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6. Conclusion
As china experienced rapid economic growth with rising average income per capita in recent years, together with China’s entry to the WTO and subsequent granting market access to foreign players, foreign financial institutions regard China as an important market to explore with sizeable profit potential. Moreover, as Taiwan and China deepening its economic relationships and ongoing discussion on future cooperative framework in finance, Taiwanese banks should rethink their China market entry strategy. In order to gain market share swiftly, Taiwanese banks needs to explore the options other than setting up representative office and then upgrading to a branch. Such options includes subsidiary, taking ownerships stakes and looking for strategic alliance partners. By doing so, the Taiwanese banks can find a new way to rejuvenate growth in the sector that in the current intense domestic market competition condition does not provide.
First, this paper analyzes the strategic decisions of foreign financial institutions about equity stakes acquisition in China banking sector. Besides in consideration of macroeconomic variables of home country of foreign financial institutions and interaction variables between foreign banks home country and China, we also take into the financial ratios variables of foreign financial institutions and invested Chinese banks both to figure out relative significance level, and discuss the optimal probability hazard threshold further.
Moreover, the contingent claim model is applied to examine the risk and return of foreign financial institutions after acquiring equity stakes of Chinese bank. To comply with regulatory capital control, this paper also analyzed the asset value of foreign financial institution and factors associated with risk after acquisition. Under the limitation and bridle of risk exposure and appetite, we evaluate the optimal acquiring equity stakes proportion to achieve the goal of maximizing shareholder value.
We stretch the analysis on the appropriate time and entry model to China banking sector for Taiwanese banks finally. When the China financial market is pretty much laid out by many other foreign financial institutions as leading, this paper apply real option model to discuss the threshold on optimal entry point as being the market followers such like emerging country banking industry as Taiwanese banks.
Meanwhile, we figure out respective intensity of equity stakes acquisition to determine the best Chinese bank and district to invest under the previous derived
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optimal Cox’s proportional-hazard survival model.
For the research in the investment of foreign financial institutions by equity stakes acquisition in China banking sector, this paper shows that those with higher earning capability and better asset quality possess higher probability of intensity to raise the management performance of invested Chinese banks and earn significant return. Moreover, the Chinese banks with good asset quality also have higher intensity to invest with consideration of creating strategic cooperative value in the win-win status. Meanwhile, the probability of intensity is higher for those financial institutions’ home countries with higher financial development, but it is lower for those with higher bilateral-trade volume under the customer followed, and adopt without equity stakes acquisition such as others like establishment of branch or wholly owned banks for foreign financial institutions.
Furthermore, invested Chinese banks have shown positive improvement on its asset quality, capital adequacy and earning ability as the strategy of equity stakes acquisition by foreign financial institutions, here the joint-stock commercial banks have significant increase in asset quality especially. The earning ability has improved to a large extent during the year of investment for the state-owned banks, whereas during the year after investment, the joint-stock commercial banks reach their significant point. This may be due to the simultaneous and active effort in write-off policy. Meanwhile, in Cox proportional-hazard survival model, we could figure out relative intensity of taking equity stakes acquisition for foreign financial institutions with data in China banking sector before, and derive the optimal probability hazard threshold, to be determinant of whether or not to take equity stake acquisition by foreign financial institutions, including Taiwanese banks.
After the discussion of the motives and its optimal probability hazard threshold of equity stakes acquisition by foreign financial institutions, we will implement dynamic processes to analyze the relationship between risk and return using contingent claim model for foreign financial institutions that acquire equity stakes of invested Chinese banks. Additionally, we set up both of asset values of foreign and local financial institutions individually, as well as consider the influence of exchange rate. The above-mentioned factors are required to follow the concept of maximizing shareholder value and stipulating the capital requirements of a certain portion on risk-weighted assets.
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Based on the aforementioned situations and conditions, we further infer the optimal return volatility and its corresponding acquiring proportion for foreign financial institutions to take stakes in Chinese banks. The Static analysis have conducted on different variables and find the numerical results of the asset risk and asset value of the foreign financial institutions; The results show that, for foreign financial institution to lower the portfolio risk under capital control environment, it would reduce the asset price volatility and maintain lower leverage ratio to mitigate the equity risk of investing and take as the buffer with higher capital. Furthermore, considering the new asset value after acquiring equity stakes that would come from both parties with certain portion, searching for the optimal ownership stakes proportion with right risk tolerance is important for the foreign financial institution.
The proportion will be in a positive direction with the asset value of the Chinese bank, but negative with the factors such as the asset return volatility of foreign financial institution and invested Chinese bank, exchange rate return volatility and correlation coefficient of return of each other and so on. When foreign financial institutions acquire equity stakes of Chinese bank, besides following the statutory capital requirements and reducing the portfolio risk of the asset, they will also aim to create investment value and return simultaneously.
Furthermore, the study evaluates the entry modes and time into Chinese financial market for following-entry banking industry. The result showed the requirement on launching representative offices or branches have lowest cost and threshold, however, the profit growth could be restricted since banks wouldn’t be able to operate RMB business immediately. On the other hand, establish wholly owned subsidiaries could obtain qualification on operating the RMB business and start doing business sooner before all methods, and thus became the primary strategic choice for foreign financial institutions. Furthermore, cost on acquiring equity stake will likely to be raise on local Chinese commercial banks because the company values have increased gradually due to the better performance. Therefore, selecting city or country commercial banks with similar asset size and returns have became the alternative for banks to take consideration.
The paper adopts real option application to analyze the entry time and mode to the Chinese market with the viewpoint of leading foreign institution and following financial institutes. We find the market has potential benefit waiting to be developed for foreign institution as the domestic market demand remain strong and the financial market has not yet reached its saturation. Although the Chinese economic remains strong, the government adopts macro-economic control in order to mitigate the
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inflation so that the cost of entry can be reduced for foreign financial institutions.
Additionally, the increasing demand on payment service between foreign country and China also assist following financial institutes to lower the barrier to enter the Chinese market and then expand to other related businesses.
The paper also discovered the current practice, establishes a representative office first and copes with the procedure on becoming a branch soon possible, is practical for banks following-entry the market. While serving the country-fund enterprises and being familiar with the local financial market, the following financial institutes can also obtain the qualification to operate RMB business with regulated procedure. This study also noted that this current practice is practicable and appropriated for banking industry to adopt when enter the Chinese market. The main support was this application could lower the uncertainty when entering the market with the overall demand on financial market remains positive and the country-fund business continues to grow, the threshold on optimal entry point would be reduce.
Entering the market by establishing a wholly own subsidiary or acquiring equity stake of local bank could increase the fixed cost and result in higher threshold on optimal entry point and longer investing waiting period with the current practice, On the other hand, if following-entry banking industry can crate innovative business and niche strategy and then compete with the local and leading foreign financial institution, then establishing a wholly own subsidiary or acquiring equity stake of local bank should be feasible on the operating effectiveness.
For the analysis of motives of Taiwanese banks in equity stakes acquisition, we find the intensity would be raised generally as the cross-strait policy environment tends to stale and economics recovery moderately. The pan-government-owned banks generally takes advantage of the motives and terms equity stakes acquisition as compared to the private banks outside under steady of earning ability and good asset quality. Furthermore, for the types and regions of invested Chinese banks, this paper also finds the joint-stock commercial banks posses the highest probability of intensity, and then followed by state-owned and city commercial banks and rural cooperatives.
As the statutory equity stakes acquisition proportions of the joint-stock commercial banks and state-owned banks are mostly reached for foreign financial institutions, most Taiwanese banks take into consideration on the city commercial banks and rural cooperatives as first priority to acquire the deterministic certain proportion among management power and have investment return. For the types, the results reveal that the probability of intensity reach highest in Western China Region, followed by Yangtze River Delta and Haixi Economic Zone, and reaches the lowest in Pearl River
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Delta and Bohai and Beijing-Tianjin-Hebei Economic Rim. This responds to result that the Taiwanese banks access objectively in taking equity stakes acquisition strategy in the districts such that the Western China Region which is known for its green channel, Yangtze River Delta in which most Taiwanese business are clustered, and Haixi Economic Zone which has similar culture and location closed to Taiwan.
The paper attempts to explore China market entry strategy from the foreign financial institution (including the Taiwanese banks) perspective. As the paper is based on the models and empirical study on the foreign financial institution taking ownerships stakes in the Chinese banks, analyzing the other market entry options of set up branch and subsidiary were only limited to theoretical validation. Therefore in order to formulate a comprehensive China market entry strategy, it is necessary to build related research model and undertaking statistical analysis of the different market entry options as the direction for future research.
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Consider two dynamic processes as )
The dynamics of asset value, , calculated by Ito’s lemma is
;
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The instantaneous volatility of asset return of a foreign financial institution after taking ownership stake is
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Tables
Table 1: Number of legal entities and staff of the banking institutions in China (As of end-2011)
Institutions / Items Number of banks Number of staff
Large commercial banks (1) 5 1,626,223
Policy banks & the CDB 3 61,015
Joint-stock commercial banks (2) 12 278,053
City commercial banks 144 223,238
Rural credit cooperative 2,265 533,999
Rural commercial banks 212 155,476
Rural cooperative banks 190 70,115
Finance companies of corporate groups 127 7,018
Trust companies 66 8,944
Financial leasing companies 18 1,483
Auto financing companies 14 3,381
Money brokerage firms 4 313
Consumer finance companies 4 417
New-type rural financial institutions &
Postal savings bank 692 177,856
Banking asset management companies 4 8,113
Foreign financial institutions 40 42,269
Banking institutions in total 3,800 3,197,913 (1) Large commercial banks are Bank of China, China Construction Bank,
Agricultural Bank of China, Industrial and Commercial Bank of China and Bank of Communications.
(2) Joint-stock commercial banks are China Citic Banks, China Everbright Bank, Huaxia Bank, Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank, Industrial Bank, China Minsheng Bank, Evergrowing Bank, China Bohai Bank, China Zheshang Bank.
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Table 2: Total assets of banking institutions in China (2009-2011)
In RMB hundred million
Institutions / Year 2009 % 2010 % 2011 %
Policy banks & the CDB 69,456 8.73% 76,521 8.03% 93,133 8.22%
Large commercial banks 407,998 51.31% 468,943 49.20% 536,336 47.34%
Joint-stock commercial banks 118,181 14.86% 149,037 15.64% 183,794 16.22%
City commercial banks 56,800 7.14% 78,526 8.24% 99,845 8.81%
Rural commercial banks 18,661 2.35% 27,670 2.90% 42,527 3.75%
Rural cooperative banks 12,791 1.61% 15,002 1.57% 14,025 1.24%
Urban credit cooperatives 272 0.03% 22 0.00% 30 0.00%
Rural credit cooperatives 54,945 6.91% 63,911 6.71% 72,047 6.36%
Non-bank financial institutions 15,504 1.95% 20,896 2.19% 26,067 2.30%
Foreign banks 13,492 1.70% 17,423 1.83% 21,535 1.90%
Postal savings bank &
New-type rural financial institutions 27,045 3.40% 35,101 3.68% 43,536 3.84%
Banking institutions in total 795,146 100% 953,053 100% 1,132,875 100.00%
Table 3: Profit after tax of banking institutions (2009-2011)
In RMB hundred million
Institutions / Year 2009 % 2010 % 2011 %
Policy banks & the CDB 352.5 5.27% 415.2 4.62% 536.7 4.29%
Large commercial banks 4,001.2 59.86% 5,151.2 57.29% 6,646.6 53.09%
Joint-stock commercial banks 925.0 13.84% 1,358.0 15.10% 2,005.0 16.02%
City commercial banks 496.5 7.43% 769.8 8.56% 1,080.9 8.63%
Rural commercial banks 149.0 2.23% 279.9 3.11% 512.2 4.09%
Rural cooperative banks 134.9 2.02% 179.0 1.99% 181.9 1.45%
Urban credit cooperatives 1.9 0.03% 0.1 0.00% 0.2 0.00%
Rural credit cooperatives 227.9 3.41% 232.9 2.59% 531.2 4.24%
Non-bank financial institutions 298.7 4.47% 408.0 4.54% 598.8 4.78%
Foreign banks 64.5 0.96% 77.8 0.87% 167.3 1.34%
Postal savings bank &
New-type rural financial institutions 32.2 0.48% 119.0 1.32% 257.9 2.06%
Banking institutions in total 6,684.2 100% 8,990.9 100% 12,518.7 100.00%
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Table 4: Entry model and location of Taiwanese bank in China
Name of Bank Entry Model Location
Land Bank of Taiwan Branch Shanghai
First Commercial Bank Branch Shanghai
Hua Nan Commercial Bank Branch Shenzhen
Chang Hwa Bank Branch Kunshan
Taiwan Cooperative Bank Branch
Representative Office
Soochow Beijing
Cathay United Bank Branch Shanghai
Chinatrust Bank Branch
Representative Office
Shanghai Beijing
Bank of Taiwan Branch Shanghai
Mega International Commercial Bank Branch Soochow
E. Sun Bank Branch Dongguan
Taiwan Business Bank Representative Office Shanghai Taipei Fubon Bank (1) Equity Investment
Representative Office
Xaimen Soochow (1) Fubon Bank (Hong Kong) is on behalf of Taipei Fubon Bank to invest equity of
Xaimen Bank around 19.99% with 230 RMB million in November 2008.
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Table 5: The average and deviation of assets and net income of invested Chinese banks in the last five years
In USD thousand Mean 3,345,805,184 Asset
Deviation 1,108,072,969 Mean 12,319,633 State-owned banks
Net income
Deviation 6,779,435 Mean 856,325,466 Asset
Deviation 383,502,232 Mean 6,608,271 Joint-stock
commercial banks
Net income
Deviation 4,349,354 Mean 178,212,579 Asset
Deviation 76,516,521 Average 1,809,978 City commercial
banks
Net income
Deviation 981,607 Average 22,244,362 Asset
Deviation 981,607 Average 22,244,362 Asset