Red Capitalism | Carl E. Walter

Summary of: Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise
By: Carl E. Walter

Introduction

Dive into the complex world of China’s financial foundations with this summary of ‘Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise’ by Carl E. Walter. Explore the intricate financial structures and relationships that enabled China to rise from bankruptcy in the late 1970s to economic powerhouse today. Discover how China’s Communist Party transitioned from Maoist ideologies to embracing capitalism and the challenges they faced during their rapid transformation. You’ll learn the roles and impacts of state-owned enterprises, banking regulations, and Chinese crony capitalism in shaping their unique economic landscape.

China’s Economic Transformation

China’s journey towards economic success is not without mistakes. The transformation began when Deng Xiaoping acceded to power in 1978. The nation deregulated its markets and founded stock exchanges in Shanghai and Shenzhen. After the Asian financial crisis of 1997, China restructured and recapitalized its bankrupt state banks. The banks listed some of their shares on global exchanges, allowing them to raise new money and attract international partners. Eventually, China relaxed its controls and allowed more local governments to set up their own special economic zones. Understanding how China built its own version of capitalism is fundamental to understanding the role China will play in the global economy in the next few years.

China’s Complex Economy

The Chinese economy is a complicated fusion of personal and political relationships. Despite a facade of independence, state-owned enterprises (SOEs) are tied to the political system. These corporations are “superficially internationalized” but still under state control. In contrast, foreign direct investment operates in a private, non-state sector that has produced a growing entrepreneurial class. Although China’s Communist Party holds a seemingly monolithic power structure, it is essentially fragmented. Regional and local governments have significant sway, and special interests contribute to “crony capitalism.” Leading party members follow a patronage system and pursue their economic interests to maintain political stability. While China has made economic reforms that have allowed SOEs to thrive, its banks and overall economy still have weaknesses.

China’s State-Controlled Banking

China’s banking system heavily relies on its state-owned banks, primarily the Bank of China, China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China, that hold 43% of the nation’s financial assets. Foreign banks account for less than 2% of banking assets. Lending decisions are made by untrained party loyalists in the employ of state-controlled banks. Though borrowers, including state-controlled companies and other government interests, are under no obligation to repay their loans, the state comes to the rescue of these undisciplined lenders repeatedly.

China’s Ongoing Debt Crisis

China’s financial crisis of the late 1990s prompted the country’s financial authorities to revamp its banks through capital injections and transfers of nonperforming loans to asset management companies. The restructuring efforts were successful, and major banks have since raised large capital in international markets. However, despite this success, some concerning items remain unaddressed, specifically the IOUs issued by the Ministry of Finance persisting on bank balance sheets, some dating back to the early 1990s. These IOUs are outstanding, and it is unlikely that the government will extinguish them, given their grip on the banks. This complicated issue confounds Western accounting analysis, leaving its standing on who approved the debt, and how to collect it, unclear. Moreover, the People’s Bank of China (PBOC), acting as a central bank, is guaranteeing China’s asset management companies, but lax regulations prompt doubts about adequate loan valuations, credit issuance, and risk controls. This is further complicated by the PBOC’s efforts to stimulate China’s economy through lending in the wake of the 2008 global recession, which led to another wave of future nonperforming assets.

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