This paper analyzes empirically what explains the low profitability of Chinese banks for the period 1997-2004. We find that better capitalized banks tend to be more profitable. The same is true for banks with a relatively larger share of deposits and for more X-efficient banks. In addition, a less concentrated banking system increases bank profitability, which basically reflects that the four state-owned commercial banks - China’s largest banks - have been the main drag for system’s profitability. We find the same negative influence for China’s development banks (so called Policy Banks), which are fully state-owned. Instead, more market oriented banks, such as joint-stock commercial banks, tend to be more profitable, which again points to the influence of government intervention in explaining bank performance in China. These findings should not come as a surprise for a banking system which has long been functioning as a mechanism for transferring huge savings to meet public policy goals.

Vertical fragmentation of product value chain across borders is the driving force of growing economic interdependency in East Asia. A common currency, not flexible exchange rates between national currencies, would reduce flexibility in relative prices within East Asia. Its impact would be far greater for exports that have stronger production network linkage. In order to test the hypothesis, the paper estimates the effect of a common currency on China's processing and ordinary exports separately. The distinction is necessary because the processing exports, unlike the ordinary exports, are produced along the regional production networks, with final stages of assembly and exporting being increasingly concentrated in China. The short-run dynamics indicate that the effect on China's processing exports is more than double the corresponding effect on China's ordinary exports. The long-run effect on the processing exports of intra-regional RER flexibility, which is otherwise the lack of a regional currency, is almost nine times as large as the long-run effect of a unilateral RMB appreciation. By contrast, the corresponding long-run effect is statistically insignificant for the case of ordinary exports that are produced primarily by using local inputs. The long-run coefficient of this intra-regional RER flexibility implies that the actual volume of processing exports is 20 percent below the potential. The magnitudes of these effects are consistent with the hypothesis that a common currency would further integrate East Asian production networks and promote regional economic integration.

We investigate the role of managers' country of origin in leverage decisions using data on foreign joint ventures in China. By focusing on foreign joint ventures in a single country, we are able to hold constant the financing environment, eliminate the effects of formal institutions in the foreign managers' home country, and consequently reveal the effects of informal institutions such as national culture on corporate finance decisions. Using cultural values of embeddedness, mastery, and uncertainty avoidance to explain country of origin effects, we find that national culture has significant explanatory power in the financial leverage decisions of foreign joint ventures in China. Country-level variation is evident in capital structure and appears to work through choices of firm characteristics, industry affiliation, ownership structure, and region of investment.

This paper investigates control mechanism and accounting information used for control mechanism, shaped by government incentives for business. Using a sample of China's state-owned enterprises (SOEs) from 2001 to 2005, it finds that the likelihood of top management turnover in China's SOEs, which is an important aspect of corporate control mechanism, is inversely associated with two types of accounting information of firm performance, firm-specific accounting performance and relative accounting performance, which is induced by the interests of Chinese government for the economic performance and political competition. Further, this paper finds that relative accounting performance, especially regional relative accounting performance, receives more weight in turnover decisions if a SOE is a local monopolistic firm or in local monopoly, because relative performance measure could offer a relatively simple benchmark for local government to assess manager's quality and provide stronger incentive scheme in China's political environment. By seeking deeper understanding into government incentives, the findings imply that induced by government incentives, effective corporate governance which is based on distinguished characteristics of accounting information exists in an economy highly involved by government.

The impacts of business environmental factors on operations strategy choices in a manufacturing context have been heavily researched. However, how managers of service firms in developing countries such as China develop operations strategy has yet to receive any significant attention among researchers. Drawing on the manufacturing literature, we examine, in the Chinese context, the relationships between business environmental factors (such as business cost, competitive hostility, labour availability, and environmental dynamism) and operations strategy choices (such as low cost, quality, flexibility and delivery performance). Employing a path analytic framework, we have identified strong linkages between business environment (viz.: business cost, competitive hostility and environmental dynamism) and operations strategy choices. We have found that environmental dynamism (such as changes in retail technology and innovations in new service development) had the strongest influence on the degree of emphasis placed on operations strategy choices. However, environmental concerns about labour availability do not appear to have any direct effect on the operations strategy selections among retail firms in China.

The Article first presents a brief history or survey of some of the earlier problems that associate with China’s banking and financial institutions. The Article then addresses specific problems, in the context of the rules, procedures, and practices of the banking and finance sector, which widely range from non-performing loans, to China’s money market and interbank lending business. These problems also directly associate with the liberalization of the banking and finance sector of the economy, and the requirements of both the WTO rules and China’s WTO Protocol on accession. The Article also briefly explores the US sub-prime mortgage crisis and its contagion effect throughout the world, including the Asian region. In the context of China and the subprime crisis, the Article summarizes some of the problems that associate with China banking and financial institutions, by focusing on the policy implications of the history of banking and finance in China, and what this means in terms of both WTO compliance and greater liberalization of banking and financial institutions, especially pursuant to the WTO GATS, as service industries. All of this, eventually, allows for the presentation of certain conclusions concerning China banking and finance in the new era of a global subprime crisis.

Comprehensive data on corporate announcements of Chinese firms allows us to examine the preference for, and determinants of, cash and stock dividends. The results indicate that Chinese public investors prefer stock dividends over cash dividends, which are preferred by large state and legal person shareholders generally. Stock dividends, which do not require an explicit cash outflow from a firm, are found to be positively related to higher earnings, supporting the signalling hypothesis of dividend policy. In an imperfect market, these results have some implications for government regulation of financial markets.

During the reform era, the Chinese government has been carrying out strategic industrial policies modelled on those in post-war Japan and South Korea, in the hope of transforming its highly fragmented manufacturing sector into one that comprises a small number of internationally competitive big businesses. Using the evolution of the Chinese steel industry structure from the late 1980s to the early 2000s as a case in point, this paper finds that the Chinese government's consolidation attempts have, by and large, not been very successful. The disappointing policy outcome is interpreted by a detailed examination of the industry policy mechanism in China. It is concluded that the institutional framework of the Chinese state differs from its counterparts in Korea and Japan in some fundamental aspects. Among these, the fragmented and uncoordinated Chinese bureaucracy contributes significantly to the inefficacy of policy implementation.

In China, regional disparities are important. We examine the difference in the sensitivity of investment to cash flow between firms in inland regions and those in coastal regions. By using the financial data of Chinese listed firms, we found that firms in inland regions rely more on their internal funds in terms of their investment activities than those in coastal regions and that the sensitivity gap between inland and coastal firms widened in the recent contractionary monetary policy period. This suggests that firms in inland regions are harder to obtain outside funds due to unfavorable social and economic environments for inland firms. Our findings suggest that capital markets in China respond rationally to the potential impact of regional disparities on a firm’s performance.

This article tests several predictions of tournament theory on executive compensation in the context of a transition economy. Using an unbalanced panel which consists of a total of 34701 executives in 450 publicly listed firms in China during 1999 and 2006, we find that (1) pay increases as executives move up the corporate hierarchy into higher ranks; (2) pay gap is the largest between the first and second tier executives, although it does not increase monotonically across all executive ranks; and (3) pay dispersion increases with the number of tournament participants and the level of noise in the business environment. In addition, we find evidence that state ownership of shares reduces executive compensation and pay gap, and corporate governance structure affect pay dispersion. Overall, our study shows that listed firms in China, as they become more and more market-oriented, have adopted a pay structure that is largely consistent with the predictions of tournament theory, and that it is important to consider both ownership structure and corporate governance in analyzing executive compensation structure.