Netizens and Private Monitoring in Chinese Banking

Abstract Purpose Much of the criticism directed toward banking in China revolves around self-dealing in relationships between bankers and their clients. Corruption, nepotism, high levels of non-performing loans, and the inefficiency of government-directed lending have all been laid at the door of embedded guanxi networks. While valid to an extent, this criticism ignores two important, related points: guanxi networks bring disciplining mechanisms as well as the potential for corruption, and those mechanisms may improve banking governance. Methodology/approach Employing theory from relationship banking, information economics, and the business ethics of guanxi, I examine how monitoring by netizens will lead to greater disclosure. Findings Relationship banking in a Chinese context – with the influence of guanxi in banking – further increases reputational costs when self-dealing is uncovered. Costs of bad banking behavior are increasing just as benefits from staying rich increase. Increased disclosure affects chances of staying rich as disclosure increases the chance that a corrupt relationship will lead to loss of wealth and reputation. Research limitations/implications This paper presents a theoretical construct informed by selected examples. An empirical analysis of netizen monitoring leading to improved banking governance would provide additional support for the theoretical construct. Practical implications Bankers, financiers, and government officials must be aware of monitoring by netizens, which forces more ethical financial contracting. Social implications Rather than weakening financial system governance, guanxi may begin to strengthen the disciplinary measures inherent in relationship banking as information disclosure increases and private sector monitoring grows. Originality/value This paper provides an extension to private monitoring theory in financial contracting which may be applied to netizen monitoring in other regions and countries.