James Laurenceson

Has Minority Foreign Investment in China's Banks Improved Their Cost Efficiency?

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.

Economic Integration between China and the ASEAN-5

The current level of economic integration between China and ASEAN will largely determine the scale of the impact of Chinas WTO entry and the China-ASEAN free trade agreement. This article supplements volume-based measures of real and financial integration between China and the ASEAN-5 with those based on the international parity conditions. The results indicate that Chinas integration with the ASEAN-5 is already relatively advanced with respect to goods and services markets. Financial market integration however remains significantly incomplete. The main implication of this finding is that the impact of future liberalization will be felt most acutely in financial markets. This makes reforms complimentary to greater levels of external financial liberalization, such as regulatory reforms aimed at improving the risk management practices of financial institutions, matters of urgency for both China and the ASEAN-5.

Shanghai's Development as an International Financial Center

In 1949 Shanghai was the leading international financial center (IFC) in Asia. Recently the push of Shanghai to regain its long lost status of a regional IFC has begun to attract widespread interest. This paper first draws upon the IFC literature to highlight the factors that are considered to be important in determining the potential of a city to emerge as an IFC. Shanghais progress is then measured against these criteria and is also placed in a comparative perspective by measuring against Hong Kong and Singapore.

Productivity Spillovers from FDI in China: Regional Differences and Threshold Effects

Economic theory posits numerous channels through which FDI might create positive spillovers for domestic firms. However, the results of empirical studies that have sought to document these spillovers have been mixed. One explanation for this variation is that the capacity of domestic firms to absorb spillovers might vary. In the present paper, we explore these issues in the case of China. Aside from being one of the worlds leading hosts of foreign direct investment, China makes for an interesting case study because its provinces vary greatly with respect to those factors most commonly held to influence absorptive capacity, such as the initial level of technology in domestic firms. This paper begins by empirically establishing that the spillovers from foreign direct investment do indeed vary across provinces. Threshold values for various factors that influence absorptive capacity factors are then estimated and it is found that conditions in many provinces presently fall short of these values. This provides an obvious focus of attention for Chinas policy-makers.

Efficiency Amongst China's Banks: A DEA Analysis Five Years after WTO Entry

WTO entry in 2001 heralded a new stage in the reform of Chinas banking sector. With the reality that foreign banks would be extended national treatment by the end of 2006, Chinas banks faced the imperative to reform in earnest. They began reforms from a variety of different starting points and have pursued a variety of different reform approaches. Five years on, this paper assesses efficiency levels in 11 of Chinas most prominent banks. The results, obtained using Data Envelopment Analysis (DEA), suggest that differences in efficiency levels are actually quite small. On the one hand, this finding is encouraging because it suggests that few of Chinas major banks lag behind the pack. On the other hand, it also implies that efficiency levels almost certainly do lag in Chinas less prominent banks, which together still account for more than 40% of total banking system assets.

The economic performance of China's State-owned industrial enterprises

The much-publicized declining financial performance of Chinas state-owned enterprises (SOIEs) is generally assumed to be evidence of their worsening economic efficiency. However in this paper we show that during 1980-1996, total factor productivity actually increased at an average annual rate of 1.90% and was responsible for 41% of the rise in SOIE output. The decline in financial performance can be attributed to their terms of trade deteriorating at an average annual rate of 3.19% due to increased competition and price reform. Numerous other factors, apart from economic efficiency, can further explain why the level of SOIE profitability has lagged behind non-state-owned industrial enterprises. While these conclusions do not imply that SOIEs have become efficient by international standards, they do suggest that their economic performance was significantly better than is generally claimed. They also confirm the need to evaluate economic performance directly, using criteria appropriate to the Chinese context.

Opening China's Capital Account: Modeling the Capital Flow Response

Capital account convertibility in China is on the rise. In this paper we consider the impact that removing remaining capital controls might have on the volume of Chinas international capital flows. Better understanding of this capital flow response can shed light on Chinas current degree of international financial integration, which has important implications for policy decisions such as whether China should move toward a more flexible exchange rate regime. It is also relevant to discussing the financial stability consequences of removing remaining capital controls. The main finding is that Chinas capital account is already quite open, thus implying a tradeoff presently exists between exchange rate stability on the one hand and monetary independence on the other. In terms of financial stability, the results generally serve to allay fears that further opening the capital account would compromise Chinas international payments ability or disrupt global capital flows.

Provincial Business Cycles and Fiscal Policy in China

This paper begins by documenting considerable asynchronization in business cycle fluctuations across China’s 31 provinces. Given that monetary policy is more or less centralized, this asynchronization points to potential benefits from provinces being able to exercise a degree of fiscal autonomy. The extent to which provinces have this autonomy in practice is discussed. Provincial fiscal policy is then analysed to assess whether it has had the effect of smoothing provincial business cycles. A key finding is that, if anything, provincial fiscal policy has amplified provincial business cycles, not smoothed them.

China's Exchange Rate Policy: The Case Against Abandoning the Dollar PEG

This paper critically evaluates the policy literature surrounding Chinas exchange rate regime.It first discusses several popularly raised contentions in relation to the dollar peg employed by China, which in fact are poorly grounded in evidence.These include notions that the RMB is clearly undervalued and that its value is a prominent cause of the U.S trade deficit.The paper then describes a consensus position that has emerged which argues that China should abandon the peg in favour of a flexible exchange rate regime.We see numerous weaknesses in this position but a few stand out.Moving to a flexible regime is far from the most proximate policy response to the problems that the consensus literature itself identifies in Chinas economy.Institutional realities that make moving to a flexible regime difficult also appear to have been seriously overlooked.The paper concludes by noting that in the longer term moving to a managed float may be in Chinas best interests - but for now the focus needs to be firmly in the area of domestic financial reform.

Financial sector regulation, bank franchise values and savings mobilization

Empirical studies show that financial development exhibits a positive relationship with economic growth and the extent of poverty alleviation. Implementing policies that best promote financial development – such as mobilizing savings – are therefore, a matter of importance for all developing countries. A recent theoretical proposal that draws inspiration from the East Asian development experience hypothesises that by regulating to augment bank franchise values (i.e. the capitalized value of expected future profits accruing to banks), more savings can be mobilized compared with pursuing liberalization policies. This article provides an empirical test of this theory using a panel data set that covers 101 countries over the period 1994 to 2001. The results are not supportive of the theoretical proposal. In commenting on this result, it is noted that while intervening in the financial sector might not boost the aggregate quantity of savings mobilized, liberalization policies in developing countries should not necessarily be expedited, as other considerations are also clearly relevant.