Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise [Hardcover]

“... China is bent on superpower rivalry; reserve currency status for the renminbi is a glint in the party’s eye. Red Capitalism puts a powerful case that [China’s] economy and financial system are not fully equipped to support such aspirations.” – Financial Times , January 2011 “So pervasive has this view [that the 21st century is China′s for the taking] become that any effort to examine whether it′s actually true comes as a breath of fresh air. "Red Capitalism" is such a work. Authors Carl E. Walter and Fraser J.T. Howie, both investment bankers, argue that China isn′t so different from other economies nor so immune from normal economic laws as cheerleaders argue. An examination of the financial system—or "how China′s political elite manages money and the country′s economy," as the authors put it—offers a useful lens through which to view much broader issues.” – The Wall Street Journal , January 2011 “[The authors’] ongoing research is an indispensable resource for those seeking the reality behind the often nauseating and sycophantic hyperbole surrounding China’s capital markets.” – China Economic Quarterly , December 2010 “In their new book, "Red Capitalism: The Fragile Financial Foundation of China′s Extraordinary Riser Carl E. Walter and Fraser IT. Howie paint a troubling portrait of the Chinese economy and financial system. Despite the nation′s mind–boggling growth and images of gleaming skyscrapers and luxury cars, the authors say the Chinese growth model is flawed and fragile, and they warn about substantial risks accumutating in its banking system.” – The New York Times & International Herald Tribune Asian edition , January 2011 “If Walter and Howie are right, China may be approaching a period when it can no longer hide the systemic flaws in its banking system; the more profound and problematic question the authors of Red Capitalism want their readers to ask is what this means for China as a whole. The answer will likely impact not just the Chinese, but people around the world as well.” – Asia Times Online , January 2011 The most important financial book of the year." — James Grant , editor, Grant′s Interest Rate Observer “Red Capitalism peels back the facade of China′s economy and reveals how the dominant role of the state has led to enormous financial leverage and endemic malinvestment. China′s major role in the global economy makes Red Capitalism required reading for any financial industry fiduciary.” — Mark L. Hart III , Chairman, Corriente Advisors, L.L.C.

‘ Anyone who is overly impressed with the apparent resilience of China today would do well to read [this] book’ (The Economist, December 2010). ‘…an impressive wealth of analytical detail and political nous’. (FT, January 2011). ‘ An eye–opening look at how Communist Party bosses control China ′s economy.’   (Independent.ie, June 2011).

For many years to come now, China′s economy has seemed unstoppable. A slow appreciation of the renminbi in 2007 brought wave upon wave of liquidity into China and allowed its companies and banks to raise hundreds of billions in dollars via stock market listings. State banks that had started the new century as bankrupt relics of a communist past became the darlings of international investors. Even the collapse of Lehman Brothers in 2008 and the ensuing global financial crisis seemed to have little impact on China as the government quickly responded with a huge stimulus package. But the Lehman collapse was a dramatic wake–up call to the Chinese leadership. This model of bank and capital market reform had been studiously emulated for more than a decade and had brought great benefits to China. But now, although they believed it to be bankrupt, the Chinese government were bereft of new ideas. In the face of the global financial crisis, the government returned to what it knows best: massive state intervention via the banking system. Ten years of banking and capital market reforms were dead. In Red Capitalism, Carl Walter and Fraser Howie detail how the Chinese government reformed and modeled its financial system in the thirty years since it began its policy of engagement with the West. Instead of a stable series of policies producing steady growth, China′s financial sector has boomed and gone bust with regularity in each decade. The latest decade is little different. Chinese banks have become objects of political struggle while they totter under balance sheets bloated by the excessive state–directed lending and bond issuance of 2009. Looking forward, the government′s response to the global financial crisis has created a banking system the stability of which can be maintained only behind the walls of a non–convertible currency, a myriad of off–balance–sheet arrangements with non–public state entities and the strong support of its best borrowers—the politically potent National Champions—who are the greatest beneficiaries of the financial status quo. China′s financial system is not a model for the West and, indeed, is not a sustainable arrangement for China itself as it seeks increasingly to assert its influence internationally. This is not a story of impending collapse, but one of frustrated reforms that suggests that any full opening and meaningful reform of the financial sector is not, indeed cannot be, on the government′s agenda anytime soon.