Can foreign banks compete in China?

Abstract

Foreign banks in China have faced strict regulatory requirements that were not imposed on domestic banks and as such they have performed poorly in profitability rankings. Recent changes in the Chinese regulatory requirements prompt us to consider whether foreign banks are now on an equal footing with the Chinese domestic banks. Using Cobb-Douglas stochastic frontier analysis with total income as the dependent variable, we find no significant performance difference between foreign and domestic banks. However, robustness testing using the individual components of total income as dependent variables reveals that foreign banks need to improve efficiency of their income generation.