Red Capitalism

"This book really showed the way that the capitalist system began in China and developed through the 1990s. It uses entertaining anecdotes to show how the apparently capitalist system that grew out of the old socialist economy was in many ways an illusion created by eager foreign investment banks. Contrary to what many observers think, ‘capitalism’ grew within the cage of the existing system and adapted to its parameters, creating something that is neither socialist nor capitalist. The government likes to call it ‘socialism with Chinese characteristics’—which really means ‘whatever we decide to do.’ It’s a great book. Firstly, you have to realize that the constituents for the Communist Party are not individuals. It’s not individual people that the party hears from and deals with every day: it’s entities—and those entities are state-owned enterprises. The government’s principal concern is the macroeconomy. It’s not the needs of individuals, which is more what preoccupies the governments of democratic countries. The second thing is the primacy of the Party and the importance to the Party that it remains in charge. The Party’s structure really is more—and I say this in the best possible way—like an occupying force than something that’s chosen by the people. If you go to cities and towns throughout China, you’ll find that the Party representatives are often annoying people who are parachuted in from the central government. Local people don’t necessarily like to deal with them, but they have to. They’re there to monitor and report. That’s the way the Party acts within China."

"To the extent that a book on finance can be a bestseller, yes, I really hope so! People need to pay attention to it because it’s a very important book. Carl has been in Beijing since the financial sector opened to foreign activity in the early 90s. He’s seen the evolution of the entire process and has an insider’s view. By the late 90s, China’s banks were technically insolvent because the non-performing loans ratio was 40 to 50 per cent. Carl’s still a big fan of Zhu Rongji, the former prime minister. One of Zhu’s greatest achievements was to ‘solve’ the problems in the banking sector by setting up asset-management companies and recapitalising the banks. Today, of course, the banks are still lending very recklessly despite a lot of reform – the formation of credit and risk-management committees, for example. The banks continue to require bailouts and recapitalisation from the Chinese government, which props them up so that they can sell these bank shares to the public in Hong Kong or Shanghai. Carl sees this process as a kind of Ponzi scheme. Zhu was very inventive in trying to recapitalise the banks while still maintaining state ownership over them. That was the goal and continues to be the goal of policymakers in China: prop up the banks and make sure non-performing loans don’t appear on the books. We don’t actually know the amount of non-performing loans that exist on the ledgers of China’s banks. Whenever a loan becomes problematic, especially when the borrower is a major SOE, it’s restructured – i.e. rolled over or extended. Yes. Carl and I were hopeful in 2005 and 2006, the period just after these banks were listed. We thought things might turn around. But 2009 was a watershed year: the central government essentially ordered the banks to lend to local governments to finance infrastructure projects and beat the world recession. The order from Zhongnanhai, the complex where China’s top leaders are based, was that cost was of no consequence and that we needed to maintain growth of at least eight per cent. The banks duly lent the highest amount in Chinese history. There was over 30 per cent growth in credit expansion in a year. All the cautionary procedures the banks put in place were useless. Now, of course, the government has to deal with these loans, many of which are becoming problematic. It’s a way to rope in money from investors. Share issuance didn’t really change anything. The party is still in every large, state-owned corporation. And most shares are still owned by government entities. Most of the large SOEs just obey Zhongnanhai’s orders. They don’t really care about profits and they can get cheap, low-interest loans from the banks. Still, one good outcome of listing the minority shares of SOEs and state-owned financial institutions is that there’s much more transparency now. Even if some balance sheets are manipulated, the fact that these quoted companies need to issue annual reports and quarterly summaries leads to a lot more information on how the companies are run. A careful observer can look at the figures and see when something untoward is happening. And that’s what people like me are doing now. You can view the publicly available information and spot some disturbing trends. You can then bring evidence to the table when you’re arguing against people who are very bullish about China."