Chinese Banking System Case Study

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Introduction
The Chinese government has a lot of influence on the Chinese banking system, especially through the four Chinese state-owned banks, which are called the 'Big Four'. In the last three decades, the Chinese state-owned banks had to undergo a privatization program to reduce the government influence and to increase the performance, profitability, and efficiency of the Chinese banking system. An important driver to make the financial reforms successful were the foreign direct investments (FDI) which are stimulated through globalization. The changes that have been made, raise several questions. In particular, which effects do foreign investors cause in the Chinese banking system in terms of performance, profitability, and efficiency? …show more content…
The inflows of FDI worldwide multiplied by 10.9 times with an total value of US$633 billion in absolute terms in 2002 (World Bank, 2003a; IMF 2003a, as cited in Gunter & van der Hoeven, 2004, p. 10, table 1). Looking at China and India, they saw their share of FDI worldwide in relative terms, increase from 2.9% in 1985 to 9.8% in 2002 which is a lot compared to the increase or decrease of the low-income, middle-income, and high-income countries (World Bank, 2003a; IMF 2003a, as cited in Gunter & van der Hoeven, 2004, p. 10, table 1). Despite the absolute increase, the high-incomes countries' share in world portfolio investment remained at around 90% (Gunter & van der Hoeven, …show more content…
To strengthen the balance sheets and to increase the competitiveness of the big four, the government set up three major instruments. First, to decrease the great amount of NPLs in China's financial system by establishing three policy banks which were funded mainly from the PBC. Second, the Chinese government enacted the "Commercial Banks Law of the People's Republic of China" to construct a legal commercial banking system. This also included that the entry barriers for new domestic commercials banks and foreign banks were loosened (Chang, Hu, Chou, & Sun, 2012). Third, China adopted new accounting principles, which are consistent with the basic ideas of the International Accounting Standards (Chang, Hu, Chou, & Sun, 2012). After the Asian financial crisis, PBC recognized the importance of risk management in the banking sector, which resulted in adopting a new risk management system with five levels of loans in 1998 (Chang, Hu, Chou, & Sun,
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