Foreign Ownership and Liquidity Creation in China's Banking Sector

This paper investigates the effects of foreign ownership on bank liquidity creation. Using a manually collected novel dataset that includes both listed and unlisted commercial banks in China during the period between 2006 and 2018, we find that foreign ownership is significantly related to lower bank liquidity creation. In addition, we find that this effect is more pronounced for banks with a higher degree of financial service diversification, suggesting that banks with a higher proportion of foreign ownership are better able to diversify their products and services, enabling them to be less reliant on risky lending business. The findings lend support to the global advantage view of foreign ownership in general. Further analysis shows that such mechanism is especially evident among small banks, indicating that foreign investors play a stabilizing role, albeit rather marginal, in the Chinese banking industry. Our main conclusion remains valid after considering various robustness and endogeneity issues