To compete or cooperate: The application of system dynamics simulation on the choice of Chinese banks

Abstract

This paper uses Evolutionary Game Model and System Dynamics Simulation to explore the impact of interest rate liberalization policy and guanxi on competition among Chinese banks. The results show that the guanxi is a key factor to push both large and small banks to cooperate with each other in the interest rate fully limited period. However, during the partial liberalization period, large banks and small banks display different behaviors, with the former adopting a cooperative approach due to guanxi while the latter choose to compete. In the fully liberalized period, the declining impact of guanxi on business drives large banks to compete in the market with lower interest rates. In general, guanxi is a major factor that hinders competition and results in varying lending rates in the market.