Banking Deregulation and Macroeconomic Impact in China: A Theoretical Analysis and Implications of Wto Accession to the Mainland and Hong Kong

Abstract

This working paper was written by Zhijun Zhao (Chinese Academy of Social Sciences), Yue Ma (Lingnan University), Shu-ki Tsang (Hong Kong Baptist University), Matthew S. Yiu (Hong Kong Institute for Monetary Research) and Shucheng Liu (Chinese Academy of Social Sciences).

Since the beginning of 1990s, the credit balance of the banking system in mainland China has experienced a big swing from negative to positive. The balance has continued to expand up to now. It seems that both negative and positive credit balances are so large that the financial resources have been utilized inefficiently by the banking system. On the eve of China's accession to the World Trade Organization (WTO), challenges from banking competition will increase. In this paper a three-sector equilibrium model of monopolistic banking competition is set up and is applied to analyze the impact of the expanding credit balances and banking reform on the Chinese economy. Through theoretical analysis, reasons for the expanding credit balance are provided and some possible solutions are given. China's accession to the WTO will present many challenges to the state-owned banks. Foreign banks will be allowed to compete directly with Chinese local banks. We found that competition will not only promote China's GDP, investment, consumption and deposits as well as bring benefits to consumers, but also provide the banking sector from Hong Kong with new opportunities.

Keywords: banking competition, WTO, China, Hong Kong

JEL Classification: O11, O41, G21