China Herald: The interaction between political and financial elites

Victor Shih

Scholar Victor Shih is interviewed by the China Daily, on how he analyzed the links between different factions in China´s politics. A dive into China´s capital markets since 2009, achieved Victor Shih high praise as one of the first to document China´s serious debts.

The China Daily:

The book is considered by some the first in academia to develop a framework with which to analyze how elite politics affect monetary and banking policies.

Scholars review this book as a clear, well-researched explanation of the dynamic driving China's reforms.

"It is both a fascinating portrait of elite politics in China and a rigorous test of an analytical model," said Bruce Dickson, political science professor and director of Asian studies at George Washington University. "Most scholars are good at one approach or the other. Shih shows he is equally gifted at both."

Shih began his study of China's capital markets in 2009. His findings on China's local government debt were published in China Economic Review in 2010, creating a stir in the US and China. He noted in the thesis that combining the findings of the National Audit Office (NAO), the China Banking Regulatory Commission (CBRC) and the People's Bank of China, the total official estimates of local governmental debt is much higher than the National Audit Office (NAO) said in its report.

"My estimate was entirely based on official numbers that the government announced to the public online," Shih said.

His study suggested that Chinese government must have the resolve to stop local-level leveraging before risks in the financial system steam out of control.

"I noticed that in recent years the Chinese government has taken many efforts to control the total amount of local debts," said Shih. "I also noticed that the Chinese government tends to be more transparent about the financial figures."

Shih said now People's Bank of China published the total debts of the entire country and he's able to observe the whole situation in China. "My intention is to answer such a question - how China's total debts affect China's rapidly growing economics?"

China has significant ability to control the economic fluctuations.

Shih argued that "China needs to bring some financial risk to some degree. "In financial markets, there have to be some failures," Shih said. "If your bonds are bad ones, your company shuts down. So people won't count on the government all the time as the final straw for bad business. Any market has risks.

"The only thing I see purely possibly run by a market economy is the so-called underground banking system, which is illegal in China."

Shih believes that the Chinese government will make more of an effort to balance the economy.

"Slowing down a bit is not bad, and sometimes needed," Shih said.

More in the China Daily.

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