An Economic Assessment of Legal and Institutional Barriers to Foreign Bank Establishment in China

Abstract: This study estimates the effects of legal and institutional barriers to foreign bank establishment in China. Provincial corruption data is compiled from official Chinese procuratorial work reports and analyzed together with economic indicators and measures of legislative liberalization in a multiple regression analysis. The analysis uses panel data for 18 Chinese cities in 11 provinces over 8 years (1998-2005). While there are certain indications that provinces with fewer corruption cases attract more foreign banks, no robust statistically significant effect of corruption on foreign bank establishment is found. Legal restrictions on local currency are shown to have a considerable impact on the establishment of foreign banks. Cities where such legislation was liberalized in early stages are found to attract more foreign branch offices. Lastly, a strong link is found suggesting that foreign banks have been prone to follow vertical investment strategies in China caused by oligopolistic reactions.