Draft: This paper is published in Applied Geography (Volume 32, Issue 2, March 2012, pp. 854-867).

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Centralization and Marginalization: The Chinese Banking Industry in Reform

Godfrey YEUNG (corresponding author)
Department of Geography National Singapore University 1 Arts Link Singapore 117570 E-mail: Geoykyg@nus.edu.sg Phone: +65-6516 7374 Fax: +65-6777 3091

Canfei HE
College of Urban and Environmental Sciences Peking University Beijing 100871 China E-mail: Hecanfei@urban.pku.edu.cn

Hao Liu
College of Urban Planning and Design Shenzhen Graduate School of Peking University Shenzhen 518055 Guangdong China

Drafted: August 2011 Revised: September 2011

Acknowledgement: We could like to show our gratitude for the insightful comments made by the reviewers and editor on the earlier draft of this paper. As usual, the authors are responsible for the comments and remaining omissions. Number of words (excluding tables, figures, footnotes & references): 9,211

Centralization and Marginalization: The Chinese Banking Industry in Reform
Abstract: Based on the distribution patterns of the sub-branches and saving outlets of the Industrial and Commercial Bank of China and the Bank of China in prefectural cities in China between 2001 and 2009, this paper examines how these two Chinese state-owned commercial banks may centralize their operations and thus lead to the possible marginalization of the provision of basic banking services to low value-added customers. The restructuring of SOCBs may not result in high levels of layoff due to the state’s objectives of minimizing both operational costs and political risks. When the politically sensitive issue of (un)employment is not taken into account, the more economically developed cities with larger populations and the more developed telecommunication facilities experience a higher level of centralization of their banking operations. The centralization of banking operations in China is, however, not always at the expense of savings outlets, despite the merging of savings outlets with sub-branches in various Chinese cities. There is circumstantial evidence to suggest the convergence thesis is not applicable to the banking industry in China, which is different from the conventional argument in financial geography that the centralization and marginalization of banking operations are two sides of the same coin as in the restructuring of the Anglo-American banking industries. This difference could be due to the hybrid ownership structures of state-owned commercial banks in China where the boundaries between public and private property rights are blurred.

Keywords: centralization, marginalization, banks, state, China The Anglo-American convergence thesis is not fully applicable to the Chinese banking industry The centralization of Chinese banking operations is not at the expense of savings outlets The differences are due to the Chinese banks hybrid ownership structures

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1 Introduction
The convergence of practices in the Anglo-American banking industry (herein after, convergence thesis) since the 1980s is the result of the structural deregulation of a financial regime placed in a more open and prudential regulatory space. Commercial banks are pushed by the new regulatory space to compete with one another across market boundaries to improve their economic efficiency. This neo-liberal spirit of competition and efficiency is incorporated into the World Trade Organization (WTO) accession treaties signed by China at the insistence of other member countries, that is, China had to open its banking market to foreign banks. International banks have subsequently accelerated their expansion drives in China after the WTO accession. According to the China Banking Regulatory Commission (CBRC) - the central banking regulatory authority in China - 224 foreign banks (of which 40 are locally incorporated) operate but only accounted for 1.85 percent of the total banking assets in China in 2010 (CBRC, 2010, p. 35). Existing studies largely target the expansion of foreign banks in China or discuss the potential impact of banking reforms on Chinese banks. Examples of the former approaches are Leung and Young (2005), Lu and Dewhurst (2007), Zhang and Yang (2007), Chen (2009) etc. Leung and Young (2005) examined the implications of China’s accession to the WTO for foreign banks, while He and Yeung (2011) investigated the location patterns of foreign banks in China. Other literature has focused on the potential impact of the banking reforms on Chinese banks, e.g., Bonin and Huang (2002) examined the implications of China’s accession to the WTO for domestic banks, while Yeung (2009a) examined the lending criteria of state-owned commercial banks (SOCBs). Although the current literature is useful to understand the institutional environment of the banking reform in China, it is unable to provide solid empirical evidence to support or reject the convergence thesis as in the AngloAmerican banking industry. Based on the changing distribution patterns of the sub-branches and savings outlets of two of the most important SOCBs at prefectural city level in China between 2001 and 2009, this paper aims to narrow this gap by examining two major propositions concerning the extent of the centralization of banking operations in sub-branches made by local bankers and

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deposits and withdrawals from personal savings accounts. e. The findings of this paper could have profound policy implications for scholars and decision makers interested in economic restructuring in China.. and the potential political risks of massive layoffs as a result of restructuring in the SOCBs could be spatially different across China. including the demarcation of property rights between publicly and privately owned enterprises. level of economic development. local bankers in the Industrial and Commercial Bank of China (ICBC) and the Bank of China (BOC) could pursue a strategy to improve cost competitiveness by centralizing banking operations at sub-branch level. 3 .the corresponding marginalization of savings outlets in China.g. the convergence thesis is more of a reflection of the neo-liberal ideology of competition and freedom in the Anglo-American banking industry than a framework to explain the impact of the consolidation of the banking industry in non-market economies. which is undergoing extensive institutional reforms. Sub-branches are at higher level in the administrative hierarchy than savings outlets in the Chinese banking system: subbranches have the authority to provide professional private banking services (such as the provision of investment-oriented products). That is. the informal practices of local bankers regarding their areas’ specific economic structure. Without taking region-specific institutional systems into consideration. and at the same time minimize the political risks associated with massive layoffs by reducing the marginalization of savings outlets. Both propositions are derived from the expectation that the banking industry is restructuring under specific socio-economic constraints due to the blurring of the boundaries between public and private property rights in the transitional Chinese economy. The necessary condition – a functioning market in an advanced capitalist economy – of the convergence thesis does not exist in the transitional economy of China. In addition to the formal rules and regulations stipulated by the CBRC. while savings outlets can only deal with basic private banking services. The entrance of foreign banks into China has certainly had an impact on the competitiveness of the banking industry but this specific impact on the centralization of SOCBs operations is not the focus and thus will be not discussed in this paper.

the background to the banking reform and the corresponding four research hypotheses are outlined in the next section.1 Convergence of the Anglo-American banking industry The new regulatory space of structural deregulation pushed AngloAmerican commercial banks to compete with one another to improve economic efficiency. 4 . The fourth section describes and analyzes the extent of centralization and marginalization in the banking industry in China. as in the restructuring of the Anglo-American banking industries. the restructuring of SOCBs may not result in high levels of layoffs. 2 Conceptual framework and research hypotheses This section reviews the convergence thesis and the relevant policy background to contextualize the banking reforms before outlining the four research hypotheses on the centralization and marginalization of the Chinese banking industry. 2. The findings of this paper are then presented and analyzed before drawing some conclusions. 1 The introduction of the Financial Services Act and the Building Societies Act in the UK in 1986 are examples of such regulatory rules. When the politically sensitive issue of (un)employment is disregarded.Due to the bankers’ objectives of minimizing both operational costs and political risks. Therefore. Before describing the methods and data sources. The former 1 This sub-section relies heavily on Yeung (2009b). there is circumstantial evidence to reject the convergence thesis as operating in the banking industry in China and this finding is different from the conventional argument in financial geography that the centralization and marginalization of banking operations are two sides of the same coin. The centralization of banking operations in China is not always at the expense of savings outlets despite the merging of savings outlets with sub-branches in various Chinese cities. the more economically developed cities with larger populations and more developed telecommunication facilities experience a higher level of centralization in their banking operations. This difference in industrial practice could be reconciled by the hybrid ownership structures of SOCBs in China. a brief review of the literature.

p. together with the retention of existing and the recruitment of new customers. bank branches have historically played an important role in the collection of market and credit information. 1999. normally through branch closures and labour downgrades . As they can enter each other’s geographical and product markets.. 316) suggest that there are four characteristics of the convergence thesis. This is illustrated by the widespread use of automated telephone and electronic banking rather than face-to-face interaction for the provision. 1993. First. These regulations broke down the institutional divisions in the retail financial market (between the conventional banks and building societies) and encouraged financial institutions to compete across market sectors (Marshall et al. the governments and regulatory authorities in the US and UK play an important role in the deregulation of the Anglo-Saxon banking industry. 1999. As a result of the rationalization of branch networks and the introduction of customers’ fees for banking services. there is the centralization of banking operations and the marginalization of bank branches in the provision of banking services. assessment and processing of banking services (Pollard. there has been a shift from the provision of credit-related services to investment-oriented products and fee-generation activities in bank branches to justify their existence (Leyshon & Thrift. Dymski. Leyshon et al. The abolition of laws prohibiting inter-state banking in the US intensified industrial consolidation through mergers and acquisitions as an effective way for large banks to capture a market share and create synergy (Berger et al. 1998. 1992). see also Morrison & O’Brien. banks are under tremendous competitive pressure to cut operating costs. the convergence of practices in the retail banking industry.. 1996.allowed the investment industry to operate as a self-regulating body and the latter allowed building societies to diversify into new markets and participate in wholesale money markets with up to 25 percent of their total deposits. market segmentation and financial exclusion are two specific features of the converged banking industry. 1999). 1998). 1999. In other words. p. The increasingly competitive 5 . and hence.using part-time and temporary workers to replace full-time employees. 1999.. 2001 for the New Zealand case).. Third. Martin. Leyshon & Thrift. Second. Leyshon and Pollard (2000. Leyshon et al. 205) and Argent (2002.

12 March 2011. 1998). p. banks provide tailor-made services for their high value customers and withdraw the full range of services to poorer customers. Leyshon & Thrift. That is. where a functioning market does not exist and the state plays an even more important role in the opening up of retail banking? A brief review of ownership reform in the Chinese banking industry. Wills. and are thus financially excluded and have to settle all their transactions in cash. and its relevant debates is in the next section. there has been a massive restructuring of the Chinese banking industry during the last few decades. and to what extent. 1996. Fourth. The change in the ownership structure of banks reflects the changing role of the state and thus the regulatory regime in the Chinese banking industry. 1996. to the transitional economy of China. Fuller. 1996). 1993. 1995. there were at least 17 million American adults without bank accounts in 2009 (The Economist. According to the survey conducted by Federal Deposit Insurance Commission. Pollard. Is the convergence thesis applicable. 2. 1992) and the subsequent segmentation of the market. charge fees to maintain low balance accounts under the ‘user pays’ principle or even close branches in deprived neighbourhoods to reduce costs and improve their overall competitiveness (Dymski & Veitch. People without bank accounts are unable to access the wide range of services for which bank accounts provide gateways.environment in the banking industry has resulted in the ‘flight to quality’ (Gentle & Marshall. There are no more ‘jobs for life’ and full-time employees may be replaced with part-time or temporary workers (Leyshon & Thrift. 78). The state played an important role in the deregulation and the subsequent convergence of the Anglo-American banking industry. one of the most important factors distinguishing the formerly planned economies from market economies. 6 .2 The ownership reform of the Chinese banking industry in a transitional economy Along with the market-oriented reforms in the manufacturing sector. the closure of bank branches to reduce operating costs has resulted in the restructuring of the established industrial ‘paternalistic’ labour relations to create greater workplace flexibility and competitiveness in the banking industry. 1995.

1 billion) of pre-1996 non-performing loans to the four newly created Asset Management Corporations.. The present Chinese banking industry includes the SOCBs. following the classification system used by the CBRC. foreign banks. The SOCBs include the ‘Big Four’ (incorporating the ICBC. the state had no choice but to open up the banking market to foreign banks as stipulated in the WTO accession treaty. and the three policy banks. BOC. After the establishment of the People’s Republic of China in 1949. This institutional setting was too rigid and unable to fulfil the needs of the economy. and trade sectors (Yeung. Foreign banks have been allowed to provide local currency services to Chinese companies since 11 December 2003 and had full market access (including individual customers) all over China from 11 December 2006.61 billion) into the banking system in 1998. joint-stock commercial banks. i. On the one hand. China Construction Bank and Agricultural Bank of China) and the Bank of Communications (BOCOM). peasants banked with the Agricultural Bank of China (ABC).This section provides a brief overview of the relevant background to help contextualize the reforms in Chinese banking industry.4 trillion yuan (US$169. In addition to an injection of 270 billion yuan (US$32. This policy literally created three monopolies in the agricultural. SOCBs began to restructure their loan portfolios by adopting the strategy of commercial lending. the state is under internal economic pressure to improve governance to prepare SOCBs for public listings and thus reduce the financial burden upon the Ministry of Finance. while trade or foreign-financed companies had to channel their foreign exchange through the BOC. SOCBs became responsible for such loans made after 1996. Between 1998 and 2003. when all 7 . 2009b). industrial. This situation remained unchanged for almost three decades until economic reforms were implemented in China in 1979.e. the central government transferred 1. There was still no direct competition between the commercial banks due to the ‘sector-specific segmentation’ policy in China: industrial enterprises dealt with the China Construction Bank (CCB). The Chinese government is under tremendous pressure to reform the banking system. the central bank monopolized almost all the banking services in the Chinese banking system. signed in 2001. rural credit institutions. On the other hand.

foreign investors had equity stakes in 39 Chinese banks (CBRC. and 2010 in the case of the Agricultural Bank of China. the SOCBs controlled 49 percent of the 95. 132).8 trillion) banking assets in China (CBRC. In the UK. a quasi-judicial body with Board members appointed by the UK Treasury. the financial regulatory authority in the UK. comprising both executive and (independent) non-executive directors who oversee various departments ranged from strategic investment. one of the independent non-executive directors of ICBC is Malcolm C. p. and the organization is structured as a limited company and owned by the UK government. A number of other city commercial banks are partly owned by foreign investors but the local governments are the majority shareholders. To fulfil the listing requirements. SOCBs became by definition international holding financial institutions after their initial public offerings on the Stock Exchange of Hong Kong in 200506. For instance. which in turn are monitored by the Board of Supervisors. especially the State Administration of Foreign Exchange and the People’s Bank of China. is a former Assistant Governor and Deputy Governor of the People’s Bank of China.3 trillion yuan (US$14. For instance. Unlike the UK where a 8 . a nonexecutive director of HM Treasury and the former Chairman of the Financial Services Authority (FSA). audit. the state is still the majority equity holder in all SOCBs. the Chairman of the Board of Directors and Executive Director of ICBC. p. 2010. Jiang Jianqing. Thus it can be expected that most important managerial appointments in SOCBs are held by (former) senior managers of pertinent Ministries. the financial services industry is regulated by the Financial Services Authority (FSA). In 2010. Xiao Gang. 2009b). with at least 54 percent of equity (in the case of Bank of Communications).non-prudential market access constraints against foreign financial institutions were removed (Yeung. 35). while the Chairman of the Board of Directors of the BOC. and risk control. In 2010. all SOCBs have adopted similar Anglo-American type corporate structures and are governed by their corresponding Board of Directors. However. This form of hybrid ownership structure of SOCBs obviously creates a different institutional setting between the regulators and banks from their AngloAmerican counterparts. is also a member of the Monetary Policy Commission of the People’s Bank of China. 2010. McCarthy.

Stark. Stark & Nee. 1999. pp.and state-chartered savings banks and savings and loans associations in the US. and money supply and exchange rate targets) to ensure the stability of the financial system. 1998. securities and insurance industries. The Office of Thrift Supervision supervises and regulates all federally. The CBRC formulates the rules and regulations governing the banking institutions. The debates about the role and mix of plans and markets in China as well as the formerly planned economies of Eastern Europe have been going on for decades (Guthrie. In other words. the banking industry is regulated by the People’s Bank of China and the CBRC. 1989.2 This regulator-bank relationship violates the principle of free market economy and obviously has an impact on the applicability of the convergence thesis in China. The People’s Bank of China is the central bank and responsible for formulating and implementing monetary policy (including setting minimum reserve requirements and interest rates. 1988). while the state is both the regulator and owner of the regulated SOCBs in China.single authority regulates the banking. the regulatory authorities in the UK and the US are state-controlled institutions to monitor the operations of privately-owned commercial banks. China follows the US with separate regulatory agencies for securities. It is thus useful to have a brief review of the relevant debates on ownership reform in state-owned enterprises in transitional economies to contextualize the Chinese banking reforms. the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) are the primary banking regulators at the federal level. 9 . 1997. while The Federal Deposit Insurance Corporation was established in 1933 through the Glass–Steagall Act to insure deposits and to protect depositors from losses by insolvent commercial banks. 2001). Stark & Bruszt. The debate shifted to considering the combination of public and private property in the mid-1980s. and supervises all banking institutions and their business activities in China. and insurance. Stark (1989. In China. Instead of a “socialist mixed economy” with well-defined public and private sectors (Szelényi. 167-8) argued that the institutional reforms implemented in these formerly planned economies have resulted in “hybrid mixtures of public 2 But the recent financial crisis has changed this regulator-banks relationship as the UK government is now the majority shareholder of RBS and Llodys-TSB. commodities. Grabher & Stark. In the US. 1996.

Peng and Heath (1996). Both Chinese SOCBs and their Anglo-American counterparts are facing a two-tiered market but the size of the mass market ordinary customers and the potential size of high value customers in China are (much) bigger. With blanket coverage of banking services over the whole country geographically. p.g. When the structure of property rights is poorly defined in a transitional economy. 10 . Similar ideas have also been expressed in scholarly research in China. 1990). actors can use their personal connections (guanxi) to lower the transaction costs of “hybrid organizational forms” and be more responsive to market demands (see also Nee & Young. 997) coined the term “recombinant property” to explain a distinctive form of organizational hedging through the diversification.ownership and private initiative” that cross and blur the conventional boundaries between public and private property. Guthrie (1999). ‘hybrid property’) (see Yeung. Nee (1992. redefinition and recombination of assets by actors. 3 Therefore. p. This form of organizational hedging results from actors responding to the uncertainty created by the institutional reforms in Hungary.. Based on the property rights school. 2009b). e. Oi (1992) introduced the concept of “local corporatism” to explain the fiscal taxation reforms that allowed local governments to be involved in the establishment of township and village enterprises in China. Stark (1996. the apparent competitive advantage of SOCBs may not always translate into profitability as the average deposit is small 3 In cases of extremely complex cross-holding equities. Based on transaction costs and new institutional economics.. Walder (1994) argues that the clarification of property rights in Chinese fiscal reforms (which thus define who the reward recipients are) has contributed to the rise of township and village enterprises in China. a mixed form of public and private property. SOCBs surely must have the first-mover competitive advantages over other foreign banks in the mass banking market. Sabel (1990) deviates from the property rights school by arguing that ambiguity rather than clearly defined property rights allows actors to adapt to dynamic market demands.e. Although there is US$4 trillion in personal deposits sitting in the Chinese banking system. 2) argues that the ownership reforms implemented in China have resulted in “hybrid organizational forms”. economic efficiency can be improved when there is a transformation of property rights without privatization (from the fully publicly-owned to neither publicly nor privately-owned. i. For instance.

(US$3. and half of them do not provide amenities such as drinking water dispensers or newspaper racks (China Daily. comprising on-line banking (including a retail loan approval system). According to the Boston Consulting Group’s report. As part of the effort to diversify income streams. p.000 in 2001 to 310. and yet the state is still the majority shareholder. p. It is expected that this number will have doubled by the end of 2011 (Yeung.g.1 percent of these outlets have toilet facilities. telephone banking. Therefore.470/customer) and the majority of customers demand services at rock bottom prices. which has an average profit rate ten times higher than that of the European and American retail banking businesses. To cut operating costs. This shift in service provision has resulted in customers waiting in hour-long queues for basic banking services at ICBC and China Construction Bank outlets. basic complementary facilities for ordinary customers are very limited. 58. to affluent customers in 2005. 2005. 48-9). 12 July 2007). SOCBs are aggressively improving their services to compete with foreign banks in the highly lucrative market of private banking business in China. 2009. 2005.000 by the end of 2006. which incorporates structured investment products and foreign exchange services. which means razor-thin profit-margins for banks (especially in rural areas). 2009b). SOCBs launched their exclusive wealth management provision of a one-stop dedicated VIP service. SOCBs are under pressure from their (foreign banks’) shareholders to maximize profits. pp. the number of households with more than US$1 million in liquid assets in China had increased from 124. only 7. the BOC “vigorously promoted its fee-based personal banking business” and its number of (prestigious) wealth management centres reached about 780 in number in 2009 (BOC. and multifunctional self-service terminals to handle counter-based non-cash services (BOC. the boundaries between public and private property rights in the Chinese banking industry have become blurred and thus have strong characteristics of the ‘hybrid 11 . both the BOC and ICBC have fully implemented e-banking channels. e. ICBC. local bankers in SOCBs could be inclined to move toward the provision of investment-oriented and fee-generating activities by providing VIP financial services to high value-added customers. mobile banking. For instance. Rather than focusing on the mass market of lower value-added customers. according to a recent survey of 113 outlets of major SOCBs in Beijing.. 44). Moreover.

we hypothesize that: H1: The extent of the centralization of banking operations by opening new subbranches in the ICBC and BOC is positively related to the level of economic development at prefectural level cities in China.property’ inspired by the concept of “hybrid organizational forms proposed by Nee (1992) and further conceptualized by Stark (1996) (see Yeung. 2. Although SOCBs are not operating in a free market economy. Based on the above. for example. The closure of saving outlets is an effective means for local bankers to cut costs as all SOCBs. either through merging saving outlets into sub-branches or simply closing down saving outlets in areas with small local banking markets to cut operating costs. had about 20. local bankers are now responsible for their financial losses and thus are under tremendous pressure to streamline their SOCB operations. It is of profound interest to find out to what extent the local bankers in SOCBs are driven by profit-oriented benchmarks to cut operating costs by centralizing their banking operations or by preserving their legacy from the planned economy of maintaining local banking services and socio-economic stability. ordinary versus high value customers) but are under different regulatory regimes. market segmentation. It is expected that the centralization and marginalization of banking operations by merging saving outlets into subbranches will be more evident in the more economically developed regions where operating costs are higher. The closure of bank branches is one of the most visible indications of centralization.700 savings outlets in 2001 (Table 2). 12 .3 Restructuring SOCBs & the consequent constraints As both SOCBs and their Anglo-American counterparts have similar corporate structures and a two-tier banking market (mass market. have tens of thousands of savings outlets all over China. The ICBC. and marginalization. local bankers at SOCBs have to strike a delicate balance between cost-cutting (tested by the first two hypotheses outlined below) and yet have to maintain local socio-economic stability (tested by third and fourth hypotheses outlined below). especially the ‘Big Four’. 2009b).

local bankers realized that they could not simply replicate the Anglo-American banking restructuring policies without paying attention to the political and socio-economic circumstances in China. while the number of SOCB employees has declined at the much slower pace of 9 percent. The number of people employed in the financial sectors is a generic indicator of the size of SOCB payrolls and the potential costs that could be saved during the restructuring of banking operations. In other words. For instance.309 in 2008. from 1. The socio-economic and political costs of full-scale centralization and marginalization are too high for the SOCBs to tolerate due to the consequent massive redundancies and potential political instability in a transitional economy without a systematic welfare safety net or a fully mobile labour market (due to the legacies of the household registration system). meaning job security and senioritybased promotion) and were partially sheltered from market competition (Table 1). can be faster in areas where large numbers are employed in the financial sector. especially by merging saving outlets with sub-branches.055 in 2001 to 66. It is therefore logical to expect that the pace of restructuring.H2: The extent of the marginalization of saving outlets among ICBC and BOC is positively related to the level of economic development at prefectural level cities in China.45 million (Table 1). This is especially the case where the state still influences industrial practices. the 1. the downsizing in the banking reforms implemented by the SOCBs in China are smaller in scale in order to lessen the impact on society and the economy. from 112. for instance. This can be further illustrated by the different scale of downsizing between operational units and number of employees at SOCBs. the banking reforms in China are a compromise taking account of the political and socio-economic considerations 13 .5 million employees in five SOCBs that had been enjoying the security of life-long employment (in the form of the “iron-rice bowl” and “iron arm-chair”. The number of SOCB banking units has decreased by 69 percent. However. Instead of pursuing centralization and marginalization as in the Anglo-American banking industries. massive layoffs may not always follow organizational restructuring at the SOCBs due to potential influence from the state. either through direct regulation or direct intervention.58 million to 1.

faced by the formal institutions and individual agents and are special features of the transition from a planned to a market-oriented economy. with centralization as the dependent variable against four explanatory variables in two regressions. H4: The extent of the marginalization of saving outlets among ICBC and BOC is negatively related to the population and the employment levels in the financial sector at prefectural level cities in China. From the above. we expect that the areas with a large population and large numbers employed in the financial sector will experience a slower pace of SOCB centralization and marginalization. 3. we expect that the hybrid nature of ownership in SOCBs could have an impact on the format and magnitude of the centralization of banking operations and the marginalization of saving outlets as part of the provision of banking services in China. the location of the branches (分行) and sub-branches (支行) of SOCBs is determined by the administrative boundaries in China. 3 Methods and data sources We explain the models used in our estimates before presenting the sources of data and their potential limitations. H3: The extent of the centralization of banking operations by opening new subbranches in the ICBC and BOC is negatively related to the population and employment levels in the financial sector at prefectural level cities in China. All SOCBs have one branch in the capital of every province and at least one sub-branch in every prefectural level city. 14 .4 Under the administration of sub-branches are saving outlets (储蓄所) and 4 SOCB branches could be located in some major cities. Based on the above. According to the conventional classification of banking units in China.1 Modelling centralization-marginalization We ran four sets of regressions to test the four hypotheses. and with marginalization as the dependent variable against the same four explanatory variables in another two regressions.

presumably but not exclusively through merging or closing down savings outlets in selected sub-branches to reduce operating costs. However. In this paper. deposits and withdrawals from personal saving accounts). Thus. In other words. Professional private banking services (such as the provision of investment-oriented products) are normally available only at sub-branch level and the approval and auditing of loans and mortgages are normally conducted at branches of SOCBs. We could allocate a notional figure say one .700 savings outlets and banking offices of various sizes scattered all over China in the ICBC alone in 2001.. the centralization of banking operations by opening sub-branches is followed by the marginalization of savings outlets in the same city. Savings outlets only deal with basic private banking services (e. the percentage change in the operation of units between 2001 and 2009 could reveal the relative magnitude of centralization regionally and be used as the dependent variable in the models. we used the change in number of subbranches at prefectural level cities between 2009 and 2001 as the dependent variable. while banking offices provide all private and certain commercial banking services. a 200 percent increase between 1 and 3.g. more than 10 percent of 363 cities had no BOC sub-branches in 2001.g.to all cities without sub-branches and savings outlets but this could distort the magnitude of centralization for cities with a small number of outlets or sub-branches.. the change in the number of savings outlets in prefectural level cities between 2001 and 2009 is used to reveal the general decrease in number of this type of operation. e. Arguably. To reveal the level of centralization. there should be the centralization of banking operations and the marginalization of bank customers. There were about 21.banking offices (分理处). we examine the changing number of sub-branches and savings outlets (combining savings outlets and banking offices for the sake of simplicity) in prefectural level cities to reveal the extent of the restructuring of banking operations between 2001 and 2009. If the SOCBs follow practices similar to those of the Anglo-American banking industries. 15 . although the change in absolute units is the same. but only a 100 percent increase between 2 and 4. For ease of interpretation. positive figures for both dependent variables are equivalent to an increase in the number of sub-branches and a decrease in the number of savings outlets in that city over time.

3. and vice versa for AGRIND (Table 3).5 5 Another reason that we selected 2005 for our explanatory variables is that we are unable to access the 2009 data as the latest available data are for 2008 from the Statistical Yearbook. It is expected that the dependent variable has a positive relationship with GDPpc for sub-branches and savings outlets. A positive relationship with the level of centralization and marginalization is expected. H1 and H2. etc.To test the cost-cutting hypotheses.000 people) and is used as an indicator of the potential cost synergy for restructuring. People’s Bank of China. The data for 2005 could indicate the potential impact of the explanatory variables on the centralization drive in SOCBs in the pre.) and CITY for provincial level cities. we expect a positive relationship with the level of centralization and marginalization.2 Data sources and limitations Location data on banks at prefectural level are based on the basic unit census of 2001.and post. NETMOBILE is generated by multiplying the number of registered internet users with the number of registered mobile phone users. 2006). As these are alternative channels for personal banking. FIN-EMP is employment in the financial sectors (per 10. We selected the mid-point of the investigation period (2001 to 2009) to reveal the possible influence of the centralization of banking operations implemented by SOCBs from 2001 to prepare for their initial public offerings in 2004 and 2005.initial public offerings. It is expected that both explanatory variables correlate negatively with the level of centralization and marginalization. 16 . GDP per capita (in yuan) (GDPpc) and the ratio of agricultural-industrial output values (AGRIND) are used as explanatory variables for the level of economic development. POP is the population size (per 10 thousand people) and is used to reveal the potential socio-economic instability that may arise from massive redundancies (Table 3). Two explanatory variables are used to test socio-economic stability hypotheses. We also include two dummy variables in the model: CENTRE representing regional financial centres (nine regional headquarters. H3 and H4. and 2009 data are derived from the corresponding SOCB websites. A composite indicator of telecommunication infrastructures is used as the control variable. Data on the explanatory variables in prefectural cities in 2005 come from the China Urban Statistical Yearbook (NBS.

To mitigate the multicollinearity. we tested the significance of FINEMP and NETMOBILE separately in models 1 and 2. according to the Breush-Pagan chi-squares.809 savings outlets in all provinces for BOC and ICBC. In addition. 17 . First. but POP and FINEMP less so.256 and 5. FINEMP and NETMOBILE correlate highly. 6 Agricultural Bank of China raised US$22 billion in the Shanghai and Hong Kong stock markets in July 2010. the Agricultural Bank of China was still unlisted during the period of our examination and thus could be under less financial pressure to restructure its operations. We also feel that the exclusion of these three SOCBs will not significantly affect the accuracy of our estimates. 4 Centralization and marginalization in the Chinese banking industry Before presenting and analyzing the data. Table 4 presents Pearson’s correlation coefficients for the explanatory variables. The Bank of Communications. and one of the major functions of the China Construction Bank is to provide loans for construction and development (rather than personal banking). As expected.The Agricultural Bank of China. compared with 3. we have to check the collinearity between the explanatory variables and the heteroscedasticity of the various models. The coefficients shown in all the tables have been corrected by the conditional heteroscedasticity White matrix method. 6 Second. had only 106 savings outlets in one-third of the Chinese provinces in 2009. China Construction Bank and Bank of Communications are not included in this paper as we were unable to find a complete set of data that could be compared with the data from the other two SOCBs. Other explanatory variables do not strongly correlate with each other. we have already incorporated two of the ‘Big Four’. being a newcomer to SOCBs. into our estimates. respectively. Incorporating partial data into our datasets could introduce an unacceptable margin of error in the model. there are obvious signs of heteroscedasticity in all the models. ICBC and BOC. The Bank of Communications is excluded from the dataset as it has much lower geographical coverage compared with the other two SOCBs.

01 level in all the models. this suggests that cities with a higher level of economic development and a more developed telecommunication market experience a higher level of centralized banking operations through the opening sub-branches in SOCBs. highly significant at the 0.1 Economic development & centralization-marginalization There are obvious signs of the centralization of banking operations through the opening of sub-branches in SOCBs. The control variable . Combined with the above evidence from the two explanatory variables. There are unexpected and apparently contradictory signs of the marginalization of saving outlets by SOCBs. however.regional financial centres and provincial level cities . the four hypotheses on centralization and marginalization were tested using two specific groups of variables of economic development .05 or 0.05 level (Table 5).01 levels (Table 5). Both explanatory variables have the expected signs and are highly significant at either the 0. The higher the level of economic development in terms of GDP per capita and the ratio of agricultural-industrial output values. With the exceptions of GDP per capita in model 1 and the control variable of the number of registered internet and mobile phone users. whilst the economic structure in terms of the agricultural-industrial output value has a higher level of impact on the same phenomenon in the ICBC (Tables 6-7).have the expected signs but apparently are not as important as the two explanatory variables for determining the opening of sub-branches. with only the coefficients of provincial cities being significant at the 0. the higher the number of newly opening sub-branches in prefectural cities in China. This is also the case for the BOC.01 level of significance in all the models. where the coefficients of GDP per capita and provincial level cities are highly significant at the 0.01 level. The marginally 18 . as the value of the coefficients is higher and at the 0.employment and population size. The other two dummy variables .As explained earlier.the number of registered internet and mobile phone users is. 4. all the explanatory and dummy variables present unexpected negative signs in all the model specifications (Tables 8-10). The number of sub-branches opened by SOCBs is apparently determined most by the level of economic growth measured in terms of GDP per capita.

the local banking authorities may implement a ‘conservative’ centralization-marginalization policy through merging savings outlets with sub-branches and without making massive redundancies. This apparent puzzle could be reconciled by two possible explanations: a compromise decision due to the hybrid nature of SOCB ownership. This suggestion is consistent with the positive and significant AGRIND coefficients. Moreover. in the BOC. and the use of number of units for the estimates. Economic structure in terms of agricultural-industrial output value apparently has a bigger impact than economic growth in the marginalization of savings outlets in BOC than in the ICBC.01) coefficients of provincial cities provide further support for the claim that there is a lower level of marginalization in prefectural cities with higher levels of economic development and presumably higher operating costs. The banking authorities are under tremendous pressure to slash high operating costs on the one hand. In smaller cities. In bigger cities where unemployment is more politically sensitive. the local banking authorities may implement a locationspecific centralization-marginalization policy.significant and negative coefficients of GDP per capita in model 4 suggest that an increase of one percentage point in GDP per capita will slow down the reduction in the number of saving outlets by over two-and-a-half percentage points. These unexpected findings are apparently inconsistent with the previous findings on centralization. especially for the BOC and the ICBC. First. the booming private property market since the housing reform in 1998 could explain the expansion of sub-branches in bigger cities where the provision of mortgages services is a profitable business for SOCBs. whose total number of employees actually increased by 19 . the local banking authorities may be able to tolerate the political risk of redundancies and thus implement a relatively ‘aggressive’ centralization-marginalization policy and close down savings outlets to cut costs (see the next section). The same patterns are more or less replicated in all four models for the ICBC. and to a lesser extent. Thus. but to maintain the core functioning of the banking system (as large-scale layoffs in major cities could demoralize the staff and trigger political instability) on the other hand. The negative and highly significant (at 0. the findings illustrate the possible effect their socio-economic concerns about closing down savings outlets and any resulting layoffs in big cities could have on their decisions.

In Pakistan.695 units in 2009.844 between the two variables. It must however be emphasized that the merging of savings outlets with sub-branches or even the closure of savings outlets in deprived neighbourhoods and peripheral areas may or may not imply the financial exclusion of the general public in those areas as the geographical proximity of bank branches is no longer a necessary condition for accessing banking services (Cairncross. There is a shift from face-to-face customer/teller interaction to automated banking in SOCBs. rural saving cooperatives. In the ICBC. from 2. 28 November 2010). there was a significant reduction in the number of savings outlets and an increase in the number of sub-branches in the same prefectures from 2001 to 2009. Similar patterns appeared in the BOC. the number of sub-branches more than doubled.300 branches of all Pakistani banks) and connect to critical banking services for the first time (International Herald Tribune.g. while at the same time. The suggestion that savings outlets are merged with sub-branches is supported by the changing patterns of these banking units over time. and the general public can still access other banking institutions locally. i. O’Brien.689 to 6. e. the number of sub-branches tripled from 1. 1997. the more economically developed (coastal) cities are also more financially viable and maintain more savings outlets in operation.000 independent retail outlets (more than the 8.e.025 units (Figures 1-4). the Norwegian mobile phone operator.. with a highly significant correlation coefficient of 0. including the use of automated teller machines. while the number of savings outlets was slashed by two-thirds.210 to 3. from 20. Moreover. the number of savings outlets was slashed by more than two-thirds. where only 14 percent of the population have bank accounts. 910).164 units in 2009. There was a trend to merge savings outlets with sub-branches nationwide between 2001 and 2009..000 active users can transfer money (through text messages) through their mobile phones and collect the cash through the network’s 11.seven and nine percent respectively after their initial public offerings (Tables 2. 1992).119 units. from 9. the biggest financial network is a unit of Telenor. 20 . Since introducing mobile banking in November 2008.805 units in 2001 to 6.748 units in 2001 to 8. More and more poor households in other developing countries can access certain types of banking services via their mobile phones. Telnor’s 500.

employment. The cities with higher levels of economic development and more developed telecommunication facilities experience a higher level of centralization of banking operations through the opening of sub-branches in prefectural cities but there is no strong evidence for the closing down of savings outlets in the same areas. the use of numbers in banking units could exaggerate the extent of marginalization in some cities. The evidence for financial sector employment is more obvious. the conventional marginalization thesis observed in the AngloAmerican banking industries has not fully materialized in China.Second. the level of marginalization of savings outlets in the richer city is higher in terms of percentage change but lower in terms of change in absolute numbers. which is lower than the 100 percent reduction from 35 to 0 in Yangquan prefecture (阳泉市). the two population coefficients in models 3 and 4 are positive although their value is marginally significant to insignificant in the general dataset. when the financial employment level is also considered (Table 5). For instance. Further examination of the impact of population size on banks strengthens the impression that there is 21 .01 level. 4. Therefore.473 yuan) in the same province. and the first hypothesis concerning the centralization of banking operations is accepted but the second hypothesis on marginalization is rejected. In this case. a city with a much higher GDP per capita at 15.01 level) and with the expected negative sign in model 2. from 76 in 2001 to 18 in 2009 (a reduction of 58 units). & centralization-marginalization Both population size and financial sector employment have an impact on the extent of the centralization of banking operations in SOCBs. The above evidence provides a prima facia case for centralization without the same corresponding level of marginalization. although there are cases where SOCBs have been merged with savings outlets in sub-branches in various cities in China. When financial employment is not considered. the number of savings outlets in Yuncheng prefecture (运城市) of Shanxi decreased by 76 percent.811 yuan (compared to 9.2 Population. while the evidence for any effect of population size is far from conclusive (Tables 5-7). most coefficients have unexpected positive values and are highly significant at the 0. The coefficient of population size is only significant (at 0.

01 level (Tables 6-7)! The unexpected positive coefficient of financial employment and the expected negative coefficient of population size imply that cities with smaller populations but with higher levels of employees in the financial sector (i. This clearly suggests that the centralization drive of banking operations in China will not be followed by a massive drive to marginalize savings outlets. small cities where the financial sector accounts for a larger proportion of employment) have experienced a higher level of centralization of banking operations.. The ICBC have the same findings as the general dataset but the BOC’s findings are apparently contradictory: the population coefficient is negative and significant (only at the 0. The reduction in savings outlets 22 .. hence the need to centralize banking operations. the higher number of employees in the financial sector implies higher operating costs.no conclusive finding. The positive coefficients of population in models 3 and 4 when employment in the financial sector is not considered (these two coefficients are significant at 0. Population size clearly has a more significant impact than jobs in the financial sector on the marginalization of savings outlets at SOCBs (with the exception of BOC) (Tables 8-10).01 level in the BOC) suggests that the bigger cities may actually experience a larger level of centralization of their banking operations. All coefficients of population size are negative and highly significant at the 0. but the coefficients in models 3 and 4 are positive and significant at the 0.e. we argue that the more economically developed cities with bigger populations and a more developed telecommunications market experience a higher level of centralization of banking operations only when the potentially sensitive issue of job loss in the financial sector is not considered (see below). i. Combining all the above findings.01 level.e. This phenomenon could be partially explained by the suggestion that the extent of centralization could be higher in the smaller cities where it is not economically viable to support all their saving outlets locally. This finding concurs with the conventional expectation and is consistent with the findings in the previous section that the more economically developed cities have experienced a higher level of centralization of banking operations. We have to note that the higher rate of centralization may not be equivalent to a higher rate of layoff in the financial sector (see below).1 level) in model 2.

For instance. According to the estimate of a protestor. In China. one of the most important bases for private enterprises (see Wei et al. but the number of ICBC savings outlets only decreased by 75 percent to 40 between 2001 and 2009. Ningbo (宁波市) and Shaoxing prefectures (绍兴市)..g. Ningbo has the second largest employment level in the financial sector (31. The recent demonstration of 2. Unemployment is a contentious issue in every country. 2007). as mentioned earlier.000 dismissed employees at the BOC’s headquarters in Beijing straight after the initial public share offer of the Agricultural Bank of China clearly illustrates the political sensitivity of making workers redundant. In Lishui prefecture (丽水市).74.5 million) and ranks third in GDP in Zhejiang province (one of the most economically developed provinces in southeast coastal China).189 yuan and a ratio of agricultural-industrial output value at 40. e. and the second highest GDP per capita of 44.156 yuan. an excessively high unemployment rate could become a trigger for political and social instability. by 71 percent to 9 in the same period. The above speculation about the possible political motivation for the banking authorities to ensure political stability in the bigger and more economically developed cities with large populations at the expense of smaller and less economically developed cities may be supported by selective and circumstantial evidence in the dataset. a possible consequence if there were massive layoffs following the restructuring of SOCBs. Wenzhou prefecture (温州市). The number of ICBC sub-branches in this city increased by 556 percent to 105. there are about 70.actually occurred at a much lower rate in cities with bigger populations.800 employees). Similar patterns can be found in other economically developed cities with large populations in the same province. the poorest and one of the smallest cities in Hangzhou with GDP per capita of 12. the number of ICBC sub-branches increased by 11 percent to 19. The number of sub-branches in this city increased by 82 percent to 48 but the number of ICBC saving outlets only decreased by 38 percent to 61 between 2001 and 2009. but the number of savings outlets decreased by a much larger degree. especially the ‘enforced retirement’ of middle-aged former bank staff. has the largest population (7.000 former 23 .. presumably for political concerns about social instability.

presumably due to political concerns about the social instability that could result from massive redundancies following the restructuring of SOCBs. Clearly the protestors’ decision to air their grievances publicly will not promote the ‘harmonious socialist society’ meticulously portrayed by the central government. The third hypothesis about the effect of population and financial sector employment on centralization is partially accepted. we argue that the more economically developed cities with bigger populations and more developed telecommunications markets (that could facilitate automated banking) experience a higher level of centralized banking operations when the politically sensitive issue of employment is not considered. In spite of the need to cut operational costs and to create synergy by merging saving outlets with subbranches in various prefectural cities in China. etc.SOCB employees trying to regain their jobs or demand higher monetary compensation after their effective ‘enforced retirement’ between 2001 and 2005: those who agreed to resign were compensated with US$370 for every year worked at the ICBC and those who rejected the ‘buyout package’ were simply sacked without any compensation. there is no strong evidence for the systematic closing down of savings outlets in the same areas and hence the conventional marginalization thesis observed in the Anglo-American banking industries have not materialized in China. and the decision-makers in local governments surely have an incentive to prevent the occurrence of such events. e. 7 The ‘harmonious socialist society’ was proposed by President Hu Jintao in 2006. to reduce inter-personal and inter-regional inequalities in terms of wealth and maintain the balance between resource exploitation and the sustainability of the environment. while the fourth hypothesis concerning the effect of population and financial sector employment on marginalization is accepted.g. The centralization drive of banking operations in China is not necessarily followed by a massive reduction in savings outlets. 15 August 2010). social welfare or housing benefit. These are the features of the Chinese banking industry in reform.7 Based on the above.. or medical health care. and this is in violation of the Labour Laws – this type of ‘forced retirement’ has not been allowed since 2005 (International Herald Tribune. It aims to built a harmonious society in China by 2020. These ‘retired’ workers have no safety net of a pension. 24 . The reduction in savings outlets actually occurred at a much lower rate in cities with bigger populations.

partly due to the use of number of units in savings outlets in the dataset and partly due to political concerns about the impact of layoffs and the subsequent negative multiplier effects on local economies. Empirically. especially in the case of the BOC. The two dummy variables of regional financial centres and provincial level cities have the expected but slightly weaker effect on centralization and marginalization. there is circumstantial evidence to reject the convergence thesis for the banking industry in China as the centralization of banking operations has occurred without the expected magnitude of marginalization in the provision of basic personal banking services to low value-added customers. The evidence suggests that all four major explanatory variables have had some impact on the level of centralization and the marginalization of banking operations in SOCBs in China. this paper examined the level of centralization of banking services by Chinese SOCBs at regional level and thus the possible marginalization of the provision of basic banking services to lower value-added customers locally.5 Conclusions & implications Based on the changing distribution patterns of the sub-branches and savings outlets of the ICBC and BOC in prefectural cities in China between 2001 and 2009. This is different from the conventional argument in financial geographies that the centralization 25 . Economic indicators in terms of GDP per capita and the agricultural-industrial output ratio have had a significant impact on the opening of sub-branches but they are unable to fully account for the reduction in the number of savings outlets in various cities. This phenomenon could be explained by a dilemma faced by local Chinese bankers during the restructuring: the need to cut operating costs to improve competitiveness (a response to the official CBRC’s directives) but also the need to minimize the likelihood of potential social unrest (a response to the local and regional institutional environment). Labour market indicators in terms of population size have the expected strong cushioning effect on the closing down of savings outlets – an obvious sign of political concern per se – but this explanatory variable and employment in the financial sector are unable to explain the centralization drive of the opening of sub-branches by the SOCBs.

Instead of creating synergy for shareholders as in the Anglo-American economy. local bankers have other economic and strategic considerations while the scope of change in industrial practices is also limited by the existing institutional framework.and the marginalization of banking operations are two sides of the same coin as in the restructuring of the Anglo-American banking industries. In China. Precisely because of the ambiguous nature of property rights and the conflicting demands of costcutting in consideration of the shareholders while maintaining political stability. bankers place utmost importance on political and socio-economic stability when making major decisions.5 million strong employees in five SOCBs who used to enjoy the security of lifelong employment and had been partially sheltered from market competition (Table 1). the local bankers are obviously aware of the importance of the competitive pressure that SOCBs could encounter after the ‘big bang’ opening up of the banking sector to Western banks in 2007. One typical thorny issue is the 1. including the need to cut operating costs and improve the balance sheets for the initial public offerings. As a response to the goals of implementing profit-oriented restructuring directives and at the same time the importance of maintaining socio-political stability in transitional economies where the property rights of formerly stateowned enterprises become blurred between private and public ownership. where legacies from the planned economy create strong institutional inertia to change. On the one hand. Bankers in the Anglo-American banking industry can centralize banking operations without worrying about (direct) political intervention from local governments as they operate within the institutional environment of a market economy which emphasizes the freedom of economic agency. local bankers have to take calculated political and economic risks in the 26 . On the other hand. This is especially the case when reforms involve changes in the institutional environment that affect politics in the workplace. Local bankers at SOCBs are aware of the political sensitivity of the banking reforms and thus could have the incentive to implement the directives from their headquarters and the CBRC according to ‘local circumstances’. banking reforms are implemented under an entirely different institutional environment. the findings of this paper clearly illustrated that banking reforms could be interpreted and implemented by local bankers in various ways: there is a continuum formed by centralization and marginalization.

27 . Obviously. which results in a continuum for the centralization and marginalization of the SOCBs in China. Pollard & Samers. Yeung. Decision-makers thus could pay additional attention to the potential implications of industrial restructuring. this is just an initial effort to unpack the banking systems in alternative and transitional economies (c. especially any potentially massive layoffs. The rising middle class and booming private property market and its associated profitable mortgage businesses (in big cities) also provide local bankers with a legitimate business rationale to merger savings outlets into sub-branches but without laying-off all their employees. the possible rural-urban divides in market segmentation or the financial exclusion of low-income consumers are other important indications of how local bankers may respond to the challenges of cost-cutting while maintaining social-economic stability.centralization drive to cut costs. 2009b) and test the convergence thesis with available and reliable data.g.. 2007. in transitional economies. There are still plenty of virgin areas in alternative and transitional economies that demand closer examination.f. e.

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613 650.715.285 642.272 1.522 2005 2.228 112.375 135.111 2.230 3.636 1.692 50.309 2009 2010 Notes: PBoC: People’s Bank of China SOCBs: state-owned commercial banks JSCBs: joint stock commercial banks RCCs: rural credit co-operatives Sources: Compiled from NBS (various years).562 55.915 56.171 1.368 51.158 PBoC SOCBs RCCs 50.839 50.519 65.085 56.634 2.764.344 Number of Employees policy JSCBs & SOCBs banks others 1.222 123.141 634.328 3.270 33.902 1.245 648.219 49.451.140 2008 2.657 1.440 156.669 2000 2.448 155.270 1.762 81.728.046 - RCCs 634.550 628.287 39.450 138.154 675.889 615.760 118.538 137.996 63.773 2007 2.004 64.167 66.050 59.466 182.427 169.407.273 645.673 197.142 631.122 645.433.234 52.000 1.251 2.302 166.304 189.724 64.214 103.290 111.755 37.667 1.093 2.270 1.241 2.492 1.869 27.827 1.315 2.313 1.167 74.036 1.647.943 1.282 56.635 62.704 1996 2.935 1995 2.624 37.199 90.020 33.394.779 1997 2.680 1.788 2001 2.724 1.195 187.526 66.030 137.712 2006 68.297 57.483 167.189 80.659 645.734.326 179.513 44.581.984 160.984 32.888 2.506.641 2.Table 1: The Major Banks in China Number of Units Policy JSCBs & banks others 1.438 157.164 67.371 1999 2.101 19. EBACFB (various years) and CBRC (2009).503 237.453.470.634 2004 2.999 88. 31 .020 140.664 627.545.348 - PBoC 188.492 1998 2.565 139.055 2002 2003 2.551 105.258 41.743.836 2.424 57.711 651.328 2.

925 2.385 52.673 2001 12.780 536.864 47.598 16.273 300.868 68.983 356.513 Notes: BOC: Bank of China ICBC: Industrial and Commercial Bank of China CCB: China Construction Bank BOCOM: Bank of Communications ABC: Agricultural Bank of China Number of Units CCB BOCOM 35.534 192.632 237.448 297.252 2009 9.469 2.583 1996 13.763 2.279 184.279 382.234 24.610 13.464 447.138 31.004 28.453 471.883 - Sources: Compiled from NBS (various years) and annual reports of various banks (various years).278 Number of Employees ICBC CCB BOCOM 569.967 55.529 28.636 2.145 14.709 419. 32 .374 2.640 ABC 67.391 54.997 2007 10.999 511.519 441.466 56.038 431.355 2000 12.602 389.227 1999 14.734 ABC 564.088 2.555 200.584 549.345 2002 2003 11.129 2004 11.425 489.072 567.452 24.613 2.754 198.497 35.788 30.955 387.612 561.379 249.863 38.348 565.740 232.288 57.145 16.629 2.870 63.637 38.886 2.999 229.607 13.816 524.219 1997 15.777 220.539 50.710 32.581 77.572 490.117 2.092 65.864 27.484 539.Table 2: State-owned Commercial Banks in China BOC ICBC 1995 13.585 2.881 23.083 385.523 47.566 47.895 452.425 478.045 342.713 298.408 341.925 31.934 15.323 351.403 14.457 2.298 509.937 24.547 197.756 25.787 2.157 57.865 381.546 44.612 13.135 197.731 538.959 46.121 429.838 16.781 310.609 24.064 BOC 195.932 47.510 375.097 427.476 2008 9.983 16.307 21.230 378.609 298.019 18.895 2.223 2005 11.764 2006 10.529 171.251 41.990 1998 15.676 58.418 36.506 60.

131 -.000 -.010 -.000 people) in prefectural cities Expected sign + + + + - Table 4: Pearson’s correlations between explanatory variables GDPPC AGRIND CENTRE CITY FINEMP POP NETMOBILE GDPPC 1.345 .483 .000 .313 AGRIND 1.000 .590 .266 .000 -.000 .004 .271 .448 1.114 1.387 .373 1.000 people) in prefectural cities Employment in financial sectors (per 10.232 -.633 .000 CENTRE CITY FINEMP POP NETMO BILE 33 .Table 3: Explanatory variables and their expected signs Variable H1 & H2 GDPpc AGRIND CENTER CITY NETMOBILE H3 & H4 POP FINEMP Explanations GDP per capita (in yuan) in prefectural cities Ratio of agricultural-industrial output value in prefectural cities Regional financial centers Provincial-level cities A composite indicator on number of registered users of internet & mobile phones in prefectural cities Population size (per 10.342 1.836 1.000 .438 .225 -.464 .492 .

752 120.035 0. 2001-2009.559 58.623* 5.258 24.405 10.544 Model 4 3.166 955. p<0.514 13.01.769 154.818 0.037 0.4224 0.811 0.288*** 15. p<0.185** -0.461* 0. China Model 1 Constant branch2001 GDPPC AGRIND CENTRE CITY NETMOBILE FINEMP POP Obs.486*** -1.511** 0.47 3.0005*** 2. **.590 286 0.01.772 134.10 Results have already corrected for heteroskedasticity 34 .47 286 0.544 0.618 5.438*** -1. 2001-2009.0003*** 24.585** Model 4 -2.Table 5: Centralization in the sub-branches of the ICBC & the BOC.752 141.00047*** 39.095** 0.3758 -2.05.474 41.021 286 0.254 19.89 1487.721 181.72 936. China Model 1 Constant branch2001 GDPPC AGRIND CENTRE CITY NETMOBILE FINEMP POP Obs. R2 F Breusch .694 10.96 961.338*** -4.354 797.63 668. ***.720*** -3.05.680 286 0.36 2. ***.693 10.553 59.256*** 286 0.022** Model 3 -26.447* 286 0.495*** 286 0.034** 33.069 -6.57 957.Pagan chi-squared 2 Model 2 11.492** -0.148*** -3.65 5. p<0.621 96.755 216.097 0.0003*** Note: ***. R F Breusch .053** 33.71 1.155* 28.Pagan chi-squared 286 0.164*** -3.625 10. p<0.664*** -4.934 0.660 25.947*** -4.289*** 15. p<0.196 Model 3 -13.743** Model 2 8.96 1272. p<0.58 Note: ***.443 11. **.10 Results have already corrected for heteroskedasticity Table 6: Centralization in the sub-branches of the ICBC.

575** 0.10 Results have already corrected for heteroskedasticity 35 .Table 7: Centralization in the sub-branches of the BOC.35 2. p<0.192 -23.736*** 1.423*** Model 4 -6.114* -12.10 Results have already corrected for heteroskedasticity Table 8: Marginalization of savings outlets of the ICBC & the BOC.86 440.117** -0.756 0.01.910*** 286 0. p<0.816*** -1.591 66.131 6.680** Model 3 -14.0001*** 1.964 -0. China Model 1 Constant branch2001 GDPPC AGRIND CENTRE CITY NETMOBILE FINEMP POP Obs.Pagan chi-squared 286 0.348 36.347** 16.5224 6.013 17.94 705.233 -5.280*** 286 0. R2 F Breusch .865*** -2.585 15.982 784.760*** -0.84 -6. p<0.681 149. 2001-2009.929*** -2.308*** 0. p<0. ***.663** 0.452*** -1.916 508.122*** 286 0.Pagan chi-squared 2 Model 2 4.113* 285 0.788 2.479 338.047*** -0.81 829.914 749.152 0.580*** 0.923 558.01.3539 Note: ***.00016*** 15.667 92.694 89.107 7.884 18.66 285 0. p<0. p<0.892 0.838*** Model 3 2.75*** Model 2 -0.62 467.05.673 4. China Model 1 Constant outlets2001 GDPPC AGRIND CENTRE CITY NETMOBILE FINEMP POP Obs.272 -25.844 0.868*** 285 0.00013*** Note: ***.3525 1.933 550. 2001-2009.985*** 285 0.849*** Model 4 7.185*** 0.187 9.990 -26.00014** 0.886* 3.578 18. R F Breusch .283** -0.05.91 679. **.67 639. **.85 -5.178** -1.2646 -5.189 -3.795 -4. ***.

771** 0.738*** 0. p<0.419 1.911 628.828*** Model 3 -3.60 -3.151 -8.00004*** 2. 2001-2009.260** 0.00008** -1.055 -6.150*** 286 0.859*** -2.36 449.01. p<0.95 -6.769*** 1.46 597.879*** -0.Pagan chi-squared 2 Model 2 1.311* 1.913*** 6.524** Model 3 5.413 -21.178 -3.768 407. p<0.801 -3.882 527.446 247.00001*** -1.868*** -0.17 328.05.48 669.187** 1.04 545.01.689* 1.113** 0.8240 Note: ***.903 371. China Model 1 Constant outlets2001 GDPPC AGRIND CENTRE CITY NETMOBILE FINEMP POP Obs.901 637.00004*** Note: ***. R2 F Breusch .10 Results have already corrected for heteroskedasticity Table 10: Marginalization of savings outlets of the BOC.260*** 286 0. p<0. p<0.906 380. **.1247 -1.759 Model 4 -1. China Model 1 Constant outlets2001 GDPPC AGRIND CENTRE CITY NETMOBILE FINEMP POP Obs.896 400. ***. ***.835*** 286 0.219 1.10 Results have already corrected for heteroskedasticity 36 .43 -1.931*** -2.05.512 0.826* 0.172 1.329*** Model 2 -2.9280 -3.645*** 0.700*** 286 0.894 391.885 385.870*** 4.844 0.19 286 0.271 -3.980*** Model 4 9.029*** 0.482 -12.568* 2.Table 9: Marginalization of savings outlets of the ICBC.666*** 286 0.288 0. **.5531 2.491*** -1. p<0. R F Breusch .431*** 286 0.710*** 0.895 393.312 -19.560 -21.545 0. 2001-2009.518 0.Pagan chi-squared 286 0.675 -5.259*** 0.

Figure 1: The location pattern of ICBC’s sub-branches in 2001. China 37 . China Figure 2: The location pattern of ICBC’s sub-branches in 2009.

China 38 .Figure 3: The location pattern of ICBC’s savings outlets in 2001. China Figure 4: The location pattern of ICBC’s savings outlets in 2009.