Does China’s social credit system construction promote foreign bank expansion?

Abstract

Information asymmetry is one of the significant barriers to the development of multinational banks. This paper examines the impact of China’s social credit system construction in pilot cities and the privatization of credit reporting on the expansion of foreign banks. The findings indicate that the upgrading of China’s social credit system significantly promotes the expansion of foreign banks. Foreign banks establish more business branches in pilot cities and cities with higher levels of privatization in credit reporting systems. The mechanism lies in the fact that the development of the credit reporting system alleviates the information asymmetry for foreign banks. Further analysis reveals that this effect is particularly applicable to foreign banks from European and American markets, globally systemically important banks, cities with high financial development, and regional central cities. This study provides evidence from the perspective of credit reporting system reform to facilitate foreign bank expansion.