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How Does Financial Opening Affect Industrial Efficiency? The Case of Foreign Bank Entry in the People's Republic of China

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  • Ran Li

    (National School of Development, Peking Univearsity; Shanghai Finance Institute)

  • Yiping Huang

    (National School of Development, Peking University)

Abstract

This paper analyzes the effects of foreign bank entry on industrial efficiency in the People's Republic of China (PRC) as a case study of financial opening. The study reveals an overall positive impact on the industry. However, the effects vary across ownership groups: negative for state and collective sectors, positive for private enterprises, and insignificant for foreign-invested firms. These findings are incompatible with predictions based on the “cream-skimming effect” and information asymmetry. We investigate two transmission channels of the policy effects—via an easing of financing constraints and through increased competition. Foreign bank entry, like financial liberalization, reverses the effects of repressive financial policy, which protects the state sector but discriminates against private enterprises. While enhancing bank competition can be an effective way to support private sector development, the state sector deserves close attention in order to ensure a smooth transition. This case study should offer some useful lessons for future financial opening.

Suggested Citation

  • Ran Li & Yiping Huang, 2015. "How Does Financial Opening Affect Industrial Efficiency? The Case of Foreign Bank Entry in the People's Republic of China," Asian Development Review, MIT Press, vol. 32(1), pages 90-112, March.
    • Handle: RePEc:tpr:adbadr:v:31:y:2015:i:2:p:90-112
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    References listed on IDEAS

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    More about this item

    Keywords

    China; industrial efficiency; foreign bank entry; financial opening;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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