Sometimes it takes an insider-turned-outsider to expose the rot within any system. The authors, both ex-bankers with decades of experience in China, are quick to point out that this book is not intended to be a shock exposé of the worms in the core of the Chinese financial “miracle”. But the consequence, intended or otherwise, of this book is that the reader comes away feeling rather good about practically any other economy in the world!
To complete your dose of how-to-become-ridiculously-well-informed-in-one-week-about-China, this book, coupled with McGregor’s enthralling The Party and Prem Shankar Jha’s Managed Chaos, does the job admirably.
If you ride properly on the back of Red Capitalism, you will burrow deep into the crevices and fault-lines of China’s financial system. The authors start by revealing a rather interesting snippet: that in the IPO boom of the mid-2000s of Chinese banks, the aggregate amount raised was $42 billion from foreigners — and almost the exact same amount was paid out to the government by way of dividends!
Chinese banks are pure policy instruments. The Chinese government uses these banks, instead of the national budget, to fund its national capital expenditure programmes. This is smart. By doing so, China’s central government fiscal deficit and its national public debt-to-GDP ratio remain optically very low. This has fooled many analysts across the world. And, of course, the folks who know this have no reason to expose this too explicitly, for they are usually “within the system”, ie, Wall Street investment banks, asset managers and so on, all of whom remain horrifyingly compromised because of the huge fees and endless expansion China promises them.
Ever wonder why Morgan Stanley’s Stephen Roach and Goldman Sachs’ Jim O’Neill remain resolutely hyper-bullish on China, despite the country’s huge and, to my mind, insurmountable debt problem ($22 trillion by 2016)? Also, ever wonder why these very gentlemen remain so resolutely bearish on India? Go take a look at the fees that India pays these investment banks to raise capital through divestment deals — these wouldn’t fund even a day’s supply of coffee. On the other hand, in just one Chinese bank IPO, the government paid these banks $220 million as fees. Research reports by Wall Street banks have always been up for sale to the highest bidder, and nobody knows this better than the Chinese.
Bond markets in China, the authors point out, remain a joke. With no dynamism in interest rates, everything becomes moribund in the bond markets in China. Trading volumes in Chinese government bonds, the authors show, often resemble a Z-group stock’s volume on the Bombay Stock Exchange.
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The stock markets are an even bigger joke. In China, there is no rationale for the stock markets to exist, save for an avenue for the government to raise cash from foreigners. The People’s Bank of China (PBOC) exerts control over the markets, and more than one fund manager has told me that if you simply follow the PBOC, it’s hard to go wrong in Chinese stock markets. Well, that has not stopped the mainland China Shanghai Index from losing nearly two-thirds of its value since 2007.
The authors go on to point out that the current Chinese banks have been made over by Western investment banks … the lipstick, the mascara, the pedicure, the hair weave … so, in effect, they closely resemble western banks. All this was done to sell stock to western funds in mega IPOs. However, even a cursory examination of these banks’ financials shows how misplaced the western optimism on Chinese banks has been.
A company that I know well, and one with significant borrowings from Chinese banks, told me that even though the firm defaulted on payments to the Chinese banks, these loans were not classified as non-performing — you see, classifying something as a non-performing loan (NPL) is a subjective exercise in China. Contrast that with the very stringent mechanism in India.
With regard to the Party, the authors demonstrate, often in mind-numbing detail, the complicated math by which the bust Chinese banks of the nineties became supercharged and sleek institutions by the first half of the following decade. All this is credited to Zhu Rongji. The authors posit that Wen Jiabao, his successor, has all but undone the good work Zhu did on bank clean-ups through the asset management companies (at least on paper). Under Wen, China embarked on a near-suicidal credit binge after the 2008 crisis. This, the authors say, is certain to cause China’s fifth banking crisis in five decades. Just to illustrate, Chinese banks sported NPL ratios of 50 per cent-plus in the nineties. Given the recklessness by which $1.7 trillion have been doled out in just the past two or three years, it would now be reasonable to assume an NPL ratio that could be at least as bad.
If you are Indian, you will suddenly feel immensely better about the future of your country, how well Indian banks are regulated (not a single systemic banking crisis ever), and how India’s economic growth model stands head and shoulders above China’s … or for that matter, the rest of the BRICS pack.
The reviewer is vice-chairman and joint managing director, First Global
RED CAPITALISM
The Fragile Financial Foundation of China’s Extraordinary Rise
Carl Walter and Fraser Howie
Wiley; 234 pages; $29.95
