The Impact of Direct Investment by Foreign Banks on China's Banking Industry

This paper analyzes the impact of foreign participation on Chinese banking by studying its different manifestations in China’s commercial banks. We find that strategic investors play an important role when stated-owned commercial banks (SCBs) and other shareholding banks start their IPO processes, either abroad or in the local market. Foreign strategic investment, in most cases, promises to benefit China’s commercial banks by transferring management knowledge. Data show that most banks entering partnerships with foreign interests derive “direct benefits:” they improve their capability for financial innovation—in structural reorganization, and new products and services—by this transfer of management knowledge from their foreign partners. In addition, “demonstration benefits” from this transfer process could spread to other banks that endeavor to emulate the improved management practices and superior strategy shown by foreign-invested banks within an environment of heightened competition.