This study investigates the effects of the entry of foreign banks into the Chinese market. Existing studies focus on equity participations of foreign banks as a strategic investment in Chinese banks. However, studying different modes of entry is also indispensable to outline the functioning of the Chinese banking industry. Since April 2007, foreign banks have begun establishing subsidiaries to conduct renminbi business on a full scale. There was a fear that the entry of foreign banks in addition to the entry of the World Trade Organization in 2001 would adversely affect the Chinese banking industry. These effects include higher competition and a scramble for customers among new entrants. Foreign banks pose a threat to local banks because of their competitive advantages such as superior management and high-quality financial products and services. However, can we actually analyze the advantage of foreign banks over Chinese local banks? This paper aims to answer this question. First, we confirm the positions of foreign banks in the Chinese market on the basis of new reports and the financial data of these banks. This investigation shows that commitments toward China are different among foreign banks. Second, comparing the financial ratio of foreign and local banks demonstrates that foreign banks have no cost advantage
and cannot expand their credit volume fully. Third, we use data envelopment analysis and calculate the efficiency of banks operating in China. The measured results do not reveal the advantages of foreign banks. This result is different from the ex-ante prediction. Although we have some reservations regarding this result, restrictions on approval by financial authorities oriented toward industrial protection might influence the competitiveness of foreign banks. Furthermore, foreign banks are not allowed to expand credit unlike local banks ever since the 2008 global financial crises. Thus, this situation also may affect the calculation of the efficiency of banks
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