The Effects Of Financial Openness On The Competition Degree In Banking Industry Of China

Finance is the core of modern economy, and also the strong backing of theeconomy. While the banking industry is the core of one country’s finance, it has adirect effect on the development of economy and the stability of economic system.With the development of economic reform and financial openness, the reform ofbanking industry is also deepening. This dissertation aims to quantitatively estimatethe competition degree of banking industry in China, and to explore how profound theeffect of financial openness to the competition degree of banking industry in Chinathrough both theoretical and empirical aspects.Firstly, the dissertation reviews the history of China’s banking industry from1979to2012. The process is from the “universal” pattern to the highly monopolizedmarket by the large state-owned banks, and finally to the competitive situation withthe rapid development of city commercial banks and foreign banks. We can see thegradual deepening of market-oriented reform of China’s banking industry during theprocess. We can draw by the empirical data on market size, market share and marketconcentration: China’s banking industry has achieved considerable scale and is into aperfectly competitive market structure with the market concentration decreasing. Secondly, we use unbalanced panel data consisting of68representative banks toestimate the competition degree of banking industry from1997to2012. Reference toforeign study, we chose non-structural methods, Panzar-Rosse model, to conduct aregression to calculate the H statistic of competition degree about a whole industry, indifferent periods and in different size. The opinion is: China’s commercial bankingmarket structure transforms slowly from monopolistic competition in overall marketequilibrium to perfectly competition. The competition degree of joint-stockcommercial banks is greater than the one of larger state-owned banks. While themarket structure of city commercial banks is monopolistic competition ofdisequilibrium.On the basis of the results on the competition degree of the banking industry, thedissertation then explore the impact of financial openness on the competition degreeof the banking industry. First, the dissertation explains the both positive and negativeeffects of financial openness on the banking industry in theoretical way; second, usingthe H statistic derived above as a dependent variable, the degree of openness ofcapital markets and currency markets as independent variables, the dissertation usesOLS to estimate the impact of financial openness. In order to make the data smooth,we conduct a first-order differential of variables. The conclusion is: financialopenness actively increases the competition degree of banking industry.Based on the analysis above, the dissertation draws the following policyrecommendations for the development of China’s banking industry: first, financialliberalization policies should be continued to promote steadily; second, reform of thebanking industry should be deepened to enhance the competitiveness of domesticbanks; third, prudential of supervision should be strengthened to prevent excessivecompetition risk.