Abstract

Foreign financial institutions’ strategic investment in China’s banking sector is to acquire certain equity stake of Chinese banks and provide business assistance and cooperation to them, and it is one of the important foreign bank entry modes in China. This paper explores the impacting mechanism of foreign strategic investment on efficiency of different types of Chinese banks. Foreign strategic investments have several characterisitics: foreign equity ownership should be less than 20% for one strategic investor; foreign financial institutions could send foreign directors to Chinese bank board; they must provide business cooperation with Chinese banks; their equity share must be locked up at least in 3 years. We propose that foreign financial institutions have more incentive to improve the efficiency of smaller Chinese banks which include city commercial banks, rural commercial banks, and most joint-owned commercial banks; foreign directors also have more incentive to improve the corporate governance of smaller Chinese banks; foreign financial institutions would likely to transfer more technology to smaller Chinese banks than that to big Chinese banks, which mainly are the state-owned commercial banks. The longer holding periods of Chinese banks equity also make foreign financial institutions have more incentive to improve the efficiency of Chinese banks. In addition, the interest conflict between state-owned commercial banks and their foreign investors is larger than that between smaller Chinese banks and their foreign investors.

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