not require a dependant or independent variable. As we are using data which is to be
compared and not dependant on each other it further justifies the use of the Pearson
correlation.

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However, the requirement of normal distribution is not fulfilled and therefore we must
transform our data in order to form normality. Therefore, we have utilised the SigmaXL
program in order to transform the data into Normal distribution using the Box-Cox Method.
The Box Cox method transforms data to form a normal distribution by applying a
Lambda value to identify the power to which the data should be raised. This was achieved by
using the SigmaXL software in combination with Microsoft Excel.
(http://www.isixsigma.com/)
In order to get a fairer result as the values from foreign banking and Chinese banking
are vastly different I have also Logged both results to 10 (Log10), before applying the Box-
Cox Method.
After the Box-Cox method was applied, I further checked the distribution of all results
in SPSS, using the Shapiro-Wilks method. The Shapiro-Wilks is a test of normality which is
suitable for a small sample. As our sample was of 14 observations it is an appropriate method.
All variables passed the normality test with a significance value of 0.5. (Leard.com)
After the variables were transformed and normally distributed all requirements of the
Pearson correlation test were fulfilled and therefore applicable for use with our data, to show
the correlation between foreign banking and Chinese banking.

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5) Results
First the preliminary results will be given to show foreign banking’s growth isolated
from the market. Secondly the proportion of each group’s market share of Total Assets, Net
Income and Equity will be shown to demonstrate if foreign banking has depleted any of the
domestic markets hold. Finally the results of the two sectors will be compared and correlated
in order to show their relationship with each other. This will be done using Pearson’s
correlation to show if the two are in line or whether the 5-year plan has not specifically
targeted foreign banking growth but just the growth of banking in general.
5.1) Foreign banking isolated results
In this section we will cover the progress of foreign banks in China, by isolating and
displaying only their results away from the rest of the banking sector in China. This will give
a rough guideline to their development and will give clarity to the results later in the paper.
This will be shown using the variables described above, with all results being shown in
United States Dollars (USD) thousands or in percentages.

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Graph 1
(Source: Bankscope)
Graph 2
(Source; Bankscope)
0
100000000
200000000
300000000
400000000
500000000
600000000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
TotalAssetsUSD(thousands)
Year
Foreign Banking Total Assets USD (thousands)

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Graph 1 and 2 are time series graphs showing the trend of total assets and equity
respectively, of all 41 foreign banks in China combined. From the graph we can see that
during the early 2000’s when China first eased in new regulations, the total assets and equity
of foreign firms barely grew. Growth only takes place from 2006 onwards, when the foreign
banks were granted the same rights as Chinese banks. (Xu, 2011)
From then onwards it has been a steady upward rise for foreign banks in terms of their
assets and equity in China showing healthy progression. The steepest areas of growth are also
in 2006 and 2011, the years in which a new 5 year plan was implemented. This may be
evidence of the 5-year plan’s power in foreign banking policy. The total amounts of both
assets and equity are also very similar reaching a high of US$543018451.2 thousand of assets
and US$48662267.71 thousand of equity.
Graph 3
(Source; Bankscope)
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
USD(thousands)
Year
Foreign Banking Net Income USD (thousands)

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Graph 3 illustrates the net income of the foreign banks in China from 2001. We can
see that similarly to assets and equity, that there was little movement from 2001-2006, when
China first entered into the WTO. Furthermore, like assets and equity, a steep positive jump
of net income came after 2006 when the WTO regulations stipulating equal treatment
occurred.
However, unlike assets and equity, net income has shown more volatility with spikes
and crashes. Much of it is in line with the global financial crisis, showing the vulnerability of
foreign banks to external pressures. This may be due to the foreign banks performance abroad
affecting their worldwide operations, displaying the dangers of globalisation. Despite the
global financial crisis, a rapid recovery was made and the increase from 2010 to 2011 was the
largest in the whole time series. This may also be due to the 5-year plan, as seen in previous
results. If it were as a result of the 5- year plan, from the net income perspective, the 12th 5-
year plan has been the most successful.
Graph 4
(Source; Bankscope)

40. Jonathan James Yee
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Graph 5
(Source; Bankscope)
Graph 4 and 5 display the Return on Equity and Return on Average Equity of foreign
banks in China. From the Return on Equity Graph 4 we can see that the returns from the early
years were quite great with a sharp dip and then levelling off. This doesn’t seem to be healthy
but when looking on the Return on Average Equity that it does follow the market trend and
that therefore, on average there are returns being made to the equity in each time period.
Overall however, the cumulative return to equity has been slow.

41. Jonathan James Yee
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Graph 6
(Source; Bankscope)
Graph 7
(Source; Bankscope)

42. Jonathan James Yee
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Graph 6 and 7 display the Return on Assets and Return on Average Assets of foreign
banks in China. From the Return on Assets Graph 6, we can see that it is extremely erratic
and that there is no real trend. However, as time goes on it does seem to be transforming into
an area of more stability with results stabilising from 2011 onwards; the start of the 12th 5-
year plan.
When assessing the Return on Average Assets, the results seem more consistent with
the other results with it following market trends. We can see that year on year the Return on
Average Assets are improving, proving to investors, that their investment is being put to good
use.
Graph 8
(Source; Bankscope)
0
50000000
100000000
150000000
200000000
250000000
300000000
350000000
400000000
450000000
500000000
20012002200320042005200620072008200920102011201220132014
USD(thousands)
Year
Net Loan and Deposits of Foreign Banks
Net Loans
Deposits

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Graph 8 displays the commercial ability of the foreign banking sector in China. We
can see that net loans and the deposits are rising year on year since 2006, when foreign banks
were allowed more prevalence in China. This is a key indicator showing they are increasing
competition in the market by providing and accepting funds from customers, which is one of
the key functions of commercial banking. This increase in competition is vital for the
efficiency in China, as the top four banks have such an oligopolistic strangle hold on the
commercial banking market.
5.11) Analysis of Foreign Banking Isolated
The foreign banks isolated results show that in terms of all variables, that from 2001
to 2006, there were almost no improvements made by foreign banks in China. All the growth
has been since the mandatory WTO requirement of treating foreign firms at the same level as
Chinese firms. Therefore, we can see that the influence of the WTO has been extremely
powerful.
However, other aspects must have also contributed to the successful growth of foreign
banks in China as there is still continued growth in foreign banking in China. This has been
seen even despite the global financial crisis of 2008. Although affected by the crisis the
foreign banking sector was able to bounce back soon after and have seen the biggest growth
since the 12th 5-year plan started in 2011.
From these results we can see that foreign banking is making continuous gains in the
Chinese banking market and that they are improving competition in China as Loans and
Deposits into the market are also increasing.

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5.2) Share of Market Results
Table 1
(Source; Bankscope)
Table 2
(Source; Bankscope)
Table 3
(Source; Bankscope)
Total Assets
Year 2001 2002 2003 2004 2005 2006 2007
Percent Foreign 0.032998737 0.035383817 0.02624105 0.067660726 0.236062337 0.467827431 1.424185276
Percent China 99.96700126 99.96461618 99.973759 99.93233927 99.76393766 99.53217257 98.57581472
Year 2008 2009 2010 2011 2012 2013 2014
Percent Foreign 1.334558824 1.301781109 1.46134047 1.797403763 1.684302571 1.747204817 1.759813343
Percent China 98.66544118 98.69821889 98.5386595 98.20259624 98.31569743 98.25279518 98.24018666
Net Income
Year 2001 2002 2003 2004 2005 2006 2007
Percent Foreign 0.035105888 0.076154263 0.02815934 0.004610775 0.269993615 0.942883237 1.032086562
Percent China 99.96489411 99.92384574 99.9718407 99.99538922 99.73000639 99.05711676 98.96791344
Year 2008 2009 2010 2011 2012 2013 2014
Percent Foreign 1.727589701 0.973738456 0.91475248 1.74051187 1.519038031 1.287139401 1.475430118
Percent China 98.2724103 99.02626154 99.0852475 98.25948813 98.48096197 98.7128606 98.52456988
Equity
Year 2001 2002 2003 2004 2005 2006 2007
Percent Foreign 0.572783252 1.718910622 1.54150046 1.639727234 0.683988701 0.900019806 4.511899992
Percent China 99.42721675 98.28108938 98.4584995 98.36027277 99.3160113 99.09998019 95.48810001
Year 2008 2009 2010 2011 2012 2013 2014
Percent Foreign 2.907909908 3.287794857 3.00978802 3.259306292 2.949101345 2.895842033 2.817649362
Percent China 97.09209009 96.71220514 96.990212 96.74069371 97.05089865 97.10415797 97.18235064

45. Jonathan James Yee
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5.21) Analysis of Share of Market Results
In this section we will now compare the foreign banks to the rest of the Chinese
banking sector, in order to uncover the extent of their success observed, when the result were
isolated. We have done so by revealing the total market share of total assets, equity and net
income. The results of all three are extremely similar, and therefore they will be analysed
together.
In 2001 we can see that the percentage of foreign banks in China was almost non-
existent. As time progresses we do see improvement of foreign banks share of the market in
all three of the results, especially the sharp rise in 2006. However, the results and growth in
relation to the isolated growth is extremely minute.
The market share in all three areas is still extremely dominated by the Chinese banks.
The foreign banks have gained less than two per cent of market share in terms of total assets
and net income and just under three per cent in equity. This result is extremely small showing
that foreign banks, although growing are just keeping up with the growth of all other firms in
the market.
The market share of the foreign banks also dropped in 2011, which is contrary to the
results shown when isolated. Therefore, this must mean that the 12th 5-year plan has allowed
for growth of the whole sector but Chinese banks have taken advantage of the opportunity to
outperform foreign banks in China.

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To further test whether or not this is true we shall perform the Pearson correlation test.
If the results of both the foreign banks and Chinese banks are highly correlated it would mean
that the liberalisation and deregulation of the financial sector and aided all banks in China
and not specifically the foreign banks. If however, there is no correlation between the two
than we would be possible to show that the positive results shown from the foreign banking
isolated section is a result of the change is regulations and liberalisation, are a result of them
targeting just foreign banks, opposed to affecting the whole industry.
5.3) Pearson Correlation Results
Pearson correlation of Assets results
Correlations
Foreign Assets China Assets
Foreign Assets Pearson Correlation 1 .978**
Sig. (2-tailed) .000
N 14 14
China Assets Pearson Correlation .978** 1
Sig. (2-tailed) .000
N 14 14
**. Correlation is significant at the 0.01 level (2-tailed).
Pearson correlation of Net Income results
Correlations
Foreign Net Income China Net Income
China Net Income Pearson Correlation 1 .961**
Sig. (2-tailed) .000
N 14 14
China Net Income Pearson Correlation .961** 1
Sig. (2-tailed) .000
N 14 14
**. Correlation is significant at the 0.01 level (2-tailed).

47. Jonathan James Yee
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Pearson correlation of Equity results
Correlations
Foreign Equity China
Foreign Equity Pearson Correlation 1 .977**
Sig. (2-tailed) .000
N 14 14
China Equity Pearson Correlation .977** 1
Sig. (2-tailed) .000
N 14 14
**. Correlation is significant at the 0.01 level (2-tailed).
Pearson Correlation of Net Loans Results
Correlations
Foreign Loans China Loans
Foreign Loans Pearson Correlation 1 .966**
Sig. (2-tailed) .000
N 14 14
China Loans Pearson Correlation .966** 1
Sig. (2-tailed) .000
N 14 14
**. Correlation is significant at the 0.01 level (2-tailed).
Pearson Correlation of Deposits Results
Correlations
Foreign Deposits China Deposits
Foreign Deposits Pearson Correlation 1 .972**
Sig. (2-tailed) .000
N 14 14
China Deposits Pearson Correlation .972** 1
Sig. (2-tailed) .000
N 14 14
**. Correlation is significant at the 0.01 level (2-tailed).

48. Jonathan James Yee
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Analysis of Pearson Correlations
In the same way that the shares of markets results were all extremely similar to each
other, so are all the Pearson correlation results. Therefore, we have also grouped all of them
together in the analysis. The Pearson correlations are comprised of assets, net income, equity,
net loans and deposits.
All the results show that there is a positive relationship between each of the variables,
and that they all have a strong correlation. All the ‘r’ values are extremely close to 1, with 1
being the perfect correlation. They all satisfy the 0.01 level of significance too, as the ‘a’ is
below it, hence showing the results are significant. (Leard.com)
As all the results show a positive correlation for all the variables, it displays that the
deregulation and liberalisation of the financial sector has not specifically targeted foreign
banks to develop and increase competition in the sector but has instead allowed for the
growth of the banking sector in general.
The close correlation of both sectors through years also shows that they have followed
similar paths from 2001-2014, and there has not been much deviation between the two
sectors. This is further backed up by the market share results where we see the market share
and composition has not changed much since 2001.
So despite the positive results and growth shown by the foreign banks in China, it
must be true that domestic banking has also followed suit, for the results of the correlation to
be so similar. If foreign banking were to being making greater progress due to the
deregulations and liberalisation of the market, there would have been a negative correlation
between the two in the Pearson correlation results.

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6) Conclusion and Limitations
6.1) Conclusions
This paper examines the role of regulation in China and whether or not the deregulation
and liberalisation of the financial sector has specifically allowed foreign banks in China to
enter and grow in the market. By comparing and following both the trends of foreign banks in
China and the domestic banks, we are able to evaluate the extent of growth in foreign
banking. Once shown in correlation with the domestic banks we were also able to gauge
whether or not the change in the regulatory environment has aided the foreign banks, as was
the intention.
From the initial findings the results were found to be extremely optimistic, and the growth
rate from 2006 onwards, of almost every variable was positive. This was very much in line
with most of the literature, which supported that foreign banking in China would be
beneficially and hence once China, has deregulated the financial environment that many
waves of foreign banks would pursue the huge market. The literature also suggests the added
competition would dilute the powers of domestic banks, and in particular the ‘Big Four’ state
owned banks. If this were the case the growth of foreign banks must grow, as the initial
results show, while the domestic strangle hold of the market decreases. However, when
further investigations were carried out it was found that foreign banks, in reality, did not
make much progress in terms of market share. Over the 13-year period the increase in market
share in terms of net income was just over 1%. Therefore, the extent of the deregulation and

50. Jonathan James Yee
Page 48
liberalisation, although has allowed for growth of foreign banks, has not put it at any further
advantage compared to the rest of the market.
This is further reiterated when the Pearson correlation is applied to both foreign banks
and domestic banks. The results show that through the years the foreign banks have not
deviated from domestic banks much, as the correlation between the two is extremely strong.
The results imply that the growth of both the foreign banks and domestic banks are closely
related and are growing at the same rate. In essence, foreign banks have not made
improvements, as they should, due to the deregulation and in nominal terms. Foreign banks
now make up 41 out of a total 241 banks, which is a 17% proportion of the market. Therefore
the 1.48% of total assets in the market is quite disappointing and goes against most of the
literature, which would support their growth in the Chinese market.
As most globalisation theories such as the Ricardian and Hecsher-Ohlin models, along
with much of the literature in this paper, support and encourage internationalisation, China
must ensure that further deregulation and liberalisation occurs as the current practices have
still not enabled foreign banks in China to reach their full potential. (Feenstra et al, 2014)
This is not just a benefit for the domestic and global economies growth as a whole, but also to
the countries consumers. Especially as the wealth of the people continually grows, they will
demand new investment opportunities and more sophisticated banking to keep their money
safe. Foreign banks are the key for this transition and will intensify more global financial
innovations. (IMF, 2011)

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6.2) Limitations
Due to the liberalisation and deregulation of the financial sector being rather recent,
the study is limited. The total number of samples is also quite low due to the economic
environment of China and the oligopolistic nature of the banking sector.
Another limitation is that the economic environment of a dual state and market
mechanisms is quite unique. Therefore using a comparative method such as that suggested by
Jaskow and Rose may not provide the same results. The study also does not take into account
other forms of foreign entry such as subsidiaries, mergers, acquisitions and minority
shareholdings. These have a substantial impact of the activity of foreign banks in China
For future research, a longer time frame with a larger sample would allow for greater
results, as well as combining the results for mergers, acquisitions, minority shareholdings and
subsidiaries. The results of the findings will also be interesting when the new 5- year plan
will commences in 2016 and when the Shanghai Free Trade Zone and the other planned
zones such as Tianjin and Guangdong, have evolved to their full extent.

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Appendix
List of foreign banks used in the study
Bank Name
China Zheshang Bank Co Ltd
City
HANGZHOU
Shanghai Rural Commercial Bank SHANGHAI
HSBC Bank (China) Co Ltd SHANGHAI
Bank of East Asia (China) Ltd SHANGHAI
Standard Chartered Bank (China) Ltd SHANGHAI
Citibank (China) Co Ltd SHANGHAI
Bank of Tokyo Mitsubishi UFJ (China) Ltd SHANGHAI
Hang Seng Bank (China) Limited SHANGHAI
Sumitomo Mitsui Banking Corporation (China)
Limited
SHANGHAI
DBS BANK (China) Limited SHANGHAI
Mizuho Bank (China) Ltd SHANGHAI
Deutsche Bank (China) Co Ltd BEIJING
Fubon Bank (China) Co., Ltd SHANGHAI
BNP Paribas (China) SHANGHAI
OCBC Bank (China) Limited SHANGHAI
United Overseas Bank (China) Limited SHANGHAI
Australia and New Zealand Bank (China) Company
Limited
SHANGHAI
Hana Bank (China) Company Ltd BEIJING
JP Morgan Chase Bank (China) Co Ltd BEIJING

53. Jonathan James Yee
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Toyota Motor Finance (China) Company Limited BEIJING
Wing Hang Bank (China) Ltd SHENZHEN
Volkswagen Finance (China) Co. Ltd BEIJING
Shinhan Bank (China) Limited BEIJING
Societe Generale (China) Limited BEIJING
Woori Bank (China) Ltd BEIJING
Bangkok Bank (China) Co Ltd SHANGHAI
Industrial Bank of Korea (China) Limited TIANJIN
Royal Bank of Scotland (China) Co Ltd (The) SHANGHAI
Minsheng Securities Co., Ltd BEIJING
KEB Bank (China) Co, Ltd. TIANJIN
Credit Agricole CIB (China) SHANGHAI
Bank of Montreal (China) Co Ltd BEIJING
Metropolitan Bank (China) Ltd JIANGSU
East West Bank (China) Limited SHANGHAI
Bank Sinopac (China) Ltd NANJING
Morgan Stanley Bank International (China) Limited ZHUHAI
UBS (China) Limited BEIJING
VOLVO AUTOMOTIVE FINANCE (China)
LIMITED
BEIJING
Allied Commercial Bank XIAMEN
Lujiazui International Trust Co., Ltd
Shaanxi Fuping BEA Rural Bank Corporation.
(Source: bankscope)

54. Jonathan James Yee
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Aggregate Statistics of Box-Cox Transformation
Assets
Deposits
Plan foreignassets foreignlog10 foreignboxcox chinaassets chinalog10 chinaboxcox
2001 283018.95 5.45 1029.10 857382981.20 8.93 56889.00
2002 515550.97 5.71 1245.50 1456509192.00 9.16 64604.00
2003 736444.35 5.87 1389.50 2805723210.00 9.45 75285.00
2004 2242839.84 6.35 1921.20 3312589837.00 9.52 78203.00
2005 9906571.89 7.00 2853.80 4186684887.00 9.62 82470.00
2006 24387924.39 7.39 3565.10 5188629263.00 9.72 86542.00
2007 110159820.80 8.04 5046.00 7624776267.00 9.88 94248.00
2008 139941574.60 8.15 5318.00 10346038660.00 10.01 100741.00
2009 168473582.90 8.23 5536.50 12773301476.00 10.11 105429.00
2010 232832652.00 8.37 5933.60 15699980850.00 10.20 110186.00
2011 354489555.00 8.55 6481.30 19367821161.00 10.29 115202.00
2012 400258879.10 8.60 6646.30 23363813330.00 10.37 119836.00
2013 481872459.40 8.68 6904.70 27097748124.00 10.43 123604.00
2014 543018451.20 8.73 7075.00 30313575137.00 10.48 126516.00
Plan foreigndeposits foreignlog10 foreignboxcox chinadeposits chinalog10 chinaboxcox
2001 142573.40 5.15 873.31 522203629.00 8.72 50355.00
2002 320764.53 5.51 1147.40 1044092283.00 9.02 59666.00
2003 461361.20 5.66 1289.50 2260921240.00 9.35 71623.00
2004 1744558.27 6.24 1925.70 2570627135.00 9.41 73783.00
2005 8702312.91 6.94 2983.50 2977666096.00 9.47 76320.00
2006 18700621.15 7.27 3619.10 3657168527.00 9.56 79984.00
2007 93578703.08 7.97 5288.00 5663564649.00 9.75 88249.00
2008 117928744.80 8.07 5568.60 7654502132.00 9.88 94329.00
2009 140965227.80 8.15 5792.80 9816197925.00 9.99 99598.00
2010 197215426.30 8.29 6233.00 12300083317.00 10.09 104577.00
2011 303254059.40 8.48 6833.70 15370203669.00 10.19 109689.00
2012 338031515.20 8.53 6992.00 18761541512.00 10.27 114431.00
2013 404910599.50 8.61 7261.30 21707378727.00 10.34 118002.00
2014 461424491.00 8.66 7461.00 24394059524.00 10.39 120923.00

55. Jonathan James Yee
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Equity
Loans
Net Income
Plan foreignequity foreignlog10 foreignboxcox chinaequity chinalog10chinaboxcox
2001 78847.81 4.90 652.89 13686884.13 7.14 18508.00
2002 189985.73 5.28 886.99 10862696.72 7.04 17243.00
2003 263003.51 5.42 987.88 16798522.69 7.23 19691.00
2004 444932.81 5.65 1169.00 26689629.45 7.43 22588.00
2005 1030309.21 6.01 1509.00 149602181.20 8.17 36511.00
2006 2010072.86 6.30 1829.00 221326441.70 8.35 40471.00
2007 10485921.58 7.02 2839.30 221919974.00 8.35 40499.00
2008 13705188.31 7.14 3036.10 457601996.00 8.66 48721.00
2009 18388195.60 7.26 3263.80 540898390.10 8.73 50798.00
2010 22682086.96 7.36 3434.20 730928693.40 8.86 54716.00
2011 31752160.39 7.50 3721.10 942447793.50 8.97 58209.00
2012 37223644.60 7.57 3862.80 1224979319.00 9.09 61997.00
2013 43670870.91 7.64 4009.30 1464383450.00 9.17 64687.00
2014 48662267.71 7.69 4110.90 1678389663.00 9.22 66805.00
Plan foreignloans foreignlog10 foreignboxcox chinaloans chinalog10 chinaboxcox
2001 116702.69 5.07 2052.90 285114193.00 8.46 43209.00
2002 307772.08 5.49 2987.70 566908131.40 8.75 51394.00
2003 446971.53 5.65 3425.50 1254519459.00 9.10 62351.00
2004 1244534.48 6.10 4890.80 1453466449.00 9.16 64572.00
2005 6430977.33 6.81 8227.60 1642756441.00 9.22 66468.00
2006 15986009.17 7.20 10728.00 1963004100.00 9.29 69304.00
2007 62370165.85 7.79 15543.00 2989419341.00 9.48 76389.00
2008 75777468.53 7.88 16351.00 3954676969.00 9.60 81415.00
2009 88854985.31 7.95 17037.00 5338515119.00 9.73 87094.00
2010 119611247.50 8.08 18377.00 6616256786.00 9.82 91347.00
2011 163279604.10 8.21 19867.00 8110644460.00 9.91 95535.00
2012 184448934.80 8.27 20477.00 9862338808.00 9.99 99699.00
2013 217109501.10 8.34 21314.00 11646049944.00 10.07 103353.00
2014 234205195.40 8.37 21713.00 12828743815.00 10.11 105528.00
Plan foreignnetincome foreignlog10 foreignboxcox chinanetincome chinalog10 chinaboxcox
2001 753.72 2.88 32.02 2146240.14 6.33 10176.00
2002 3133.61 3.50 60.66 4111678.91 6.61 12657.00
2003 3544.46 3.55 63.76 12583602.74 7.10 18040.00
2004 771.72 2.89 32.40 16736437.79 7.22 19669.00
2005 55008.76 4.74 164.70 20319086.82 7.31 20843.00
2006 253554.09 5.40 253.12 26637802.40 7.43 22575.00
2007 523717.07 5.72 304.81 50219804.67 7.70 27083.00
2008 1251903.19 6.10 376.11 71213404.16 7.85 29858.00
2009 861420.48 5.94 344.25 87603862.61 7.94 31608.00
2010 1147218.18 6.06 368.49 124265743.80 8.09 34746.00
2011 3026342.66 6.48 459.38 170850245.80 8.23 37817.00
2012 3313038.31 6.52 468.58 214788039.10 8.33 40156.00
2013 3361717.56 6.53 470.07 257815708.70 8.41 42103.00
2014 4097136.55 6.61 490.68 273593856.90 8.44 42753.00

56. Jonathan James Yee
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