Wednesday, March 30, 2011

Red Capitalism - review

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Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, a recent book by Carl E. Walter and Fraser T. Howie is a must-read book for current foreign correspondents in China and anybody who wants to dive a bit deeper into China's recent economic history than most headlines allow.
The book not only offers a thorough overview of China's achievements in setting up a banking system from scratch, after it opened up for economic reform after 1978. That description is a balanced admiration of what has been done in those years, and a very critical analysis of the financial mess the country is in now. Not surprisingly, the authors have listened very carefully to the views of Victor Shih, who has done basic research in China's outstanding debts, and with Shih they confirm that the current financial foundations are very weak and its banks are still extensions of the party-system who cannot survive in other economies where they are not backed by the state. The Enron-scandal looks pale compared to the financial minefield, China is looking at.
"If market valuations for Chinese banks are real and the banks are in such a great shape, why hasn't China's banking model been exported? As US and European regulators and governments look for a way to prevent the next financial crisis, why is China's model - with its asset-management companies, outright state ownership and central bank lending - not invoked?", the authors ask at page 77. Asking the question is answering it.
What I really appreciate about the book is the way they frame China's governing elite. I'm sure that many Chinese financial officials and experts know how their system works, but you need relative outsiders to come with a sharp analysis like this, in a paragraph where they describe China's rulers as a family business:
What is remarkable about the financial reforms pursued by Zhu Rongji was that they were comprehensive, transformational, and pursued consistently. Failure to follow through may have been inevitable, however, given the fragmented structure of the country's political system in which special-interest groups co-exist within a dominant political entity, the Communist Party of China. What moves this structure is not a market economy and its laws of supply and demand, but a carefully balanced social mechanism built around the particular interests of the revolutionary families who constitute the political elite. China is a family-run business. When ruling groups change, there will be an inevitable change in the balance of interests; but these families have one shared interest above all others: the stability of the system. Social stability allows their pursuit of special interests. This is what is meant by calls for a 'Harmonious Society'.
As you might realize, I subscribe to that analysis. And it goes beyond the financial system, that is by accident the subject of this book.

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