Banking and finance in China

Citation

Wang, H. (2014), "Banking and finance in China", Managerial Finance, Vol. 40 No. 10. https://doi.org/10.1108/MF-06-2014-0151

Banking and finance in China

Article Type: Guest editorial From: Managerial Finance, Volume 40, Issue 10.

The economic opening and reform has transformed China's central-planned economy into a market-oriented one. A key component of the reform is the evolution of the financial system. As a result, the increasing competition, changing ownership structure, and implementation of various regulatory measures of the banking and financial system have a great impact on the overall economy. The current special issue of Managerial Finance is devoted to further understanding of some of the issues related to banking and finance in China. After a double blind review process, six papers are selected in this special issue, which are contributed by researchers from China, Finland, Italy, UK, and the USA. In the remainder of the introductory editorial note, we provide summaries of each paper included in the special issue.

The first paper by Brau et al. (2014) examines the possible convergence among banks in China in terms of asset allocation and capitalization after China's admission to the WTO. They categorize banks in China according to the ownership structure (i.e. Big Four, majority state, majority private, and majority foreign) and examine whether all groups of banks have converged toward common targets of loan to assets ratio and equity to asset ratio during the time frame from 2001 to 2007. The major conclusion is that their sample banks in different categories do not have common targets for asset allocation and capitalization. Additionally, their empirical analysis documents that domestic banks are more subject to competitive pressure and appear to have similar speed of adjustment toward their respective targets when majority foreign banks are excluded from the sample.

The second paper by Zhang and Wang (2014) utilizes a Data Envelopment Analysis (DEA) method to re-examine the production efficiency of Chinese commercial banks from 2000 to 2011. Their empirical findings reveal that Chinese commercial banks improve their efficiency over time. However, cross-sectionally, Big Four banks and public banks have below average production efficiency which is primarily driven by scale diseconomies. Further, they confirm that foreign ownership is positively associated with production efficiency.

The third paper by Curcio et al. (2014) investigates the role played by bank loan loss provisions (LLPs) as a mechanism of income smoothing or capital management in the post-crisis era. Their findings can be summarized as follows: Chinese commercial banks use LLPs as a way of income smoothing but not as a way of capital management; listed banks engage less in income smoothing; and there is no evidence that commercial banks in China provision against business cycle.

The fourth paper by Wang (2014) considers another important component of capital market, namely institutional investors in general, and foreign institutional investors in particular. In 2002, China partially opened up its stock markets by launching the qualified foreign intuitional investor (QFII) program. This paper empirically tests the trading behavior of QFIIs using a sample of investments made from 2005 to 2011. Based on vector autoregression (VAR) model, this study reveals that foreign investments can forecast future returns, and such relationship can be better explained by informational advantage hypothesis but not price pressure hypothesis.

The fifth paper by Chen et al. (2014) contributes to a relatively old strand of literature on capital structure. The authors investigate the determinants of corporate capital structure, focusing on a cross-sectional sample of non-financial firms listed in Chinese stock exchanges. They document firm size, profitability, asset intangibility and business risk as important determinants of capital structure for publicly traded firms in China.

The final paper by Jin et al. (2014) focuses on the profit hiding behavior in the banking sector in China. Because of the ownership structure of Chinese banks, local governments tend to deviate resources from banks to provide public goods (Chen and Qian, 1998). Meanwhile, banks have the incentive to hide profit to avoid government extraction. Their empirical analysis indicates that profit hiding is quite common for banks in China. Further, they link banks’ profit hiding behavior to banking market structure in terms of competition. They use various measures to capture bank competition, and report that the competitive pressure encourages banks to hide less profit.

In conclusion, we would like to thank the Editor of Managerial Finance, Professor Don T. Johnson, for the opportunity to edit this special issue. In addition, we would like to extend our appreciation to the anonymous referees who devote their precious time to review the manuscripts submitted to the special issue.

Dr Haizhi Wang - Stuart School of Business, Illinois Institute of Technology, Chicago, Illinois, USA

References

Brau, J.C., Dahl, D., Zhang, H. and Zhou, M. (2014), “Regulatory reforms and convergence of the banking sector: evidence from China”, Managerial Finance, Vol. 40 No. 10, pp. 956-968

Chen, J., Jiang, C. and Lin, Y. (2014), “What determine firms’ capital structure in China?”, Managerial Finance, Vol. 40 No. 10, pp. 1024-1039

Chen, J. and Qian, Y. (1998), “Insecure property rights and government ownership of firms”, Quarterly Journal of Economics, Vol. 113 No. 2, pp. 467-496

Curcio, D., Dyer, D., Gallo, A. and Gianfrancesco, I. (2014), “Determinants of banks′ provisioning policies during the crisis: evidence from the Chinese banking system”, Managerial Finance, Vol. 40 No. 10, pp. 987-1006

Jin, D., Liu, J., Liu, L. and Yin, D. (2014), “Competition and profit hiding: evidence from banks in China”, Managerial Finance, Vol. 40 No. 10, pp. 1040-1051

Wang, P. (2014), “Foreign institutional investor trading in Chinese a-share markets”, Managerial Finance, Vol. 40 No. 10, pp. 1007-1023

Zhang, X.T. and Wang, Y. (2014), “Production efficiency of Chinese banks: a revisit”, Managerial Finance, Vol. 40 No. 10, pp. 969-986

Further reading

Rajan, R.G. and Zingales, L. (1998), “Financial dependence and growth”, The American Economic Review, Vol. 88 No. 3, pp. 559-586