This paper aims to explore the influence of foreign ownership on liquidity creation in China’s banking sector and the role of income diversification in this relationship.
We use a unique, manually collected dataset that covers both listed and unlisted commercial banks in China from 2006 to 2022. To analyse the data, we apply the system generalized method of moments (GMM) methodology.
This paper reveals that foreign ownership is significantly associated with reduced liquidity creation in banks. This impact is more pronounced for banks with higher income diversification, suggesting that foreign investors can help banks diversify their products and services, consequently reducing their reliance on risky lending businesses. Further analyses reveal that the impact of foreign ownership on liquidity creation is more pronounced for small banks and non-listed banks.
This paper is a pioneering study that delves into the effects of foreign ownership on liquidity creation within an emerging economy, offering a comprehensive analysis from both macro- and micro-prudential perspectives. Moreover, it extends the current understanding by demonstrating that income diversification plays a crucial role in shaping the relationship between foreign ownership and liquidity creation. Finally, it adds to the existing literature by further investigating the implications of sample heterogeneity, particularly regarding bank size and listing status, thereby providing valuable insights for policymakers to develop tailored strategies in overseeing foreign investments in the banking sector in emerging economies.
