Institutional Development, Ownership Structure, and Business Strategies: A New Era in the Chinese Banking Industry

This chapter traces the structural changes in the Chinese banking industry since the 1990s and explores the role of governance in influencing the banking strategies and performance of local financial institutions. Specifically, the chapter focuses on the increasing openness to foreign ownership in local banks, the asset–liability and geographical diversification strategies undertaken by the financial institutions during these deregulatory and changing environments, and the institutional developments in the economy. Finally, the chapter links these changes with bank performance. The evidence suggests that banks with minority foreign ownership are associated with better performance, all types of diversification – captured in four dimensions: loans, deposits, assets, and geography – are associated with reduced profits and higher costs, while banks with minority foreign ownership are associated with fewer diseconomies of diversification, suggesting that foreign ownership plays an important mitigating role. We also observe a significant impact from institutional developments; gradual dominance of the market economy, growth of the private sector, and establishment of secure property rights and rule of law are important factors associated with higher bank performance.