The Impact of Interest Rate Liberalization Announcement in China on the Market Value of Hong Kong Listed Chinese Commercial Banks

Transcription

1 Journal of Finance and Invesmen Analysis, vol. 2, no.3, 203, ISSN: (prin version), (online) Scienpress Ld, 203 The Impac of Ineres Rae Liberalizaion Announcemen in China on he Marke Value of Hong Kong Lised Chinese Commercial Banks Wai-Choi Lee Absrac This paper examines he impac of he announcemen of ineres rae liberalizaion by he People s Bank of China on he marke value of Hong Kong lised Chinese commercial banks by using he economerics of even sudy. We find ha heir sock prices fall significanly in response o he announcemen of ineres rae liberalizaion. This finding suppors our belief ha ineres rae liberalizaion narrows he ne ineres margin and profiabiliy of he banking sysem. JEL Classificaion numbers: C580, E58 Keywords: Economerics of even sudy, Ineres rae liberalizaion. Inroducion Ineres rae liberalizaion in China is a widely-discussed opic (for example, Feyzioğlu, Porer, and Takás, 2009). I is believed ha when he ineres rae is deermined by marke forces insead of he governmen, he efficiency of financial resource allocaion in Chinese economy will be improved and hence he performance of he economy will be enhanced in he long run. The unlashing of ineres rae conrol encourages he free compeiion of commercial banks for deposiors and borrowers, narrowing he ne ineres margin (NIM) - bidding up he deposi raes and reducing he lending raes. Deparmen of Economics and Finance, Hang Seng Managemen College, Hong Kong, China, School of Finance, Shanghai Universiy of Finance and Economics, China. Aricle Info: Received : June 9, 202. Revised : July 3, 203. Published online : Augus 5, 203

2 36 Wai-Choi Lee As NIM conribues a maor par of profis o Chinese commercial banks 2, heir profis and heir sock prices are expeced o decline. On June 7, 202, he People s Bank of China (PBC) announced wihou noice in advance ha i decided o cu benchmark lending and deposi raes by he same percenage poins and o expand he floaing range of lending and deposi raes as of June 8, Boh he -year benchmark lending and deposi raes were cu by 0.25 percenage poins, and he benchmark raes for oher mauriies were also reduced. Simulaneously, he PBC allowed commercial banks o se lending raes a or above 0.8 imes he benchmark raes (previously he lower was 0.9 imes he benchmark raes), and deposi raes a levels a or below. imes he benchmark raes (previously deposi raes were no allowed o exceed benchmark raes). This announcemen provides a signal o he public ha he PBC sars o release he conrol of ineres rae and allow he deerminaion of ineres raes by marke forces. The policy move implies ha commercial banks could bid up deposi raes due o keen compeiion beween banks and oher deposi-aking financial insiuions. On he oher hand, hey could reduce lending raes due o compeiion beween banks for borrowers. As a resul, he banking sysem s NIM migh fall. Table shows he changes in NIM before and afer he policy move. In he exreme case, NIM migh fall o.473%. Table : Ne Ineres Margin before and afer he announcemen on June 7, 202 Loan ineres rae ( year) Deposi ineres rae ( year) Ne ineres margin (NIM) Before Benchmark 6.56% Benchmark 3.5% 3.06% (Narrowes) Lower 5.904% Upper 3.5% 2.404% (Wides) Afer Benchmark 6.3% Benchmark 3.25% 3.06% (Narrowes) Lower 5.048% Upper 3.575%.473% (Wides) Source: Websie of People s Bank of China ( This paper examines he impac of he announcemen of ineres rae liberalizaion in China on he marke value of nine Chinese commercial banks 4 lised in Hong Kong sock marke by using he economerics of even sudy. I is believed ha his announcemen conveys he message o he public ha he profis earned by Chinese commercial banks would decline. Their sock prices would fall in response o he announcemen. 2 For example, ne ineres income accouned for 95.87% of he oal operaing income of Chongqing Rural Commercial Bank in he firs half of 202 (Chongqing Rural Commercial Bank, 202). 3 PBC, PBC o cu RMB benchmark deposi and loan ineres raes and adus ineres rae floaing range : (hp:// _.hml). 4 Namely, Agriculural Bank of China, Bank of China, Bank of Communicaions, Indusrial and Commercial Bank of China (ICBC), China Consrucion Bank, China Merchans Bank, China Minsheng Bank, CITIC Bank Inernaional, and Chongqing Rural Commercial Bank.

3 The Impac of Ineres Rae Liberalizaion Announcemen in China 37 A similar sudy is conduced by Kwan (2003) who examines he effecs of a series of evens leading up o he deregulaion of deposi ineres raes in Hong Kong on he marke value of banks in Hong Kong. All he evidence suggess ha banks earned rens from deposi ineres rae rules, and deregulaion would lower hese rens and hence bank marke values. On average, he oal abnormal reurn due o ineres rae deregulaion was around negaive 4 percen. The res of he paper is organized as follows. The daa and mehodology are discussed in Secion 2. Resuls of even sudy are sudied in Secion 3. Secion 4 concludes his paper. 2 Daa and Mehodology Following he sandard even sudy approach (for example, Brown and Warner, 985; Johnson, 998), residual reurns for each of Chinese commercial banks lised in Hong Kong sock marke for an -day window cenered on he dae of he announcemen are calculaed. Daily expeced bank sock reurns are esimaed using he sandard marke model (Fama, 985): R R () m where R is bank s sock reurn a day, R m is sock reurn a day, and are a bank specific inercep and he covariance wih he marke respecively. The error erm,, is assumed o have zero mean, be independen of R m, and be uncorrelaed across firms. Rearranging he erms in (), he esimaed residual reurn for any socks prediced from he model is equal o: R Rm (2) The residuals from (2) are used o es he compeing hypohesis relaing o ineres rae liberalizaion. The ordinary leas square esimaes, and, are esimaed using daily sock reurns from days 00 o 25 relaive o he announcemen dae. The es saisic is he raio of he day mean excess reurn o is esimaed sandard deviaion; he sandard deviaion is esimaed from he ime-series of mean excess reurns. The es saisic for any day is equal o: Sˆ( ) (3) / where: N (4) N i i 2 ( ) Sˆ( ˆ ) (5)

4 38 Wai-Choi Lee (6) and N equals he number of banks. Daily sock reurns for all nine lised Chinese commercial banks in Hong Kong sock marke are obained from Bloomberg. The daily reurns of he Hang Seng Sock Index are used as a proxy for he marke reurn. 3 Even Sudy Resuls Table 2 repors he mean residual daily reurns from he marke model for an eleven-day period surrounding he announcemen on June 7, 202. The sample consiss of nine Chinese commercial banks lised in Hong Kong sock marke. The mean residual reurns are negaive from day 2 o day + 4. The mean residual reurns on day + and day +2 are saisically significan a he 5% level. We can conclude ha he announcemen of ineres rae liberalizaion reduces he marke value of Hong Kong lised Chinese commercial banks. This impac is saisically significan afer he announcemen. Table 2: Mean residual reurns and sandard deviaions for an -day period surrounding he announcemen on June 7, 202 Day Relaive o he Mean Residual Reurn Tes Saisic Announcemen Day (Day 0 = 7 June, 202) % % % % % % %** %** % % % ** Indicae significance a he 5% level 4 Conclusion On June 7, 202, he People s Bank of China (PBC) announced wihou noice in advance ha i decided o expand he floaing range of lending and deposi raes as of June 8, 202. This announcemen provides a signal of he commencemen of ineres rae liberalizaion in China o he public. This paper uses he even sudy mehodology o examine he impac of he announcemen of ineres rae liberalizaion in China by PBC on he marke value of Hong Kong lised Chinese commercial banks. We find ha heir sock prices fall significanly in response o he announcemen by PBC. This finding suppors he belief

5 The Impac of Ineres Rae Liberalizaion Announcemen in China 39 ha ineres rae liberalizaion would narrow he ne ineres margin and reduce he profiabiliy of he banking sysem. ACKNOWLEDGEMENTS: I am graeful o Andy Cheng and Alex Lau for generous help and Edmond Lee for able research assisance. References [] S. Brown, and J. Warner, Using Daily Sock Reurns: The Case of Even Sudies, Journal of Financial Economics, 4, (985), 3-3. [2] Chongqing Rural Commercial Bank, 202 Inerim Repor, 202. [3] E. Fama, Foundaions of Finance, Basic Books, New York, 985. [4] T. Feyzioğlu, N. Porer, and E. Takás, 2009, Ineres Rae Liberalizaion in China, IMF Working Paper WP/09/7, (2009). [5] K.H. Johnson, Graphic Design for Even Sudy Analysis, Journal of Financial and Sraegic Decisions, :, (998), 6-7. [6] S. Kwan, Impac of Deposi Rae Deregulaion in Hong Kong on he Marke Value of Commercial Banks, Journal of Banking and Finance 27:2, (2003),