Introduction In contemporary social and with the world econo006Dy expand. It has produced a great number of multinational banks, those banks in order to achieve more profit, they expand and develop to emerging countries, which is called foreign direct investment (FDI). So, in this report, in order to much better understand some information about FDI, especially FDI impact of foreign retail banking investment in China on the commercial performance Chinese retail banks. Besides, by using Chinese bank industry as a example.
In this research, these can be broken down into four broad categories: one is reasons for foreign retail banks to come to emerging countries such as China? Another factor is foreign banking investment impact on Chinese banks’ performance. Following is FDI impact on banking market share. And lastly is FDI influence on banking industry’s revenue and profits. In addition, above these four elements are penetrated into every chapter, like Chapter 1–literature review, it is discussion of relevant existing academic literature about impact of foreign retail banking investment in China on the commercial performance Chinese retail banks.
And chapter 2–research design section, it is rationale for the chosen method and details of the procedures adopted on impact of foreign retail banking investment in China on the commercial performance Chinese retail banks. Moreover, chapter 3–results and findings section. It is making a conclusion on this research by using some relevant data and information. Last, chapter 4–discussion and analysis of findings section. It is relating them to the academic literature discussed earlier on Impact of foreign retail banking investment in China on the commercial performance Chinese retail banks.
Here is a basic concept of china’s banking system and foreign banking entry. China’s Banking System: In China, four kinds of commercial banks are existing, each one is different in terms of features associated with geographic branch coverage and its size. 1) The largest ones are known as State-owned banks, according to the figures in 2008 the five State-owned banks has more than half (52. 1%) of the total commercial banking assets. These banks have branches in all cities across china that cover most of the big cities in the country.
The second largest ones are the Joint-stock banks, altogether assets of the 12 banks forms 14% of the total banking assets. In start, they were building regional branches in specific regions mostly along the seashore. With the passage of time, these networks have increased dramatically and now most of them are having national coverage. The study is using regional and national banks representing Joint-stock and State-owned banks consequently to emphasise on their geographical location differences.
Conversely, there are numerous numbers of rural credit cooperatives and city banks that are comparatively small in size from State-owned and Joint-stock banks. These banks operate city or town based and offer area-specific and limited services. Foreign Banking Entry: Allowing foreign banks to enter into Chinese market is a major challenge. Traditionally, the foreign banking entry was controlled by the government by putting so many restrictions. The entry requirements were minimum total assets, previous presence in china and minimum entry capital.
There were some other constraints including customer type, currency denominations and geographical location. For example, foreign banks were allowed to operate in only two cities in China before 2001 and were allowed to do business with foreign companies and individuals of the specified cities only. At the end of 2001, when China agreed to the World Trade Organization (WTO) restrictions on foreign banks have massively reduced. Over five years after WTO accession, geographical and customer type restrictions were also slowly released.
Foreign banks were give n permission to enter into Chinese market in four forms to make a commercial presence. Those are, joint ventures, foreign strategic investment, foreign bank branch and wholly owned foreign banks. Foreign banks branches grown up very rapidly, the first one was built in 1981 in Shenzhen. Seventy four foreign banks from 22 different countries made 209 foreign bank branches with sub branches of 79 in 25 Chinese cities at the end of 2006 (Xu, 2011).
Reasons for foreign retail banks to come to emerging countries such as China: China acquired the third position across the world evolving largest banking market after USA and Japan (Heijes, 2008). The Bank of America entered first time into Chinese market in 1981. Their aim was to build a strong brand name in Chinese market. In 2003, China declared that its economic growth rate had been at the highest level of 9. 1% in the last seven years. Although some economist predicted that this growth rate will come down in the second half of 2004 but it remained the same.
These economic growths along with eminent national saving rates and vast population of china provided a golden opportunity to the foreign banks to invest in Chinese market. In late 2001, when china agreed with WTO, it committed to evenly open the banking industry to foreign investment banks over a period of five years. The approach was to make it fully liberal at the end of 2006. On the other side, foreign banks were anxiously waiting to avail this great opportunity of obtaining Chinese market access during this time span.
Over these five years, china has made the following changes. Firstly, the capital requirements had been lowered down for foreign banks to operate RMB business. Also, the minimum amount of working capital required for foreign bank branch conducting RMB business with Chinese firms was brought down from RMB 400 million to almost RMB 300 million. Secondly, the waiting period of one year for foreign banks to be eligible to extend new branches had been removed. Foreign banks became more flexible in terms of business expansions.
Thirdly, it mad the application process more efficient by permitting the application documents first to be submitted to the CBRC local office for initial review and then for final approval documents should be sent to CBRC headquarters. Formerly, the documents were supposed to be reviewed step by step which was taking long time. Fourthly, the maximum limit of equity share had been increased from 15% to 20% for a single foreign financial institution in a domestic financial institution. Lastly, foreign banks in china are specially rewarded with preferential treatment regarding tax measurements.
Chinese banks are entitled to pay 33% of income tax while foreign banks are compensated with a lowered rate of only 15% in specific economic zones (Liu, 2005). The above discussion and reasons collectively provided motivational gateways for foreign banks to come and invest in China. Foreign banking investment impact on Chinese banks’ performance: The impact of foreign bank entry on Chinese banks could be measured by the following two categories. 1) The number of foreign banks existing in the host country.
2) The assets of foreign banks existing in the host country (Unite and Sullivan, 2003). The calculated figures resulted from the above measurements would give the overall scale of foreign banks presence in the host country for a certain period of time. These calculations use to be considered very usefully in cross country analysis (Lensink and Hermes, 2004). In the case of China, these calculations might give wrong or incomplete information because the affect also depends upon the geographic distances between domestic and foreign banks which seem to be ignored in these calculations.
Aggregate measures might bring up econometric issues as they are observed annually without taking other influential factors in consideration, it is more applicable for a country like China (Huang and Qin, 2009). In order to overcome the issues noticed in aggregate measures, the geographic presence of domestic and foreign banks should be thoroughly understood. Each domestic bank has its own foreign exposure which can be computed differently depending on the type of bank. If the domestic bank is a city bank then its exposure is figured by the number of foreign banks existing in the same city where the domestic bank is located.
If the domestic bank is regional or national bank, its foreign exposure can be calculated by the accumulated number of foreign banks providing services in a city where these domestic banks have branches. According to the disaggregate measures, the following three performance indicators needs to be used to measure the impact of FDI on Chinese banking industry: noninterest incomes, costs and net interest margins. Apart from the findings based on aggregate measures, the findings resulted from disaggregate measures are more significant and are more consistent with theory (Xu, 2011).
Foreign banks take deposits and provide loans to customers like domestic banks do. An imposing factor of foreign banks is they provide more loans than collection of deposits. In 1999, foreign banks provided four times larger loans as compare to their collected deposits. They are not only depending on the deposits only but also on headquarters and on other overseas banks. However, domestic banks have the only source of lending which are domestic deposits. Hence, foreign banks have an edge over the domestic banks which can badly affect domestic banking performance.
Foreign banks bring new technology, capital, new products and a modified management into Chinese market. Furthermore, they are having strong relationship with multinational firms belong to their countries and also they have an advantage on foreign currency too. It would create so many challenges for Chinese banks to compete with these foreign banks. Foreign banks have well established brand name and are known for providing high class products. They are also expert to provide customized products for the customers.
Also some of the outstanding staff will move to work for foreign banks which will be a big challenge for domestic. These excellent staffs are not only rewarded with financial skills but also have good social network (Haung and Xu, 2008). a)FDI impact on banking market shares: First, foreign banks mainly provide financial services to all foreign firms and manufacturing companies in China (Leung, 2003). Thus, foreign banks are expert in foreign exchange business. After WTO accession, foreign banks have established wealth management and credit cards.
They brought in over 100 financial products for Chinese customers, it was almost thrice of the products provided by domestic banks. Customers are definitely looking for more options to have more flexibility in making decisions about financial services. Moreover, HSBC, Hang Seng and Citigroup bank came up with Sino foreign co branded credit cards and it was noticed that local credit card providers were coping strategies of the foreign banks which confirms that foreign banks have competitive advantage on domestic banks and have severe consequences on their market share.
Firstly, major goals of foreign banks are maximization of stockholder equity and more profits which will affect Chinese banks whose focus is on expanding loan before but now most of the domestic banks brought up with evaluation system emphasizing on economic value added and economic capital. Secondly, foreign banks prioritize top customers by providing them high level services and high value added products. In response, Chinese banks started dividing target markets and customers.
Thirdly, foreign banks very carefully manage domestic costs while mostly domestic banks focus on long term and transversal cost. Firstly, foreign banks are decreasing banking opportunities for domestic banks. Secondly, foreign banks have variety of creativity which requires high competence for regulator, by entering of more and more foreign banks will fluctuate the international financial market which will have indirect effect on Chinese market. It will boost up market’s external risk and will also create problems for regulators.
To sum up, post WTO era is identified an amplifying presence of foreign banks that deeply attract Chinese customers by providing extensive and elaborated banking services. It has severe consequences on the local banking industry and on their performance. The foreign banks’ strong relationship with Chinese customers has a competitive threat for the domestic banks that is expected to decrease their market share (Haung and Xu, 2008). b)Influence on revenue and profits: Janek, U. (2005) inherited this idea, furthermore he researched the impact on development of the financial system, Janek, U.
selected 319 banks data from Asia, Europe, America as an example and achieved three conclusions. For one thing, the entry of foreign investment banks makes Pre-tax profit, non-interest income will be increased significantly in host country banks, however, the average loan interest rates and Loan Loss Provisions are significantly decreased, meanwhile the general operating costs will be increased also. For another conclusion achieved by Janek, U. (2005) is that the level of banking market development in the host country would directly affect domestic banks.
If the country has a low level in banking market, the degree of decline would be significantly higher than the national which has completed banking market. Besides, the latter banks have not significantly increased in operating costs. Lastly, Janek, U. (2005) is of the opinion that the scale of the banks in host country is a factor which can be impacted on their performance. If the banks have occupied large number of quantity in market, those non-interest income and decreased level of loan losses will be much smaller than the banks which occupied at small amounts quantity in market.
Generally in emerging countries foreign banks are found to be more profitable as compare to domestic banks (Demirguc and Huizinga, 1999). Specifically in the case of China, foreign banks are more efficient and more profitable which directly affect the domestic banks profits (Berger, 2006). Additionally, as a result from empirical tests, foreign banks have impacts on domestic banks by reducing their net interest margins which leads to decrease in profits (Claessens, Demirguc and Huizinga, 2001). Net interest margins are calculated as, interest expenses are deducted from incomes and then divided by total earning assets.
An increase in the presence of foreign banks intensifies the competitive pressure on the local Chinese banks. In response, domestic banks increases deposit interest rates or decrease lending rates or do both to retain the market share. So, foreign banks enforce domestic banks to lower down interest margins in order to remain competitive (Xu, 2011). Foreign banks entry has a profound impact on domestic banking. First of all, the lost of quality clients. Foreign banks gave more attention to multinationals, big corporations, triad enterprises and personal quality clients.
As an outcome, Chinese banks will not be able to maintain its superior clients and the profits will be slumped (Huang, and Xu, 2008). Chinese domestic banks’ strategy against foreign banks: The researched done by Bekier and Lam (2005) explains that the domestic banks in china can compete their arch rivals who are foreign banks. Chinese banks should focus and improve their services to biased consumers, it will make very difficult for foreign banks to compete in $40 billion Chinese retail banking market.
The foreign banks have so many competitive advantages over domestic banks. There are certain advantages of foreign banks that cannot be competed by domestic banks but we will discuss only those problems that can be competed by domestic banks with certain strategies. 1. Chinese clients would prefer foreign banks because it would be better at matching the client’s needs and requirements and it would be more innovative and flexible (Foo, 2002). 2. Foreign banks have more professional staff and providing efficient services as compare to domestic banks.
Experienced staff leaves domestic banks and joins foreign banks because of the huge wages difference, the foreign banks can pay up to ten times of whatever domestic banks pay. Foreign banks not only pay high salaries but also create a great working atmosphere, they also send their staff abroad for further learning or for enhancing their skills (Sureshchandar, Rajendran and Anantharaman, 2003). 3. Clients would select foreign banks as they are faster in sending out money from china to any other country while domestic banks take long time (Gilligan, Smirlock and Marshall, 1984).
4. Foreign banks have special experts as senior managers, they bring unique and contemporary financial ideas for their Chinese clients. These experts have strong contact network with other experts across the world who share their global experiences with each other (Heijes, 2008). By considering all the above reasons collectively, domestic banks need to come up with the following changes as a strategy. They have to hire professional staff especially at senior level management and to provide them special training programs domestically or internationally.
Obviously, the expenses would be increased by paying high salaries and paying for training programs and it will take enough time to compete foreign banks but after a period of time it should turn out with fruitful rewards. Conclusion: As per literature review, the entry of FDIs to china is due to the third largest banking market in the world, highest economic growth rate, business opportunities, and lower income tax rate on foreign banks as compare to domestic banks and also to create their brand name in Chinese market.
Foreign banks entry bring along so many challenges for domestic banks. Foreign banks primarily focus on foreign firms and provide best and customized services which domestic banks cannot provide. Domestic banks bear loss of market share as well as cuts in profits. Domestic banks have to decrease the interest rate on loans as foreign banks offer lower rates and domestic banks are limited in providing loans as they use the cash deposited by customers only while foreign banks can lend as much as they want, they use so many sources to fully grab the market.
In this complex competition domestic banks needs to come with competitive interest rates and more flexible products in order to maintain the customer satisfaction and not to lose most of their valuable customers. Foreign banks are financially very strong and bring best staff from domestic banks by offering them high pays and incentives. Domestic banks need to keep their valuable staff by offering them good salaries as staff is the best resource for any kind of business. Chapter 2 Research Design 2. 1 Introduction
The research method used for this project is the descriptive design method. This design was chosen because it specialises in data analysis drawn from questionnaires. In order to further study the factors concerning the impact of foreign retail banking investment in China on the commercial performance Chinese retail banks, this project is using the primary data. To gather the primary data, questionnaires were handed out to chosen participants, through this method, one can directly access the relevant and available market information accurately and reliably.
This is the reason why questionnaires are one of the most popular tools to collect information about contemporary society. 2. 2 The reason why chosen questionnaire methods The reason for why choosing is that it can achieve the first data easily and directly. So in order to get qualitative data about how foreign investment banks impact on Chinese banks’ customers, by affecting their business, and their market share and the factor on foreign retail banks come to emerging countries such as China.
Also how foreign investment banks impact on Chinese banks’ financial performance, such as revenue and profits, this project will be using those self-administered questionnaire methods to investigate these issues. By using questionnaire method, it has more clear targeted to investigate this project, and more easily acceptable. Because of the self-administered questionnaire is handed out from the investigators to chosen participants, and the questionnaire should be completed by the respondents themselves. It contains open, closed and multiple-choice question designs.
When a self-administered questionnaire is delivered and presented in a professional, businesslike manner, this can be visually stimulating, and increase the likelihood of participant responding. Probably the greatest advantage of the questionnaire method is its versatility. Almost every problem in this project can be approached from the questionnaire standpoint, for example, the reason why foreign retail banks come to emerging countries such as China, foreign investment banks impact on Chinese banks’ financial performance and on revenues and profits.
Every problem in this project involves people. Therefore, ideas relative to the problems and its solutions can be obtained by asking these people about the problems. Another is speed and cost: Questioning is usually faster and cheaper than observing. Interviewers have more control over their data gathering activities than do observers. As a result, less time is typically wasted in a questionnaire study. For example, it can send some questionnaires to Chinese bank staff to investigate the project occasionally.
Despite the fact that the questionnaire method is widely used in marketing research, it has several important limitations, such as some respondents might not be willing to provide information and have a high rate to loss questionnaire. In general, the advantages in questionnaire methods are overweight than their disadvantage. Therefore to gather the correct information for the project, the questionnaire data collection method has been chosen. This is especially useful in accumulating responses to questions about FDI impact on Chinese banks’ financial performance.
e. g. loss of revenue and profits. 2. 3 Questionnaire Structure In the research of FDI impact of foreign retail banking investment in China on the commercial performance Chinese retail banks, the questionnaires in this project should satisfy the following: Providing concrete analysis of specific issues, such as the question relating to the Bank of China’s financial performance; examining their revenue and profits, also investigating into their customers financial security; Concerning loss of business, lowered performance, and/or loss or decrease of market shares.
Specifically focusing on the delivering clarity of political direction, and making sure that the correct public opinion is grasped through the information amassed. Making certain that there is a clear neutrality in the presentation of the questionnaires, that there is nothing within the articulation of the questions that would offend the respondents, and that there are no biases. Aiming to gather significant, qualitative clear information to analyse and draw conclusions from. Ensuring that the tasks and objectives within the questionnaire are accomplished.
The great benefit of using a questionnaire is that it is a simple process to complete statistical analysis on the data. The respondents selected In this project, there are two type of respondents selected. One is in questionnaire test stage, other is final questionnaire respondents. In the Test Questionnaire; when the first draft of the questionnaire design work was finished in this project, it has been entered in at the test stage. Firstly, this initial questionnaire can uncover any difficulties or problems which would arise, then the questionnaire is able to be revised.
In this stage, the pilot project choose 40 Business school students in Beijing, for example, Beijing Normal University, Beijing University, Tsinghua University and Beijing University of Posts and Telecommunications to explore the quality of the initial questionnaire, the reason for selecting these university business students is that they are top ten universities in Beijing. After test stage in questionnaire, it was discovered that there were some lacks and necessary changes were uncovered.
These were; the order of questions needed to be in a logical order for the questionnaire to comfortably flow, the font used needed to change, and the layout was not professional, and also some questions were not relevant to the target of the project. So, by using the test stage, the final questionnaire handed out in this project was a lot better than the pilot questionnaire. Then it was printed and was used officially for the final project. Then, throughout the test stage, final questionnaire respondents are selected by bank industry staff.
Because of it can achieve the primary data truly and rapidly. And in order to know FDI impact of foreign retail banking investment in China on the commercial performance Chinese retail banks. So, it is selected some staff in Bank of China (BOC), Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB). Some staff’s position in the bank is casher, project manager and customer service staff. In order to get more data, some business students which studying in university of Northampton are selected as final questionnaire respondents as well.
Some methods on selected issues In general, there are four parts in the questionnaire structure , namely; cover letters, surveillance of information, coding and conclusions. Out of all of them the most useful aspect of a questionnaire is the information gathered. The main function of a cover letter in a questionnaire is where the assisted investigators describe general information to respondents, making sure that the purposes, relative opinions and method to finish questionnaire is clear to each prospective respondent.
Meanwhile, the content details of the questionnaire includes many questions, which affects the style of answer, these questions are the main body of the questionnaire. According to the formal structure of a questionnaire; it should be divided into three types; open, closed and multiple-choice. Moreover, usually encoding is often used during large-scale surveys, because the data is too vast to collect, so one has to resort to coding and computer techniques, which can make the work a lot easier to analyse and complete.
Although this project has only 135 questionnaires, in order to take a more formalized approach to analysis this project has also used the coding method. In addition, the Conclusion should be given on the back of the questionnaire, it is not only used to thank the respondents for their cooperation, but also looking to further consult the respondents as to their opinions about questionnaire design and to request their views and feelings concerning their completion of the self-administered questionnaire.
Data collection and analysis As mentioned before, this project, in order to survey FDI impact of foreign retail banking investment in China on the commercial performance Chinese retail banks. This project sent the number of 135 questionnaires, but received the questionnaires at the number of 108. In the questionnaire, the type of questions can be summed up into four categories that are used in questionnaires, these are; free essay questions, double choice topic, multiple choice question and cis-position question, respectively.
Of which three of them are closed questions. Then, by finishing data collection stage, it entered into the next stage: data analysis. Analyse data using content analysis or other suitable technique leading to findings on the FDI-related issues facing Bank of China and their responses to them as a business. So this section using simple math, statistics method. Data analysis can be more easily found in research purposes. Data analysis is purposefully organized to collect data, analyze data and making information on the process.
The main activities of the data analysis process from the identification information are to collect data, analyze data, evaluate and improve the effectiveness of data analysis component. Identify information needs is to ensure the validity of the data analysis process the first condition, can collect data, analyze data to provide a clear target. Second, the process of data collection is aimed to collect data in order to ensure effectiveness of data collected. Therefore, it is to make sure that the recorded data is to be easily used and to take effective measures to prevent data loss and interference of false data on the system.
Third, analyze the data, it is the process to collect data through processing, collation, by analysing and transferring it into information. In this research project, the main use is to sort the map and associated maps. 2. 7 Conclusions In order to achieve the first data to analysis impact of foreign retail banking investment in China on the commercial performance Chinese retail banks. This project used the Descriptive design research method, using questionnaire and interview data.
The reason why it is suitable is because the project primarily draws conclusions through data selection analysis gathered from questionnaires and an interview which were all conducted at the Bank of China. Foreign bank Chapter 3 Results/ Findings 3. 1 Introduction In this project, the main target is to investigate the topic on impact of foreign retail banking investment in China on the commercial performance of Chinese retail banks, by using the questionnaire method. The aim is to look in more detail at the three key issues; (1) Reasons for foreign retail banks to come to emerging countries such as China.
(2) Foreign banking investment impact on Chinese banks’ performance. a)FDI impact on banking market shares. b)Influence on revenue and profits. (3) Chinese domestic banks’ strategy against foreign banks. Therefore,in order to research the information more deeply and accurately so as to critically analyse foreign investment bank impact in China on the commercial performance, this questionnaire has focused on Chinese retail banks, specifically, the Bank of China. So what follows are the details of the findings and results. 3. 2 Findings and Results
3. 2. 1 Reasons for foreign retail banks to come to emerging countries such as China. As a large developing and emerging country, since 1970s, along with sustained economic growth and opening-up trade policy, world multinational companies are flowing into China more rapidly than ever before. This increase has occurred especially since 2002, where China formally joined the World Trade