COMPETITION IN BANKING SECTOR

Competition In Banking Sector

Table of Contents

CHAPTER 1: INTRODUCTION3

Overview3

Purpose of the Study6

Research Question6

Organization of the Dissertation7

CHAPTER 2: LITERATURE REVIEW8

Brief Overview Of China's Financial System8

Mergers and Acquisitions15

The Literature And Experiences From Central Europe23

Foreign Bank Penetration In China: The Current Situation30

CHAPTER 3: METHODOLOGY37

Theoretical Framework37

Model Incorporation37

CHAPTER 4: RESULTS AND DISCUSSION43

CHAPTER 5: CONCLUSION53

REFERENCES55

BIBLIOGRAPHY60

APPENDIX65

Figure65

Chapter 1: Introduction

Overview

The speeding up of globalization in finance has resulted in a wave of mergers and acquisitions (M&A) among banks. The expansion of operations across countries and sectors has brought competition in financial markets across the boundaries of nations. Impacted by such developments, banks all over the world have been busy making adjustments in order to keep up. In China where the financial system is relatively immature, the banking industry has been constantly engaged in restructuring. The process of banking reform in China is, in effect, a process of privatization.

Such rapid economic development makes banking reforms a necessity for the financial industry in China. Foreign financial institutions have also climbed on the bandwagon, and have rushed into this massive market. These foreign banks provide capital, technology and management experience, and have helped to speed up the development of the financial industry in China (Chen and Shih, 2004). Meanwhile, these foreign banks have also set themselves to gain substantially from this huge market. This win-win situation has been prompting the Chinese government to gradually lift its restrictions on the participation of foreign financial institutions.

In accordance with its accession commitment to the WTD, China fully opened up its Renminbi services to foreign banks before the end of 2006. The experiences of Eastern European countries in terms of financial reform indicate that institutional transformation is the key to success in the liberalization of the financial market, and the legal framework that protects the implementation of contracts is of particular importance (Clarke et al., 2005:10). Moreover, foreign bank entry has lowered costs in the post-communist transitional economies (Fries et al., 2006:98).

By the end of September 2006, there were a total of 14 registered financial institutions in China that were either solely foreign-owned or joint -ventures between Chinese and foreign equity owners. These 14 financial institutions comprised a total of 17 branches and affiliate companies in China. Foreign banks have established a total of 191 branches, 61 branch offices and 242 representative offices in 24 cities in China. The total value of deposits with foreign banks in China amounted to US$33,4 billion, with loans amounting to US $54.3 billion.

The share of corporate bonds in financing has increased substantially, from less than 1% in 2001 to 6% currently. Government bonds, on the other hand, have seen their share declining from 16% in 2001 to 1% during the same period. Funds raised in the equity market have been erratic during this period due to the ongoing reform. The stock market's share in financing fell slightly from 8% in 2001 to 6% at end-June 2006. (Wong 2007: 19-41)

Although the share of bank lending is expected to decline from its near 90% level today, bank loans ...