Accounting and Finance Master Thesis No 2001:02 CHANGES IN ASIAN BANKING INDUSTRY - COMPARATIVE STUDIES IN HONG KONG, SINGAPORE AND CHINA Huang Mintong Zhang Qiuyue Graduate Business School School of Economics and Commercial Law Göteborg University ISSN 1403-851X Printed by Elanders Novum AB 1 Table of Contents 1. Introduction.......................................................................................7 1.1 Problem Analysis and the Research Question.......................................... 9 1.2 Scope and Limitation.................................................................................. 11 1.3 Purpose of the Thesis................................................................................. 11 2. Methodology.................................................................................... 12 2.1 Research Strategy......................................................................................... 12 2.2 Research Method......................................................................................... 13 2.3 Data Collection-Reliance on Secondary Data......................................... 14 2.3.1 Advantages and Disadvantages of Secondary Data ............. 15 2.3.2 Reliability and Validity of Research..................................... 16 3. Relevant Theories and Literature Review ....................................... 17 3.1 Analyzing the Banking Industry................................................................ 17 3.1.1 The Structure and Performance Relationship ...................... 17 3.1.2 Size and Concentration.........................................................20 3.1.3 Performance and Ownership Characteristics of the Largest Banks ............................................................................................ 21 3.1.4 Regulation and Governments in Banking Industry ............. 21 3.2 Fundamental Causes of Consolidation on Financial Sector................. 24 3.2.1 Theory Framework ...............................................................24 3.2.2 Empirical Evidence on the Motives for Consolidation........26 3.2.3 Forces Encouraging Consolidation .....................................29 3.2.4 Forces Discouraging Consolidation.....................................34 3.3 Consolidation and Efficiency .................................................................... 37 3.3.1 The Measurement of Efficiency ...........................................37 3.3.2 Empirical Evidence..............................................................38 3.4 Different Perspective.................................................................................. 40 3.4.1 The Internationalization of Financial Services .................... 41 3.4.2 Internationalization and Domestic Financial Deregulation 42 3.4.3 Internationalization and Capital Liberalization...................42 3.4.4 Conceptual Framework........................................................43 3.4.5 Benefits.................................................................................44 3.4.6 Costs .....................................................................................45 3.5 Our Own Thoughts.................................................................................... 46 4. Transformation of Economic Structure in Singapore and Hong Kong, and China’s Economic Development.......................................48 4.1 The Economic Structure in Singapore and Hong Kong ...................... 48 4.1.1 Singapore and Hong Kong’s Economic Structure ...............49 4.1.2 The Role of Government in Hong Kong and Singapore...... 51 4.1.3 Hong Kong’s Integration with China...................................54 4.2 China’s Economic Development.............................................................. 55 4.2.1 Pressing Asia ........................................................................56 2 4.2.2 Engine for Growth and Investment .....................................57 5. Banking industry in Hong Kong and Singapore.............................58 5.1 Size, Structure and Profitability of the Banking Industry ..................... 58 5.2 Comparisons ................................................................................................ 65 5.3 Analyses ........................................................................................................ 68 5.4 Regulatory Framework and Government Policy.................................... 69 5.4.1 Different Approaches............................................................69 5.4.2 Responses to Global Trend and the Asian Financial Crisis.73 5.4.3 Attitudes towards M&A Actitivities .....................................76 5.5 Summary....................................................................................................... 77 6. China’s Banking Industry ...............................................................82 6.1 Transition from Policy-Driven to Profit-Oriented................................ 82 6.1.1 Regulatory Framework .........................................................82 6.1.2 Ownership Diversification....................................................83 6.1.3 Size and Market Share by Banking group and the Performance..................................................................................83 6.1.4 Foreign Banks in China........................................................85 6.2 The Weaknesses and Strengths of Chinese Banks................................. 86 6.2.1 The Weakness of Chinese Banks .........................................86 6.2.2 Strengths of Chinese Banks .................................................89 6.3 The Impact of China’s Entry of WTO.................................................... 90 6.3.1 The Content of the agreement of China’s Entry of WTO on Banking Sector..............................................................................90 6.3.2 Different Perspectives .......................................................... 91 6.3.3 Summary of China’s Banking Industry - Mission Impossible or Crouching Tiger and Hidden Dragon?....................................92 7. Studies on DBS’s and ICBC’s Mergers ...........................................93 7.1 DBS’ Acquisition of Hong Kong’s Dao Heng Bank............................. 94 7.1.1 Business Objective and Main Strategy .................................94 7.1.2 Analyzing the Impacts on P/L Account and B/L Sheet .....97 7.2 ICBC’s Acquisition of Union Bank of Hong Kong ............................ 100 7.3 More Comparisons. .................................................................................. 103 8. Conclusions and Future Studies.................................................... 104 8.1 Linking the Empirical Study to Theories .............................................. 104 8.1.1 Motives for Acquisitions ..................................................... 104 8.1.2 Forces Encouraging Consolidation.................................... 106 8.1.3 Forces Discouraging Consolidation................................... 107 8.1.4 Internationalization of Financial Services.......................... 108 8.2 Principal Conclusions ............................................................................... 109 8.3 Suggestions for Future Study .................................................................. 110 Reference List ....................................................................................112 Appendix 1-China and WTO..............................................................116 Appendix 2-The List of Some Key Abbreviations............................. 120 3 Table and Figure list Table 1 Size and performance of commercial banks....................................... 19 Table 2 Structure of the economy of Singapore (% of GDP) ....................... 49 Table 3 Structure of the economy of Hong Kong (% of GDP).................... 49 Table 4 China’s economic growth ...................................................................... 56 Table 5 Number of Authorized Institutions in Hong Kong at Year-End ... 59 Table 6 The ten top locally incorporated banks in Hong Kong (2001):....... 61 Table 7 The structure of banking industry in Singapore................................. 62 Table 8 Local banks in Singapore (2001):.......................................................... 63 Table 9 Efficiency of the banking system, 1999............................................... 64 Table 10 Banking system assets and external liabilities (End-1999).............. 65 Table 11 Comparisons on regulatory framework............................................. 78 Table 12 Degree of openness indices in banking sector ................................. 79 Table 13 Size and market share by banking group........................................... 83 Table 14 The profitability of the industry (%, 1999) ....................................... 84 Table 15 Foreign banks in China (end-2000).................................................... 85 Table 16 Ranking of Chinese banks in the world............................................. 87 Table 17 International comparison for productivity and profitability (1999) .................................................................................................................................. 88 Table 18 Liquidity indicators (1999)................................................................... 90 Table 19 Key figures of DBS Bank .................................................................... 95 Table 20 Key figures of Dao Heng Bank and Kwong On