Has minority foreign investment in China’s banks i.pdfVIP

Has minority foreign investment in China’s banks improved their cost efficiency? *# James Laurenceson and Fengming Qin, Has minority foreign investment in China’s banks improved their cost efficiency? East Asia Economic Research Group Discussion Paper No. 13, January 2008, School of Economics, University of Queensland, Brisbane. Abstract Since 2001, foreign investors have been permitted to acquire minority ownership stakes in China’s banks. This paper assesses whether there is any evidence of a cost efficiency payoff in those banks that have taken on foreign investment. Data Envelopment Analysis is first used to generate measures of cost efficiency for China’s banks over the period 2001-2006. A second stage regression is then performed to determine whether foreign investment has an impact on cost efficiency. The results indicate a positive impact, although one that is only marginally significant. Policy implications are discussed. JEL codes - C24, D24, F21, G21, Key words – China, banking, foreign investment, cost efficiency * Corresponding author – James Laurenceson School of Economics University of Queensland Brisbane, Queensland, 4072 Australia Ph – (+61) 7 3365 6085 Email – j.laurenceson@.au # We would like to thank Kam Ki Tang and Tingqiu Cao for helpful comments. 1 1. Introduction Since the Open Door Policy was embarked upon in 1979, China has emerged as a leading host of foreign investment. This foreign investment has not, however, been evenly distributed across economic sectors. While the Open Door Policy liberalized foreign ownership in some sectors, notably manufacturing, the services sector, including banking, remained largely off limits. This state of affairs changed considerably after China joined the WTO in 2001. Firstly, China committed to extending national treatment to fo