Regulatory reforms and convergence of the banking sector: evidence from China

Purpose – The purpose of this paper is to examine the effect of regulatory reform on the asset allocation and capitalization of Chinese banks from 2002 to 2007, a period following China's entry into the World Trade Organization (WTO). Design/methodology/approach – The evidence rejects a hypothesis that the four categories of banks operating in China – the Big Four, Majority State, Majority Private, and Majority Foreign banks have converged toward common targets. Supplemental analysis indicates that domestic banks, but not foreign banks, adjust equally to their targets. Findings – The paper concludes that, although Chinese banking remained segmented during this unique transitional period, a more uniform pattern has emerged for those Chinese banks that are domestically owned. Originality/value – The authors employ a methodology that is explicitly designed to determine if banks have converged toward common approaches to asset allocation and capitalization, which has not been studies previously.