Domestic banks' responses to the entry of foreign banks in China

Publication Date30 Sep 2013
AuthorHorn-Chern Lin,Tao Zeng
SubjectEconomics,International economics
Domestic banks’ responses to the
entry of foreign banks in China
Horn-Chern Lin
Strategic Research Unit, Ministry of Finance, Toronto, Canada, and
Tao Zeng
School of Business & Economics, Wilfrid Laurier University, Waterloo, Canada
Purpose – This paper examines the effect that foreign bank entry into China had on transaction fees
and service fees charged by domestic Chinese banks.
Design/methodology/approach – This paper is an empirical study using financial data for listed
Chinese banks collected from the China Stock Market Financial Statement Database.
Findings – This paper finds that domestic banks cut transaction fees and service fees shortly before
the entry into China of foreign banks, and domestic banks did not cut transaction fees and service fees
after foreign banks entered into China.
Research limitations/implications – This paper does not examine any non-price strategies
employed by local Chinese banks in response to the entry of foreign banks.
Originality/value – This is the first study to examine transaction fees and service fees charged by
domestic Chinese banks in response to the entry of foreign banks into China.
Keywords Domestic banks,Foreign banks, Market entry, State-ownedbanks,
Transactionand service fees
Paper type Research paper
1. Introduction
China is a unique market because, before 2007, the presence of the foreign banks in
China was negligible. Prior to this time, the market was competitive locally but
relatively dominated by the Big Four state-owned banks. The historical development
of China’s market provides an opportunity to investigate important questions
regarding the functioning of the market for banking services that are difficult, if not
impossible, to test in other globally established markets.
The purpose of this study is to examine the effect of the market entry of the foreign
banks into China on transaction and service fees charged by the domestic banks. Market
research has little to offer on local bank pricing responses to the entry of foreign banks in
any market, mainly because in Western countries such as Canada, England, and the
USA, those foreign banks are the oldest banks operating in the market. Thus, we rely
primarily on the incumbent pricing literature (Simon, 2005; Geroski, 1995) to help us
develop our specific hypotheses and empirical tests.
Using data from the annual reports of Chinese listed banks from 1994 to 2009, this
paper examines whether domestic banks cut transaction and service fees in response to
The current issue and full text archive of this journal is available at
The authors gratefully acknowledge the financial support for this research was received from
WLU/CA Research Centre. The authors thank participants at the second International Scientific
Conference of Economics and Social Development for their helpful comments. The authors also
thank the anonymous reviewers for their insight comments and suggestions.
Received 25 March 2013
Revised 14 June 2013
Accepted 15 June 2013
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 6 No. 3, 2013
pp. 168-177
qEmerald Group Publishing Limited
DOI 10.1108/JCEFTS-03-2013-0008

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