THE UNIVERSITY OF ADELAIDE DOCTORAL THESIS Modern Chinese Banking Networks during the Republican Era Author: Principal Supervisor: Lingyu KONG Dr. Florian PLOECKL A thesis submitted in fulfillment of the requirements for the degree of Doctor of Philosophy in the School of Economics ii May 13, 2019 iii Declaration I certify that this work contains no material which has been accepted for the award of any other degree or diploma in my name, in any university or other tertiary institution and, to the best of my knowledge and belief, contains no material previously published or written by another person, except where due reference has been made in the text. In addition, I certify that no part of this work will, in the future, be used in a submission in my name, for any other degree or diploma in any university or other tertiary institution without the prior approval of the University of Adelaide and where applicable, any partner institution responsible for the joint-award of this degree. I acknowledge that copyright of published works contained within this thesis resides with the copyright holder(s) of those works. I also give permission for the digital version of my thesis to be made available on the web, via the University’s digital research repository, the Library Search and also through web search engines, unless permission has been granted by the University to restrict access for a period of time. Signed: Date: v Abstract This thesis examines three themes that focus on inter-banking connections and their impact on modern banking development in the 1930s. Chapter2 provides an overview of the modern bank sector and highlights the inter- banking relations. Tracing the shape, structure, and development of links within the sector, I find that it was characterized by a strong network of interlocking directorates. This network shows a dominating central cluster, indicating that the sector was characterized by internal cooperation rather than competition. Similarly, new entrants were usually linked to existing banks, indicating that entry was driven by the expansion of existing banks rather than the rise of new competition. Finally, central locations of public banks within the cluster indicate that the government gained influence over the sector through direct bank ownership. Chapter3 investigates how board connections in an inter-bank network affect their cor- porate policy decisions. I find evidence that corporate decisions of banks are influenced by their social peers — the more directors two banks share with each other, the more similar are their corporate strategies. Also, banks with a central position in the boardroom network make corporate decisions less distinctively. Additionally, the empirical outcomes show that co-moved corporate policies are mainly driven by banks’ intentions to pursue profits and eliminate risks, known as profitability and insurance effects. I further examine whether inter-banking connections based on interlocking directorates contributed to the overall performance in Chapter4 . I find characteristics of banks, which share directors with other banks, are significantly different compared to those of uncon- nected counterparts. The empirical results elucidate a high positive correlation between banks’ profitability and their connections with rivals through interlocking directors. Last but not least, Chapter5 investigates the development of the interlocking directorate network between domestic Chinese banks from 1933 to 1936 to understand how financial institutions structure cooperation within the sector in response to uncertain external envi- ronments and weak property rights. This part uses a dynamic network simulation approach to address the reflection problem between bank performance and network formation, illu- minating the factors driving the network evolution and shaping the structure of cooperation between Chinese banks. vii Acknowledgements Words can hardly express the extent of my obligations to Dr. Florian Ploeckl for his support and guidance throughout the M.Economics and Ph.D. at UoA. As my principal supervisor, the time he spent on me went far beyond what one could ever dream for. His insight, intellectual rigor, and curiosity not only shaped this very thesis but tremendously improved my understanding of economics and what it means to be a researcher. Thank you so much. I am also indebted to Professor Richard Pomfret and Dr. Nicholas Sim, who has been my co-supervisors in the supervision panel. On top of being excellent scholars, they proved to be fantastic people. I have always been impressed by their calm mastery of a very large scope of development economics, econometrics, and economics in general. I have always found our discussions extremely dense. They have also been the ones, who offer me warmly help and supports at the rainy times. I have been incredibly lucky to be part of the School of Economics at UoA, an inspir- ing and collaborative community of researchers. My gratitude goes out to Dr. Stephanie Mcwhinnie, for always being supportive and for sharing her enthusiasm and expertise in answering my questions in all kinds. I truly believe that my thesis would not have been pos- sible without her help and encouragement. I thank Paul Pezanis-Christou, Terence Cheng, Jacob Wong, Firmin Doko Tchatoka, Nicolas Groshenny, Benedikt Heid, Giulio Zanella, Umair Khalil and Mandar Oak for their tutoring, for making me fall in love with empirical research, and for their intriguing viewpoints. I thank Sandra Elborough, Alisa Cameron, and Lina Maney for all their support and for making the school a great place to work. Last but not least, I thank my family for supporting me throughout my life, for giving me so many opportunities, and for making me feel that anything is possible. I am forever indebted to my parents Jun Cheng, and Jian Kong. Without your love and unconditional support over all these years, I could have never done it. Also, I must thank the most won- derful, intelligent, and beautiful person in my world, my wife, Wenxiao Wang. It is you who made the journey so special and so easy when life got tough. Thank you for your endless kindness and unconditional love! ix Contents Abstract v Acknowledgements vii 1 Introduction1 2 The Banking Networks: An Overview7 2.1 Introduction......................................9 2.2 Historical environment of China in 20th century................. 11 2.3 The modern Chinese banking industry during the Nanjing Decade...... 15 2.4 Links and Networks................................. 19 2.5 Connections and cooperation............................ 25 2.6 Government and banking cooperation....................... 38 2.7 Conclusion....................................... 42 3 Corporate policies propagation through board connections 43 3.1 Introduction...................................... 45 3.2 Background...................................... 51 3.2.1 China in the early 20th century....................... 51 3.2.2 Chinese financial environment and modern banks in the early 20th century.................................... 52 3.3 Data and variables.................................. 55 3.3.1 Sample construction and sources...................... 55 3.3.2 Measures of corporate policy........................ 58 3.3.3 Control variables............................... 61 Bank characteristics............................. 61 Bank pair level controls........................... 63 x 3.4 The impact of inter-bank ties on corporate policy................. 63 3.4.1 The empirical framework: Pair model................... 63 3.4.2 The main results............................... 67 3.5 Endogeneity and further tests............................ 72 3.5.1 Controlling for homogeneity........................ 72 The pattern of board connection...................... 72 Controlling for region effects........................ 74 3.5.2 Inter-bank cooperation or corporate control?............... 77 3.6 Bank network and operational policies....................... 80 3.6.1 Analysis framework............................. 80 3.6.2 Bank connectedness measure........................ 81 3.6.3 Empirical outcomes............................. 82 3.7 Why did banks coordinate their corporate policy?................ 85 3.7.1 The profitability effect of being connected................. 85 3.7.2 The insurance effect of being connected.................. 88 3.8 Conclusion....................................... 91 4 Connections and Performance: The Impact of Interlocking Directorates 93 4.1 Introduction...................................... 95 4.2 Historical background................................ 98 4.2.1 The modern Chinese banking industry in the Republican period... 98 4.2.2 Relation with the traditional financial institution and foreign banks.. 100 4.3 The relationship between board-connectedness and performance....... 102 4.3.1 Data and variables.............................. 102 4.3.2 Empirical framework............................. 103 4.3.3 Board connectedness measures: a network approach.......... 104 4.3.4 Bank characteristics............................. 106 4.3.5 Empirical Results............................... 108 4.4 Robustness and further tests............................. 111 4.4.1 The prevalence of connected directors................... 111 4.4.2 Board composition and connectedness................... 114 4.4.3 Network neighborhood analysis...................... 116 xi 4.4.4 Additional analysis of endogenous concern................ 118 4.5 Conclusion....................................... 120 5 The Evolution