The journey of a thousand miles: a decade of the impact of foreign shareholders on the performance of Chinese commercial banks

We analyze the impact of foreign shareholdings on the performance of Chinese commercial banks over 2010-2019. Using panel data GMM IV analysis, we consider bank performance across profitability, quality of assets and liquidity. We find that foreign shareholdings have a significant negative impact on banks' ROE. Increase in foreign investment is coincident with growth in the size of Chinese commercial banks in terms of assets that is faster than the increases in the banks' return on capital. These findings are intuitive: foreign investors increase banks' appetite for growth in assets under management. Furthermore, banks' NPL ratio is strongly negatively correlated with foreign shareholdings. In terms of liquidity performance, foreign share ownership has a significant negative influence on banks' loan-to-deposit ratio and a significant positive influence on loan loss coverage ratio. Combined, these findings suggest strong positive effects of foreign shareholdings on Chinese banks' risk profiles.