Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise [Hardcover]

 

 

Create your own review

Many people are familiar with the story about how China's economy was forged from the embers of the Cultural Revolution; how it went from an insolvent, antiquated, Soviet-style system to a white-hot and unstoppable free-market beacon. After Mao Zedong's death, Deng Xiaoping worked to replace the memories of the chairman's assault on the Four Olds (old culture, customs, habits, and ideas), along with the subsequent Gang of Four, with his (Deng's) Four Modernizations (agriculture, industry, science and technology, and the military). The communes came down and the special economic zones went up. Methods that didn't work were abandoned; ones that did were adopted, and the Communist Party worked closely with its citizenry to ensure a reasonable rate of acceleration during this, to quote Marx, primitive accumulation of capital. In the early 1990s, responding to the popular notion that some people had gotten too rich too quickly, the Party refitted "socialism with Chinese characteristics" to take it into the future and ensure all Chinese had a stake. Since then, it's been full steam ahead. China has become the world's second largest economy, on its way to becoming the largest economy. The Asian leviathan was virtually unfazed by the 2008 economic meltdown, etc.

Gee whiz. What a success story. Look at China go.

Stuff and nonsense, say Carl E. Walter and Fraser J. T. Howie in their book Red Capitalism: The Fragile Foundation of China's Extraordinary Rise. After reminding the reader that China's rise really is extraordinary, and that if not for a few key figures and events the country might have remained a monetary basket-case like it was prior to 1978, the writers reveal a series of unflattering truths through the medium of commentary embedded in case study.
China's much-lauded model is a derailed version of the one envisioned by former vice-premier Zhu Rongji, not Deng Xiaoping. Zhu hoped to internationalize China's economy, to create a break between it and the Party - to set it free. But the Party has too many competing special-interest groups, i.e. elite families and other cliques whose chief special interest is themselves. The face of China's economy, its vaunted and gargantuan state-owned enterprises (SOEs), may have the veneer of Western corporations (they employ accountants, lawyers, are listed on stock exchanges at home and abroad), but are "not autonomous" and can "hardly be said to be corporations at all." Instead, they are "completely dependent on their political patrons" (special-interest groups), never mind that the SOEs are Western creations (including the 20 or so listed in the Fortune Global 500) birthed by Wall Street. The aims of Zhu Rongji and American investment bankers have been thwarted by the state and its petty, factionalized interests with the upshot that China's major companies are publicly listed, Fortune 500 pseudo-communist oligopolies.

This situation makes for an atmosphere of instability, the authors argue. The Party, or rather: the dominant interest groups, can remove CEOs, order up mergers, initiate expansion into unchartered territory, or whatever they please. It's not about what's best for the "corporation," it's about what's best for the political elites and their dependents.

In China, nothing is as it seems, and with this in mind the writers take us on tours of the banking sector, the bond markets, the stock markets, etc. The fulcrum of China's economy is its banking system. By the year 2000, each of China's major banks was badly managed and bankrupt. The government stepped in to recapitalize and, with the aid of Western advisors, restructure and reform. But the Party continued with its bad old ways, meaning it continued to order banks to lend to the SOEs, even though bad loans were still outstanding. Debt and losses accrued from non-performing loans are hidden, whatever it takes to keep the SOEs afloat in cash so the economy can continue to grow by eight percent per annum. Debt is removed from balance sheets, record profits and low problem-loan quotients are announced, and the boom-bust cycle begins again. While huge piles of debt are shifted from pocket to pocket, cadres lecture Westerners on the weaknesses of their financial systems.

And on and on it goes. The reader sees that the system and all its constituent parts appear fine on the outside, but are moribund and rotting on the inside. Any bona fide internal reform is trumped by a state-backed culture of myopic incompetence. The stock exchanges are state-of-the-art - and state manipulated. Institutions meant to work in tandem jockey for clout and position. The government has become addicted to debt (and burying that debt) to ensure momentum. The train can't stop; if it does, its passengers might lynch the engineers. In 2009, rather than deal with unresolved loans from the 1990s, the banks went on a $1.4 trillion lending spree.

The subtext is that the Chinese are only fooling themselves, a perennial theme to the observant China watcher. Someone will be left holding the bag, and what a big, burdensome bag it is. According to Red Capitalism, China's public debt (as of 2009) could be as high as 76 percent of its GDP.

As someone who's familiar with Chinese history, culture, and society, but who only has a theoretical understanding of business and finance, I found this book engaging, but choppy. There are far too many acronyms, and a way of dealing with this issue should have been to use them sparingly or not at all. There's a "list of abbreviations" (they are not abbreviations) on p. xiii, but not all of the acronyms are present, and, as mentioned, there are just too many of them. Here's a sentence from p. 63. "By the end of 2006, BOC, CCB and ICBC had completed their IPOs and the AMCs shortly thereafter had finished their workouts for their NPL portfolios." On p. 114, because there's a chart, there are just 17 lines of text, but there are 14 acronyms. For a business report, perhaps that's all right, but for a book, it's unacceptable.

Another issue is consistency. We see National Champions, and then "National Champions"; Who's Who and then Who's Who, italicized (different and both incorrect - it should be who's who). We see `every body' when it should read `everybody', and `a top' when it should say `atop.'

The book also repeats itself - often. It requires summaries, but not repetition. Using a one-chapter-per-topic approach, the structure of a chapter should have been: introduction, main body, conclusion - like a textbook. If one must repeat, one should at least reword statements and consult a thesaurus.

Esoteric terminology is introduced and not defined. Amounts are sometimes written in dollars, sometimes in renmenbi, sometimes in both. There is little understanding of parallelism: you cannot write MOF and Ministry of Railways in the same sentence, just like you cannot write 1:23 p.m. and two-thirty in the afternoon in the same sentence.

Finally (and I hate to say it, but someone's got to) there are too many interrogatives; sometimes they come in bunches, and it's not always easy, or at least for a layperson like me, to know if they're rhetorical or not. Chapter Four, "China's Captive Bond Market" ends with the line: "So the question again presents itself: why did China build its fixed income market?", to which I mentally rejoindered, `Uh, I don't know. Did I miss something? Are you going to deal with that in the next chapter? I was kind of hoping you would tell me.' Never form an argument from questions, and avoid asking the reader questions,' are fundamentals a professor would tell a first-year student.

Nevertheless, Red Capitalism is interesting and necessary. Like China itself, Westerners believe China's economy is doing fine because that's what's reported and people don't understand how it functions. Although privatized to a degree, financial entities and mechanisms are shackled to the state - and this is debilitating, not invigorating. China is sitting on a mountain-sized pile of bad debt, and, as Walter and Howie point out, it's possible that pile will only grow during the coming years. They understand China well enough to know that problems, even mammoth ones, can fester and go unchecked for ages. Though enlightening, extracting pertinent information from this volume is, at times, tedious and in between the engaging bits one wonders where the editor was.

Troy Parfitt is the author of Why China Will Never Rule the World

Share your thoughts with other customers: Create your own review

› See the customer review...

 

Search Customer Reviews
Only search this product's reviews

Search Listmania!