DOMESTIC BANKS' RESPONSES TO THE ENTRY OF FOREIGN BANKS IN CHINA

China is a unique market because, before 2006, the presence of the foreign banks in China was negligible. Prior to this time, the market was competitive locally but relatively dominated by the Big Four state-owned banks. The historical development of Chinas market provides an opportunity to investigate important questions regarding the functioning of the market for banking services that are difficult, if not impossible, to test in other globally established markets. The purpose of this study is to examine the effect of the market entry of the foreign banks into China on transaction and service fees charged by the domestic banks. Market research has little to offer on local bank pricing responses to the entry of foreign banks in any market, mainly because in western countries such as the Canada, England, and the United States, those foreign banks are the oldest banks operating in the market. Thus, we rely primarily on the incumbent pricing literature (Simon 2005; Geroski 1995) to help us develop our specific hypotheses and empirical tests. Using data from the annual reports of Chinese listed banks from 1994 to 2009, this paper examines whether domestic banks cut transaction and service fees in response to foreign bank entry and whether ownership structure is associated with domestic banks pricing response to the entry of the foreign banks. Results suggest that domestic banks cut the transaction and service fees before entry but state-owned domestic banks did not.