WTO Accession, Foreign Direct Investment and International Trade
Advances in Chinese Economic Studies series
Edited by Chunlai Chen
Chapter 7: Foreign Banks in China: Market Segmentation and Expanded Presence in the Post-WTO Environment
Lilai Xu INTRODUCTION Theoretically, openness to foreign banks has both positive and negative impacts on the banking sector in a developing country: (1) local banks will be exposed to fierce competition and existing bank–customer relationships can be destroyed, resulting in market instability; (2) the spillover effect of foreign banks’ technology and quality service will enhance the efficiency of local banks, thereby improving the provision of financial services and capital. Studies by Goldberg and Saunders (1981), Walter (1981, 1985, 1988), Gray and Gray (1981) and many others have found that easing restrictions on the entry of foreign banks has potential benefits for the domestic market in terms of resource allocation and efficiency. Lavine (1996) asserts that foreign banks promote financial development directly by providing highquality services, and indirectly by three means: (1) by spurring domestic banks to improve service quality and to cut costs; (2) by encouraging the upgrading of accounting, auditing and rating institutions; and (3) by creating domestic pressures to harmonize bank regulatory and supervisory procedures, and to bring standards in line with those of developed countries. However, when a country gains the benefits of financial development from relaxing foreign bank entry, and product and market controls, the costs and risks involved can also be substantial (Stigliz, 1993). Seth, Nolle and Mohanty (1998) report that the motivation to ‘follow their customers’ has not been the sole reason for foreign banks to enter the US market over the past few decades. There seems to be a trend among foreign...
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