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Red Capitalism: The Fragile Financial Foundation Of China's Extraordinary Rise (2011)

by Carl E. Walter(Favorite Author)

3.91 of 5 Votes: 5

ISBN

0470825863 (ISBN13: 9780470825860)

languge

English

genre

History & Biography

publisher

John Wiley & Sons

review 1: "Red Capitalism" 2nd edition in 2012 covers up to 2011 the various financial institutions and Communist Party reforms and development that have transformed China economically. It is worth reading to get an understanding and insight on the history and legacy of China's path to its red capitalism status as of 2011, prior to catching up what China's capital market is nowadays.The book first reveals how reforms have happened in the banking, which started out in 1978 after the Cultural Revolution based on Soviet inspired model ... from 1 bank (PBOC) to 29 banks; 745 trust and investment companies; and 34 securities companies in 1989, these institutions were provincially controlled and lending unstintingly leading to high inflation, corruption and out of control financial system... more. This system was abandoned in 1994 with Zhu Rongji who led a reform in favor of the capitalist inspired model (based on the American experience). In 1998, Zhu proceeded to adopt international methods of corporate governance and risk management, including the spinning out the problem assets from the Big 4 banks' balance sheets to 4 "bad banks" named as AMCs (asset management companies) during 1999 to 2005 so as to ready the banks for IPOs. During the process, PBOC (People Bank of China ... central bank role) have to underwrite all financial cleanups of the non-performing loans transferred to the AMCs, including the creation of its own AMC (Huida AMC) to take "problems left over from history" off its own balance sheet. Subsequently, the state banks were able to raise new capital from international strategic investors and IPOs on international markets during the period 2003 through 2008. Interestingly the authors explained how the banks raised capital via IPOs to pay dividends to the state (who owns significant portion of the banks), that turn around put the money back to the banks. The western model based reform since 1998 was ended in 2009 after the 2008 financial crisis induced by Lehman Brothers collapse, which led to the reform framework's lost of credibility and banks without fall back to replace it went on lending binge ... this ended up in crazy bank lending with other security instruments credit of RMB 14 trillion in each of year 2009 and 2010 (translated to 40% of GDP in 2009 and 35% of GDP in 2010) ... compared with 2008's RMB 7 trillion (22% of GDP). It is also explained how the organization, ownership and transactions among PBOC, AMCs and MOF (Ministry of Finance) played out during the reform and after. The authors concluded that China's banks operate within a comfortable cocoon woven by the Party and produce vast, artificially induced profits that redound handsomely to the same Party.After talking about bank reform, the book proceed to cover China's bond market. In the early 1980s, MOF issued CGB (Chinese government bond) that were primarily taken up by SOE (State Owned Enterprise) investors. Over the course of the 1980s, successful agricultural reforms and growth of small enterprises rapidly enriched the general population, which by 1988 nearly two-third of all bonds were sold directly to retail investors. Then the Party realized that getting banks to buy bonds lower the MOF's interest expense (as Party controls the interest rate) compare with retail investors requiring higher returns. So bond market switch to having banks and non-bank financial institutions as prime instead of retail investors ...with banks holding 68% of bonds outstanding in 2010 bond market while retail dropped to 1% ... this way the household savings are channeled by the Party to MOF. As a result, China's bond market contrasts with the international market where banks dominate underwriting and trading, while investors are diverse with large roles played by mutual & pension funds as well as insurance companies. In China, diversity means nothing as all institutional investors (bank or non-bank) are controlled by the state ... thus credit and market risk cannot be diversified.The final parts of the book covers China's stock market. As a result of Shenzhen Development Bank's IPO and Vanke's IPO in 1987 which led to generous cash dividend in 1989, share fever and wild street market trading was spread over in China causing social unrest ... Beijing decided in 1990 to establish Shanghai and Shenzhen stock exchanges, which were opened in 1990 and 1991 respectively. Apart from closing the street markets, the Party's agenda was to use the stock exchanges to reform SOEs through incorporation and put an end to free private capital markets. Two subsequent events in 1992 also contributed to China's future development. First being Deng Xiaoping affirmed the value of stock markets, which gave rise to huge equity boom and truly national capital market. Second event was Zhu Rongji permitted Chinese companies to list their shares on overseas markets and agreed to open international markets and their capital to China's SOEs, which let in ideas and financial technologies that created its great National Champions. National Champion idea came from Goldman Sachs ... by consolidating provincially owned-and-run industrial assets into a new company out of the regional fragmentation of an industrial sector (e.g. China Telecom/China Mobile as national telecommunication company). Ministries thus learned from Goldman Sachs and Morgan Stanley how to use international law and complex transfers of equity shares to build the National Champions. The outcome being huge amount of cash raised internationally for powerful companies with national markets. China Mobile ended up its 1997 IPO on New York and Hong Kong stock exchanges with historical US$4.5 billion. National Champions of different industries (Telecoms, Oil and Gas, Mining, Insurance, Airlines, Energy, Banking) held overseas IPOs for the period 1997 to 2006 resulted in US$73.2 billion capital raised. Then in 2006 and 2007, these companies began to return to Shanghai market for secondary listings and use their wealth to reward friends; family; other SOEs & agencies closely associated with the Party to take profit from the listing as investors ... by means of deliberate setting of low company valuation plus "real strategic" investors with full allocation (versus other investors going through a lottery system).
review 2: Red Capitalism is a complete, objective, and data-driven look at the forces behind China's meteoric rise over the past three decades. Indulging in neither cynical nay-saying nor worship at the altar of China Inc, authors Carl Walter and Fraser Howie first deconstruct the legitimate successes achieved by 'the Party', then weigh the hidden costs and long-term consequences. A highly informative read littered with facts and figures, Red Capitalism suffers only by being so technical that at times it gets bogged down by jargon and acronyms. less

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