Foreign Investment In Banks Effective

Banking in China, as well as other strategic industries, has been traditionally a state controlled industry. Over the last decade though, especially after China accession to the WTO, reforms have been undertaken in order to improve the efficiency of the domestic banks and bring them closer to international standards. Selling a limited part of the banks' equity to strategic institutional investors has been one of the aspects of the reforms, with the hope that foreign expertise will benefit the banks long term interests and provide instant international recognition. Meanwhile, when meeting certain conditions, foreign banking institutions have been able to invest directly in China and set up wholly owned subsidiaries serving both the institutional and retail market.This paper analyzes the foreign investment in the Chinese banking industry through 2008, and the performance effects achieved through that investment. After a brief literature review on foreign investment and its benefits in emerging markets around the globe, the paper goes through the policy framework of foreign investment in the banking industry after market liberalization from the end of the seventies throughout WTO accession in 2001 and the retail market liberalization in 2006. We will then review foreign investment in the modern Chinese banking industry in the last 20 years. In the last two chapters, we will rely on an existing model to analyze the benefits and other effects achieved by foreign investment in domestic banks in China.We find out through our study that foreign participation has, in some aspects more than in others, benefited the domestic banking industry. Although not similar to models adopted by other emerging economies, the Chinese model of gradual opening to foreign investment appears to be successful while safeguarding the overall stability of the banking sector.