Centralization and marginalization: The Chinese banking industry in reform

Applied Geography 32 (2012) 854e867

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Centralization and marginalization: The Chinese banking industry in reform Godfrey Yeunga, *, Canfei Heb, **, Hao Liuc a

Department of Geography, National Singapore University, 1 Arts Link, Singapore 117570, Singapore College of Urban and Environmental Sciences, Peking University, Beijing 100871, China c College of Urban Planning and Design, Shenzhen Graduate School of Peking University, Shenzhen 518055, Guangdong, China b

a b s t r a c t Keywords: Centralization Marginalization Banks State China

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. Ó 2011 Elsevier Ltd. All rights reserved.

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

Abbrevations: BOC, Bank of China; CBRC, China Banking Regulatory Commission; ICBC, Industrial and Commercial Bank of China; NBS, National Bureau of Statistics; SOCBs, state-owned commercial banks; WTO, World Trade Organization * Corresponding author. Tel.: þ65 6516 7374; fax: þ65 6777 3091. ** Corresponding author. Tel.: þ86 10 6275 7075. E-mail addresses: [email protected] (G. Yeung), [email protected] (C. He). 0143-6228/$ e see front matter Ó 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.apgeog.2011.09.003

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 Anglo-American banking industry. Based on the changing distribution patterns of the sub-branches and savings outlets of two of the most important state-owned commercial banks (SOCBs) at prefectural city level in China

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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 the corresponding marginalization of savings outlets in China. That is, 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, and at the same time minimize the political risks associated with massive layoffs by reducing the marginalization of savings outlets. Sub-branches are at higher level in the administrative hierarchy than savings outlets in the Chinese banking system: sub-branches have the authority to provide professional private banking services (such as the provision of investment-oriented products), while savings outlets can only deal with basic private banking services, e.g., deposits and withdrawals from personal savings accounts. 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. Without taking region-specific institutional systems into consideration, the convergence thesis is more of a reflection of the neo-liberal ideology of competition and freedom in the AngloAmerican banking industry than a framework to explain the impact of the consolidation of the banking industry in non-market economies. The necessary condition e a functioning market in an advanced capitalist economy e of the convergence thesis does not exist in the transitional economy of China, which is undergoing extensive institutional reforms, including the demarcation of property rights between publicly and privately-owned enterprises. In addition to the formal rules and regulations stipulated by the CBRC, the informal practices of local bankers regarding their areas’ specific economic structure, level of economic development, and the potential political risks of massive layoffs as a result of restructuring in the SOCBs could be spatially different across China. The findings of this paper could have profound policy implications for scholars and decision makers interested in economic restructuring in China. 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. Due to the bankers’ objectives of minimizing both operational costs and political risks, the restructuring of SOCBs may not result in high levels of layoffs. When the politically sensitive issue of (un) employment is disregarded, the more economically developed cities with larger populations and more developed telecommunication facilities experience a higher level of centralization in their banking operations. 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. Therefore, 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, as in the restructuring of the Anglo-American banking industries. This difference in industrial practice could be reconciled by the hybrid ownership structures of SOCBs in China. Before describing the methods and data sources, a brief review of the literature, the background to the banking reform and the corresponding four research hypotheses are outlined in the next section. The fourth section describes and analyzes the extent of centralization and marginalization in the banking industry in China. The findings of this paper are then presented and analyzed before drawing some conclusions.

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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. Convergence of the Anglo-American banking industry The new regulatory space of structural deregulation pushed Anglo-American commercial banks to compete with one another to improve economic efficiency.1 The introduction of the Financial Services Act and the Building Societies Act in the UK in 1986 are examples of such regulatory rules. The former 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. 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, Gentle, Raybould, & Coombes, 1992). 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, Demsetz, & Strahan, 1999; Dymski, 1999; Martin, 1999). As they can enter each other’s geographical and product markets, banks are under tremendous competitive pressure to cut operating costs, normally through branch closures and labour downgrades - using part-time and temporary workers to replace full-time employees. In other words, the governments and regulatory authorities in the US and UK play an important role in the deregulation of the Anglo-Saxon banking industry, and hence, the convergence of practices in the retail banking industry. Leyshon and Pollard (2000, p. 205) and Argent (2002, p. 316) suggest that there are four characteristics of the convergence thesis. First, there is the centralization of banking operations and the marginalization of bank branches in the provision of banking services. This is illustrated by the widespread use of automated telephone and electronic banking rather than face-to-face interaction for the provision, assessment and processing of banking services (Leyshon, Thrift, & Pratt, 1998; Leyshon & Thrift, 1999; Pollard, 1996; see also Morrison & O’Brien, 2001 for the New Zealand case). Second, bank branches have historically played an important role in the collection of market and credit information, together with the retention of existing and the recruitment of new customers. As a result of the rationalization of branch networks and the introduction of customers’ fees for banking services, 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, 1993, 1999; Leyshon et al., 1998). Third, market segmentation and financial exclusion are two specific features of the converged banking industry. The increasingly competitive environment in the banking industry has resulted in the ‘flight to quality’ (Gentle & Marshall, 1992) and the subsequent segmentation of the market. That is, banks provide tailor-made services for their high value customers and withdraw the full range of services to poorer customers, charge fees to maintain low balance accounts under the ‘user pays’ principle or even close branches in deprived neighbourhoods to reduce costs

1

This sub-section relies heavily on Yeung (2009b).

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and improve their overall competitiveness (Dymski & Veitch, 1996; Fuller, 1998; Leyshon & Thrift, 1995, 1996). People without bank accounts are unable to access the wide range of services for which bank accounts provide gateways, and are thus financially excluded and have to settle all their transactions in cash. According to the survey conducted by Federal Deposit Insurance Commission, there were at least 17 million American adults without bank accounts in 2009 (The Economist, 12 March 2011, p. 78). Fourth, 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. There are no more ‘jobs for life’ and full-time employees may be replaced with part-time or temporary workers (Leyshon & Thrift, 1993; Pollard, 1995; Wills, 1996). The state played an important role in the deregulation and the subsequent convergence of the Anglo-American banking industry. Is the convergence thesis applicable, and to what extent, to the transitional economy of China, 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, one of the most important factors distinguishing the formerly planned economies from market economies, and its relevant debates is in the next section. The ownership reform of the Chinese banking industry in a transitional economy Along with the market-oriented reforms in the manufacturing sector, there has been a massive restructuring of the Chinese banking industry during the last few decades. 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. This section provides a brief overview of the relevant background to help contextualize the reforms in Chinese banking industry. After the establishment of the People’s Republic of China in 1949, the central bank monopolized almost all the banking services in the Chinese banking system. This situation remained unchanged for almost three decades until economic reforms were implemented in China in 1979. 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), peasants banked with the Agricultural Bank of China (ABC), while trade or foreign-financed companies had to channel their foreign exchange through the BOC. This policy literally created three monopolies in the agricultural, industrial, and trade sectors (Yeung, 2009b). This institutional setting was too rigid and unable to fulfil the needs of the economy. The present Chinese banking industry includes the SOCBs, jointstock commercial banks, rural credit institutions, foreign banks, and the three policy banks. The SOCBs include the ‘Big Four’ (incorporating the ICBC, BOC, China Construction Bank and Agricultural Bank of China) and the Bank of Communications (BOCOM), following the classification system used by the CBRC. The Chinese government is under tremendous pressure to reform the banking system. On the one hand, 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. Between 1998 and 2003, SOCBs began to restructure their loan portfolios by adopting the strategy of commercial lending. In addition to an injection of 270 billion yuan (US$32.61 billion) into the banking system in 1998, the central government transferred 1.4 trillion yuan (US$169.1 billion) of pre1996 non-performing loans to the four newly created Asset

Management Corporations, i.e., SOCBs became responsible for such loans made after 1996. On the other hand, the state had no choice but to open up the banking market to foreign banks as stipulated in the WTO accession treaty, signed in 2001. 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, when all non-prudential market access constraints against foreign financial institutions were removed (Yeung, 2009b). SOCBs became by definition international holding financial institutions after their initial public offerings on the Stock Exchange of Hong Kong in 2005e06, and 2010 in the case of the Agricultural Bank of China. To fulfil the listing requirements, all SOCBs have adopted similar Anglo-American type corporate structures and are governed by their corresponding Board of Directors, comprising both executive and (independent) non-executive directors who oversee various departments ranged from strategic investment, audit, and risk control, which in turn are monitored by the Board of Supervisors. For instance, one of the independent non-executive directors of ICBC is Malcolm C. McCarthy, a non-executive director of HM Treasury and the former Chairman of the Financial Services Authority (FSA), the financial regulatory authority in the UK. However, the state is still the majority equity holder in all SOCBs, with at least 54 percent of equity (in the case of Bank of Communications). In 2010, the SOCBs controlled 49 percent of the 95.3 trillion yuan (US$14.8 trillion) banking assets in China (CBRC, 2010, p. 132). A number of other city commercial banks are partly owned by foreign investors but the local governments are the majority shareholders. In 2010, foreign investors had equity stakes in 39 Chinese banks (CBRC, 2010, p. 35). Thus it can be expected that most important managerial appointments in SOCBs are held by (former) senior managers of pertinent Ministries, especially the State Administration of Foreign Exchange and the People’s Bank of China. For instance, the Chairman of the Board of Directors and Executive Director of ICBC, Jiang Jianqing, is also a member of the Monetary Policy Commission of the People’s Bank of China, while the Chairman of the Board of Directors of the BOC, Xiao Gang, is a former Assistant Governor and Deputy Governor of the People’s Bank of China. This form of hybrid ownership structure of SOCBs obviously creates a different institutional setting between the regulators and banks from their Anglo-American counterparts. In the UK, the financial services industry is regulated by the Financial Services Authority (FSA), a quasi-judicial body with Board members appointed by the UK Treasury, and the organization is structured as a limited company and owned by the UK government. Unlike the UK where a single authority regulates the banking, securities and insurance industries, China follows the US with separate regulatory agencies for securities, commodities, and insurance. In the US, the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) are the primary banking regulators at the federal level. The Office of Thrift Supervision supervises and regulates all federally- and state-chartered savings banks and savings and loans associations in the US, while The Federal Deposit Insurance Corporation was established in 1933 through the GlasseSteagall Act to insure deposits and to protect depositors from losses by insolvent commercial banks. In China, the banking industry is regulated by the People’s Bank of China and the CBRC. 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, and money supply and exchange rate targets) to ensure the stability of the financial system. The CBRC formulates the rules and regulations governing the banking institutions, and supervises all banking institutions and their business activities in China. In other words, the regulatory authorities in the UK and the US are state-controlled

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institutions to monitor the operations of privately-owned commercial banks, while the state is both the regulator and owner of the regulated SOCBs in China.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. 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 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, 1999; Grabher & Stark, 1997; Stark, 1996; Stark & Bruszt, 1998, 2001; Stark & Nee, 1989). The debate shifted to considering the combination of public and private property in the mid-1980s. Instead of a “socialist mixed economy” with well-defined public and private sectors (Szelényi, 1988), Stark (1989, pp. 167e168) argued that the institutional reforms implemented in these formerly planned economies have resulted in “hybrid mixtures of public ownership and private initiative” that cross and blur the conventional boundaries between public and private property. Stark (1996, p. 997) coined the term “recombinant property” to explain a distinctive form of organizational hedging through the diversification, redefinition and recombination of assets by actors. This form of organizational hedging results from actors responding to the uncertainty created by the institutional reforms in Hungary. Similar ideas have also been expressed in scholarly research in China, e.g., Guthrie (1999), Peng and Heath (1996). For instance, 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. Based on transaction costs and new institutional economics, Nee (1992, p. 2) argues that the ownership reforms implemented in China have resulted in “hybrid organizational forms”, a mixed form of public and private property. When the structure of property rights is poorly defined in a transitional economy, 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, 1990). Based on the property rights school, 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.3 Therefore, economic efficiency can be improved when there is a transformation of property rights without privatization (from the fully publiclyowned to neither publicly nor privately-owned, i.e., ‘hybrid property’) (see Yeung, 2009b). 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, SOCBs surely must have the firstmover competitive advantages over other foreign banks in the mass banking market. Although there is US$4 trillion in personal deposits sitting in the Chinese banking system, the apparent competitive advantage of SOCBs may not always translate into profitability as the average deposit is small (US$3470/customer) and the majority of customers demand services at rock bottom prices, which means razor-thin profit-margins for banks (especially

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. 3 In cases of extremely complex cross-holding equities, 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.

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in rural areas). SOCBs are aggressively improving their services to compete with foreign banks in the highly lucrative market of private banking business in China, which has an average profit rate ten times higher than that of the European and American retail banking businesses. According to the Boston Consulting Group’s report, the number of households with more than US$1 million in liquid assets in China had increased from 124,000 in 2001 to 310,000 by the end of 2006. It is expected that this number will have doubled by the end of 2011 (Yeung, 2009b). Rather than focusing on the mass market of lower value-added customers, 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. For instance, SOCBs launched their exclusive wealth management provision of a one-stop dedicated VIP service, which incorporates structured investment products and foreign exchange services, to affluent customers in 2005. As part of the effort to diversify income streams, the BOC “vigorously promoted its feebased personal banking business” and its number of (prestigious) wealth management centres reached about 780 in number in 2009 (BOC, 2009, pp. 48e9). To cut operating costs, both the BOC and ICBC have fully implemented e-banking channels, comprising online banking (including a retail loan approval system), telephone banking, mobile banking, and multifunctional self-service terminals to handle counter-based non-cash services (BOC, 2005, p. 58; ICBC, 2005, p. 44). 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, according to a recent survey of 113 outlets of major SOCBs in Beijing. Moreover, basic complementary facilities for ordinary customers are very limited, e.g., only 7.1 percent of these outlets have toilet facilities, and half of them do not provide amenities such as drinking water dispensers or newspaper racks (China Daily, 12 July 2007). SOCBs are under pressure from their (foreign banks’) shareholders to maximize profits, and yet the state is still the majority shareholder. Therefore, the boundaries between public and private property rights in the Chinese banking industry have become blurred and thus have strong characteristics of the ‘hybrid property’ inspired by the concept of “hybrid organizational forms proposed by Nee (1992) and further conceptualized by Stark (1996) (see Yeung, 2009b). 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. 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, ordinary versus high value customers) but are under different regulatory regimes, 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 socioeconomic stability (tested by third and fourth hypotheses outlined below). The closure of bank branches is one of the most visible indications of centralization, market segmentation, and marginalization. Although SOCBs are not operating in a free market economy, local bankers are now responsible for their financial losses and thus are under tremendous pressure to streamline their SOCB operations, 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. The closure of saving outlets is an effective means for local bankers to cut costs as all SOCBs, especially

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the ‘Big Four’, have tens of thousands of savings outlets all over China. The ICBC, for example, had about 20,700 savings outlets in 2001 (Table 2). 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. Based on the above, we hypothesize that: H1: The extent of the centralization of banking operations by opening new sub-branches in the ICBC and BOC is positively related to the level of economic development at prefectural level cities in China. 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. 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. It is therefore logical to expect that the pace of restructuring, especially by merging saving outlets with subbranches, can be faster in areas where large numbers are employed in the financial sector. However, massive layoffs may not always follow organizational restructuring at the SOCBs due to potential influence from the state. This is especially the case where the state still influences industrial practices, either through direct regulation or direct intervention. For instance, 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. Instead of pursuing centralization and marginalization as in the Anglo-American banking industries, 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, for instance, the 1.5 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”, meaning job security and seniority-based promotion) and were partially sheltered from market competition (Table 1). This can be further illustrated by the different scale of downsizing between operational units and number of employees at SOCBs. The number of SOCB banking units has decreased by 69 percent, from 112,055 in 2001 to 66,309 in 2008, while the number of SOCB employees has declined

at the much slower pace of 9 percent, from 1.58 million to 1.45 million (Table 1). The socio-economic and political costs of fullscale 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). In other words, the banking reforms in China are a compromise taking account of the political and socio-economic considerations faced by the formal institutions and individual agents and are special features of the transition from a planned to a market-oriented economy. Based on 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. H3: The extent of the centralization of banking operations by opening new sub-branches in the ICBC and BOC is negatively related to the population and employment levels in the financial sector at prefectural level cities in China. 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 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. Methods and data sources We explain the models used in our estimates before presenting the sources of data and their potential limitations. Modelling centralization-marginalization We ran four sets of regressions to test the four hypotheses, with centralization as the dependent variable against four explanatory variables in two regressions, and with marginalization as the dependent variable against the same four explanatory variables in another two regressions.

Table 1 The Major Banks in China. Number of Units

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Number of Employees

PBoC

SOCBs

Policy banks

JSCBs & others

RCCs

PBoC

SOCBs

policy banks

JSCBs & others

RCCs

2438 2448 2440 2290 2551 2222 2228 e 2199 2189 2167 e 2164 2167 e e

157,704 155,779 156,492 111,371 105,669 123,788 112,055 e 90,634 80,522 74,712 68,773 67,140 66,309 e e

e 1836 2241 2251 2270 2272 2315 e 2328 2328 2230 e e e e e

e e e e 1634 1888 2093 e 2641 3111 3344 e e e e e

50,219 49,692 50,513 44,258 41,755 37,624 37,270 33,020 33,984 32,869 27,101 19,348 e e e e

188,304 189,195 187,466 182,326 179,427 169,302 166,984 e 160,020 140,450 138,538 137,030 137,375 135,046 e e

1,734,680 1,743,287 1,728,234 1,715,368 1,764,282 1,647,635 1,581,996 e 1,470,724 1,451,004 1,407,519 1,394,915 1,433,562 1,453,085 1,506,424 1,545,050

e 39,724 52,313 51,492 56,839 62,297 63,526 e 64,762 64,999 65,214 56,760 55,565 56,483 57,673 59,503

e e e e 50,636 57,902 66,171 e 81,270 88,667 103,000 118,036 139,943 167,827 197,657 237,158

634,245 648,613 650,122 645,285 642,273 645,889 615,550 628,154 675,711 651,664 627,141 634,659 e e 645,142 631,935

PBoC: People’s Bank of China. SOCBs: state-owned commercial banks. JSCBs: joint-stock commercial banks. RCCs: rural credit cooperatives. Sources: Compiled from NBS (various years), EBACFB (various years) and CBRC (2010).

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Table 2 State-owned Commercial Banks in China. Number of Units

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Number of Employees

BOC

ICBC

CCB

BOCOM

ABC

BOC

ICBC

CCB

BOCOM

ABC

13,637 13,863 15,251 15,227 14,355 12,925 12,529 e 11,609 11,307 11,019 10,598 10,145 9983 9934

38,583 38,219 41,990 e e 31,673 28,345 e 24,129 21,223 18,764 16,997 16,476 16,252 15,513

35,895 35,117 32,787 30,469 27,886 25,763 23,925 e 16,613 14,585 14,088 13,629 13,457 13,374 e

2497 2710 2788 2864 2756 2881 2838 e 2145 2403 2607 2612 2610 2636 2640

67,092 65,870 63,676 58,466 56,539 50,546 44,418 e 36,138 31,004 28,234 24,937 24,452 24,064 e

195,754 198,555 200,135 197,547 197,534 192,279 184,529 e 171,777 220,999 229,740 232,632 237,379 249,278 e

569,983 565,955 561,279 567,230 549,038 471,097 429,709 e 389,045 375,781 341,273 351,448 381,713 385,609 e

356,864 387,385 382,932 378,523 431,959 427,566 419,157 e 342,967 310,391 300,288 297,506 298,868 298,581 e

47,348 52,612 47,072 47,584 46,453 47,121 57,602 e 55,510 54,408 57,323 60,865 68,083 77,734 e

564,731 538,780 536,816 524,484 539,298 509,572 490,999 e 511,425 489,425 478,895 452,464 447,519 441,883 e

BOC: Bank of China. ICBC: Industrial and Commercial Bank of China. CCB: China Construction Bank. BOCOM: Bank of Communications. ABC: Agricultural Bank of China. Sources: Compiled from NBS (various years) and annual reports of various banks (various years).

According to the conventional classification of banking units in China, the location of the branches and sub-branches of SOCBs is determined by the administrative boundaries in China. All SOCBs have one branch in the capital of every province and at least one sub-branch in every prefectural level city.4 Under the administration of sub-branches are saving outlets and banking offices. Savings outlets only deal with basic private banking services (e.g., deposits and withdrawals from personal saving accounts), while banking offices provide all private and certain commercial banking services. There were about 21,700 savings outlets and banking offices of various sizes scattered all over China in the ICBC alone in 2001. Professional private banking services (such as the provision of investment-oriented products) are normally available only at subbranch level and the approval and auditing of loans and mortgages are normally conducted at branches of SOCBs. In this paper, 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, there should be the centralization of banking operations and the marginalization of bank customers, presumably but not exclusively through merging or closing down savings outlets in selected sub-branches to reduce operating costs. To reveal the level of centralization, we used the change in number of sub-branches at prefectural level cities between 2009 and 2001 as the dependent variable. For ease of interpretation, 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. Thus, 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. In other words, the centralization of banking operations by opening sub-branches is followed by the marginalization of savings outlets in the same city. Arguably, 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. However, more than 10 percent of 363 cities had no BOC sub-branches in 2001. We could allocate a notional figure - say one - 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, e.g., a 200 percent increase between 1 and 3, but only a 100 percent increase between 2 and 4, although the change in absolute units is the same. To test the cost-cutting hypotheses, H1 and H2, 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. It is expected that the dependent variable has a positive relationship with GDPpc for sub-branches and savings outlets, and vice versa for AGRIND (Table 3). We also include two dummy variables in the model: CENTRE representing regional financial centres (nine regional headquarters, People’s Bank of China, etc.) and CITY for provincial level cities. A positive relationship with the level of centralization and marginalization is expected. A composite indicator of telecommunication infrastructures is used as the control variable. NETMOBILE is generated by multiplying the number of registered internet users with the number of registered mobile phone users. As these are alternative channels for personal banking, we expect a positive relationship with the level of centralization and marginalization. Two explanatory variables are used to test socio-economic stability hypotheses, H3 and H4. POP is the population size (per 10 thousand people) and is used to reveal the potential socioeconomic instability that may arise from massive redundancies (Table 3). FIN-EMP is employment in the financial sectors (per 10,000 people) and is used as an indicator of the potential cost synergy for restructuring. It is expected that both explanatory variables correlate negatively with the level of centralization and marginalization. Table 3 Explanatory variables and their expected signs. Variable H1 & H2 GDPpc AGRIND CENTER CITY NETMOBILE

H 3 & H4 POP FINEMP

4

SOCB branches could be located in some major cities.

Explanations

Expected sign

GDP per capita (in yuan) in prefectural cities Ratio of agricultural-industrial output value in prefectural cities Regional financial centres Provincial-level cities A composite indicator on number of registered users of internet & mobile phones in prefectural cities

þ 

Population size (per 10,000 people) in prefectural cities Employment in financial sectors (per 10,000 people) in prefectural cities

þ þ þ

 

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G. Yeung et al. / Applied Geography 32 (2012) 854e867

Table 4 Pearson’s correlations between explanatory variables. GDPpc GDPpc AGRIND CENTRE CITY FINEMP POP NETMOBILE

1.000 0.464 0.266 0.387 0.438 0.004 0.313

AGRIND 1.000 0.131 0.232 0.225 0.010 0.114

CENTRE

1.000 0.483 0.492 0.271 0.448

CITY

1.000 0.590 0.345 0.342

FINEMP

1.000 0.633 0.836

Table 5 Centralization in the sub-branches of the ICBC & the BOC, 2001e2009, China. POP

1.000 0.373

NETMOBILE

1.000

Data sources and limitations Location data on banks at prefectural level are based on the basic unit census of 2001, and 2009 data are derived from the corresponding SOCB websites. Data on the explanatory variables in prefectural cities in 2005 come from the China Urban Statistical Yearbook (NBS, 2006). We selected the mid-point of the investigation period (2001e2009) 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. The data for 2005 could indicate the potential impact of the explanatory variables on the centralization drive in SOCBs in the pre- and post- initial public offerings.5 The Agricultural Bank of China, 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. Incorporating partial data into our datasets could introduce an unacceptable margin of error in the model. We also feel that the exclusion of these three SOCBs will not significantly affect the accuracy of our estimates. First, 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.6 Second, we have already incorporated two of the ‘Big Four’, ICBC and BOC, into our estimates, and one of the major functions of the China Construction Bank is to provide loans for construction and development (rather than personal banking). The Bank of Communications is excluded from the dataset as it has much lower geographical coverage compared with the other two SOCBs. The Bank of Communications, being a newcomer to SOCBs, had only 106 savings outlets in one-third of the Chinese provinces in 2009, compared with 3256 and 5809 savings outlets in all provinces for BOC and ICBC, respectively. Centralization and marginalization in the Chinese banking industry Before presenting and analyzing the data, we have to check the collinearity between the explanatory variables and the heteroscedasticity of the various models. Table 4 presents Pearson’s correlation coefficients for the explanatory variables. As expected, FINEMP and NETMOBILE correlate highly, but POP and FINEMP less so. Other explanatory variables do not strongly correlate with each other. To mitigate the multicollinearity, we tested the significance of FINEMP and NETMOBILE separately in models 1 and 2. In addition, there are obvious signs of heteroscedasticity in all the models, according to the Breush-Pagan chi-squares. The

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. 6 Agricultural Bank of China raised US$22 billion in the Shanghai and Hong Kong stock markets in July 2010.

Model 1

Model 2

Model 3

Model 4

Constant branch2001 GDPpc AGRIND CENTRE CITY NETMOBILE FINEMP POP

2.544 0.625 10.338*** 4.034** 33.660 25.095** 0.00047***

11.492** 0.069

26.461* 0.254 19.486*** 1.621 96.155* 28.585**

2.934 0.443 11.664*** 4.053** 33.258 24.511** 0.0005***

39.947*** 4.495***

5.447*

1.590

Obs. R2 F Breusch - Pagan chi-squared

286 0.769 154.96 961.47

286 0.755 216.63 668.65

286 0.559 58.96 1272.71

286 0.772 134.72 936.58

6.022**

***, p < 0.01, **, p < 0.05, ***, p < 0.10. Results have already corrected for heteroskedasticity.

coefficients shown in all the tables have been corrected by the conditional heteroscedasticity White matrix method. As explained earlier, the four hypotheses on centralization and marginalization were tested using two specific groups of variables of economic development - employment and population size. Economic development & centralization-marginalization There are obvious signs of the centralization of banking operations through the opening of sub-branches in SOCBs. Both explanatory variables have the expected signs and are highly significant at either the 0.05 or 0.01 levels (Table 5). The higher the level of economic development in terms of GDP per capita and the ratio of agricultural-industrial output values, the higher the number of newly opening sub-branches in prefectural cities in China. 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, as the value of the coefficients is higher and at the 0.01 level of significance in all the models. This is also the case for the BOC, where the coefficients of GDP per capita and provincial level cities are highly significant at the 0.01 level in all the models, 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 and 7). The other two dummy variables - regional financial centres and provincial level cities - have the expected signs but apparently are not as important as the two explanatory variables for determining Table 6 Centralization in the sub-branches of the ICBC, 2001e2009, China. Model 1

Model 2

Model 3

Model 4

Constant branch2001 GDPpc AGRIND CENTRE CITY NETMOBILE FINEMP POP

3.097 0.623* 5.148*** 3.289*** 15.694 10.811 0.0003***

8.185** 0.196

13.035 0.405 10.438*** 1.553 59.514 13.544

3.037 0.618 5.164*** 3.288*** 15.693 10.818 0.0003***

24.720*** 3.256***

2.680

0.021

Obs. R2 F Breusch - Pagan chi-squared

286 0.752 141.166 955.47

286 0.721 181.354 797.36

286 0.474 41.89 1487.4224

286 0.752 120.57 957.3758

2.743**

Note: ***, p < 0.01, **, p < 0.05, ***, p < 0.10. Results have already corrected for heteroskedasticity.

G. Yeung et al. / Applied Geography 32 (2012) 854e867 Table 7 Centralization in the sub-branches of the BOC, 2001e2009, China.

Table 9 Marginalization of savings outlets of the ICBC, 2001e2009, China.

Model 1

Model 2

Model 3

Model 4

Constant branch2001 GDPpc AGRIND CENTRE CITY NETMOBILE FINEMP POP

0.756 0.131 6.047*** 0.884 18.578 18.580*** 0.00016***

4.283** 0.189

14.117** 0.187 9.760*** 0.348 36.347** 16.423***

6.964 0.107 7.452*** 1.013 17.585 15.575** 0.00014**

Obs. R2 F Breusch - Pagan chi-squared

285 0.667 92.982 784.66

Model 1

15.816*** 1.113*

2.985***

1.868***

Constant outlets2001 GDPpc AGRIND CENTRE CITY NETMOBILE FINEMP POP

285 0.681 149.479 338.35

285 0.591 66.81 829.3525

285 0.694 89.94 705.3539

Obs. R2 F Breusch - Pagan chi-squared

3.680**

861

Model 2

Model 3

Model 4

5.518 0.931*** 2.568* 2.055 6.413 21.980***

9.259*** 0.859*** 2.689* 1.482 12.312 19.260** 0.00008**

1.512 1.288 0.738*** 0.870*** 0.219 1.151 4.524** 8.560 21.113** 0.00001*** 1.801 3.260***

3.835***

3.666***

286 0.885 385.911 628.19

286 0.896 400.48 669.9280

286 0.903 371.46 597.8240

286 0.882 527.04 545.60

Note: ***, p < 0.01, **, p < 0.05, ***, p < 0.10 Results have already corrected for heteroskedasticity.

Note: ***, p < 0.01, **, p < 0.05, ***, p < 0.10 Results have already corrected for heteroskedasticity.

the opening of sub-branches, with only the coefficients of provincial cities being significant at the 0.05 level (Table 5). The control variable - the number of registered Internet and mobile phone users - is, however, highly significant at the 0.01 level. Combined with the above evidence from the two explanatory variables, 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. There are unexpected and apparently contradictory signs of the marginalization of saving outlets by SOCBs. With the exceptions of GDP per capita in model 1 and the control variable of the number of registered internet and mobile phone users, all the explanatory and dummy variables present unexpected negative signs in all the model specifications (Tables 8e10). The marginally 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-ahalf percentage points. The negative and highly significant (at 0.01) 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 same patterns are more or less replicated in all four models for the ICBC, and to a lesser extent, in the BOC. 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. These

unexpected findings are apparently inconsistent with the previous findings on centralization. This apparent puzzle could be reconciled by two possible explanations: a compromise decision due to the hybrid nature of SOCB ownership, and the use of number of units for the estimates. First, 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. The banking authorities are under tremendous pressure to slash high operating costs on the one hand, 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. Thus, the local banking authorities may implement a location-specific centralization-marginalization policy. In bigger cities where unemployment is more politically sensitive, the local banking authorities may implement a ‘conservative’ centralizationmarginalization policy through merging savings outlets with subbranches and without making massive redundancies. Moreover, 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. In smaller cities, 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). This suggestion is consistent with the positive and significant AGRIND coefficients, especially for the BOC and the ICBC, whose

Table 8 Marginalization of savings outlets of the ICBC & the BOC, 2001e2009, China.

Table 10 Marginalization of savings outlets of the BOC, 2001e2009, China.

Model 1

Model 2

Constant outlets2001 GDPpc AGRIND CENTRE CITY NETMOBILE FINEMP POP

6.844 0.892 0.736*** 0.838*** 1.788 2.233 6.75*** 5.990 26.185*** 0.0001*** 1.795 4.910***

Obs. R2 F Breusch - Pagan chi-squared

286 0.916 508.67 639.84

286 0.914 749.86 440.85

Note: ***, p < 0.01, **, p < 0.05, ***, p < 0.10. Results have already corrected for heteroskedasticity.

Model 3

Model 4

2.152 0.929*** 2.673 4.178** 1.272 25.849***

7.663** 0.865*** 2.886* 3.114* 12.192 23.308*** 0.00013***

5.280*** 286 0.923 558.91 679.2646

Model 1

Model 2

Model 3

Model 4

6.029*** 0.769*** 1.311* 1.187** 1.675 5.826* 0.00004***

2.710*** 0.828***

3.771** 0.879*** 0.419 1.913*** 6.178 3.759

1.545 0.868*** 0.172 1.645*** 0.271 3.844 0.00004***

5.122***

Constant outlets2001 GDPpc AGRIND CENTRE CITY NETMOBILE FINEMP POP

286 0.933 550.62 467.5224

Obs. R2 F Breusch - Pagan chi-squared

286 0.895 393.768 407.95

2.329***

2.491*** 1.700***

1.150***

1.431***

286 0.901 637.446 247.43

286 0.894 391.36 449.1247

286 0.906 380.17 328.5531

Note: ***, p < 0.01, **, p < 0.05, ***, p < 0.10. Results have already corrected for heteroskedasticity.

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total number of employees actually increased by seven and nine percent respectively after their initial public offerings (Tables 2,9,10). The suggestion that savings outlets are merged with subbranches is supported by the changing patterns of these banking units over time, with a highly significant correlation coefficient of 0.844 between the two variables. There was a trend to merge savings outlets with sub-branches nationwide between 2001 and 2009, i.e., 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. In the ICBC, the number of subbranches more than doubled, from 2748 units in 2001 to 8695 units in 2009, while at the same time, the number of savings outlets was slashed by more than two-thirds, from 20,689 to 6025 units (Figs. 1e4). Similar patterns appeared in the BOC; the number of sub-branches tripled from 1805 units in 2001 to 6164 units in 2009, while the number of savings outlets was slashed by two-thirds, from 9210 to 3119 units. Moreover, the more economically developed (coastal) cities are also more financially viable and maintain more savings outlets in operation. 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, 1997; O’Brien, 1992). There is a shift from face-toface customer/teller interaction to automated banking in SOCBs, including the use of automated teller machines, and the general public can still access other banking institutions locally, e.g., rural saving cooperatives. More and more poor households in other developing countries can access certain types of banking services via their mobile phones. In Pakistan, where only 14

percent of the population have bank accounts, the biggest financial network is a unit of Telenor, the Norwegian mobile phone operator. Since introducing mobile banking in November 2008, Telnor’s 500,000 active users can transfer money (through text messages) through their mobile phones and collect the cash through the network’s 11,000 independent retail outlets (more than the 8300 branches of all Pakistani banks) and connect to critical banking services for the first time (International Herald Tribune, 28 November 2010). Second, the use of numbers in banking units could exaggerate the extent of marginalization in some cities. For instance, the number of savings outlets in Yuncheng prefecture of Shanxi decreased by 76 percent, from 76 in 2001 to 18 in 2009 (a reduction of 58 units), which is lower than the 100 percent reduction from 35 to 0 in Yangquan prefecture, a city with a much higher GDP per capita at 15,811 yuan (compared to 9473 yuan) in the same province. In this case, 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. 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. 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. Therefore, the conventional marginalization thesis observed in the Anglo-American banking industries has not fully materialized in China, and the first hypothesis concerning the centralization of banking operations is accepted but the second hypothesis on marginalization is rejected.

Fig. 1. The location pattern of ICBC’s sub-branches in 2001, China.

G. Yeung et al. / Applied Geography 32 (2012) 854e867

Fig. 2. The location pattern of ICBC’s sub-branches in 2009, China.

Fig. 3. The location pattern of ICBC’s savings outlets in 2001, China.

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Fig. 4. The location pattern of ICBC’s savings outlets in 2009, China.

Population, employment, & centralization-marginalization Both population size and financial sector employment have an impact on the extent of the centralization of banking operations in SOCBs. The evidence for financial sector employment is more obvious; most coefficients have unexpected positive values and are highly significant at the 0.01 level, while the evidence for any effect of population size is far from conclusive (Tables 5e7). The coefficient of population size is only significant (at 0.01 level) and with the expected negative sign in model 2, when the financial employment level is also considered (Table 5). When financial employment is not considered, the two population coefficients in models 3 and 4 are positive although their value is marginally significant to insignificant in the general dataset. Further examination of the impact of population size on banks strengthens the impression that there is no conclusive finding. 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 0.1 level) in model 2, but the coefficients in models 3 and 4 are positive and significant at the 0.01 level (Tables 6 and 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.e., small cities where the financial sector accounts for a larger proportion of employment) have experienced a higher level of centralization of banking operations. 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, i.e., the higher number of employees in the financial sector implies higher operating costs, hence the need to centralize 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). 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 0.01 level in the BOC) suggests that the bigger cities may actually experience a larger level of centralization of their banking operations. 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. Combining all the above findings, 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). 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 8e10). All coefficients of population size are negative and highly significant at the 0.01 level. This clearly suggests that the centralization drive of banking operations in China will not be followed by a massive drive to marginalize savings outlets. The reduction in savings outlets actually occurred at a much lower rate in cities with bigger populations, presumably for political concerns about social instability, a possible consequence if there were massive layoffs following the restructuring of SOCBs, as mentioned earlier. 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. For instance, Wenzhou prefecture, one of the most

G. Yeung et al. / Applied Geography 32 (2012) 854e867

important bases for private enterprises (see Wei, Li, & Wang, 2007), has the largest population (7.5 million) and ranks third in GDP in Zhejiang province (one of the most economically developed provinces in southeast coastal China). 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. Similar patterns can be found in other economically developed cities with large populations in the same province, e.g., Ningbo and Shaoxing prefectures. Ningbo has the second largest employment level in the financial sector (31,800 employees), and the second highest GDP per capita of 44,156 yuan. The number of ICBC sub-branches in this city increased by 556 percent to 105, but the number of ICBC savings outlets only decreased by 75 percent to 40 between 2001 and 2009. In Lishui prefecture, the poorest and one of the smallest cities in Hangzhou with GDP per capita of 12,189 yuan and a ratio of agricultural-industrial output value at 40.74, the number of ICBC sub-branches increased by 11 percent to 19, but the number of savings outlets decreased by a much larger degree, by 71 percent to 9 in the same period. Unemployment is a contentious issue in every country. In China, an excessively high unemployment rate could become a trigger for political and social instability. The recent demonstration of 2000 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, especially the ‘enforced retirement’ of middle-aged former bank staff. According to the estimate of a protestor, there are about 70,000 former 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. These ‘retired’ workers have no safety net of a pension, or medical health care, social welfare or housing benefit, and this is in violation of the Labour Laws e this type of ‘forced retirement’ has not been allowed since 2005 (International Herald Tribune, 15 August 2010). Clearly the protestors’ decision to air their grievances publicly will not promote the ‘harmonious socialist society’ meticulously portrayed by the central government, and the decision-makers in local governments surely have an incentive to prevent the occurrence of such events.7 Based on the above, 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. The centralization drive of banking operations in China is not necessarily followed by a massive reduction in savings outlets. In spite of the need to cut operational costs and to create synergy by merging saving outlets with sub-branches in various prefectural cities in China, 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. The reduction in savings outlets actually occurred at a much lower rate in cities with bigger populations, presumably due to political concerns about the social instability that could result from massive redundancies following the restructuring of SOCBs. These are the features of the Chinese banking industry in reform. The third

7 The ‘harmonious socialist society’ was proposed by President Hu Jintao in 2006. It aims to built a harmonious society in China by 2020, e.g., 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, etc.

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hypothesis about the effect of population and financial sector employment on centralization is partially accepted, while the fourth hypothesis concerning the effect of population and financial sector employment on marginalization is accepted. 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 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. 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. 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, 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. The two dummy variables of regional financial centres and provincial level cities have the expected but slightly weaker effect on centralization and marginalization. Empirically, 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. Labour market indicators in terms of population size have the expected strong cushioning effect on the closing down of savings outlets e an obvious sign of political concern per se e 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, especially in the case of the BOC. 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). This is different from the conventional argument in financial geographies that the centralization and the marginalization of banking operations are two sides of the same coin as in the restructuring of the Anglo-American banking industries. 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 state-owned enterprises become blurred between private and public ownership, 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. 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. In China, banking reforms are implemented under an entirely different institutional environment. Instead of creating synergy for shareholders as in the AngloAmerican economy, bankers place utmost importance on political and socio-economic stability when making major decisions. On the one hand, 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

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2007, including the need to cut operating costs and improve the balance sheets for the initial public offerings. On the other hand, local bankers have other economic and strategic considerations while the scope of change in industrial practices is also limited by the existing institutional framework. This is especially the case when reforms involve changes in the institutional environment that affect politics in the workplace, where legacies from the planned economy create strong institutional inertia to change. One typical thorny issue is the 1.5 million strong employees in five SOCBs who used to enjoy the security of life-long employment and had been partially sheltered from market competition (Table 1). 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’. Precisely because of the ambiguous nature of property rights and the conflicting demands of cost-cutting in consideration of the shareholders while maintaining political stability, local bankers have to take calculated political and economic risks in the centralization drive to cut costs, which results in a continuum for the centralization and marginalization of the SOCBs in China. 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. Decision-makers thus could pay additional attention to the potential implications of industrial restructuring, especially any potentially massive layoffs, in transitional economies. Obviously, this is just an initial effort to unpack the banking systems in alternative and transitional economies (c.f. Pollard & Samers, 2007; Yeung, 2009b) and test the convergence thesis with available and reliable data. There are still plenty of virgin areas in alternative and transitional economies that demand closer examination, e.g., 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 socialeconomic stability. Acknowledgements 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. References Argent, N. (2002). A global model or a scaled-down version? Geographies of convergence and divergence in the Australian retail banking sector. Geoforum, 33(3), 315e334. Berger, A. N., Demsetz, R. S., & Strahan, P. E. (1999). The consolidation of the financial services industry: causes, consequences, and implications for the future. Journal of Banking & Finance, 23, 135e194. Bank of China (BOC). (2005). Bank of China Annual Report 2005. http://www. bankofchina.com/en/investor/ir3/200812/t20081212_237250.html Accessed 22.09.11. Bank of China (BOC). (2009). Bank of China annual report 2009. http://www. bankofchina.com/en/investor/ir3/201003/t20100323_989421.html?keywords¼ annualþreport Accessed 22.09.11. Bonin, J. P., & Huang, Y. (2002). Foreign entry into Chinese banking: does WTO membership threaten domestic banks? The World Economy, 25(8), 1077e1093. Cairncross, F. (1997). The death of distance: How the communications revolution will change our lives? London: Orion Business. Chen, M. (2009). Multinational banking in China: Theory and practice. Massachusetts: Edward Elgar. China Banking Regulatory Commission. (CBRC). (2010). CBRC annual report 2010. http://www.cbrc.gov.cn/english/info/annual/index.jsp Accessed 06.08.11. Dymski, G. (1999). The bank merger wave: The economic and social consequences of financial consolidation. New York: M. E. Sharpe.

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