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Carl E. Walter

Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise Hardcover – 7 Jan. 2011

by Carl E. Walter (Author), Fraser J. T. Howie (Author)

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Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise
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In Red Capitalism, Carl Walter and Fraser Howie detail how the Chinese government reformed and modeled its financial system in the 30 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 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.

ISBN-10

0470825863
ISBN-13

978-0470825860
Edition

First Edition
Publisher

John Wiley & Sons Ltd
Publication date

7 Jan. 2011
Language

English
Dimensions

16.25 x 2.41 x 22.65 cm
Print length

256 pages
See all details

Product description

Review

‘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).

From the Inside Flap

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.

From the Back Cover

"Carl Walter and Fraser Howie debunk a number of common myths about China's financial markets in this excellent new book. Investors stuffing their portfolios with China stocks would be wise to heed their warnings on the fragile foundations of China's banking system. The authors have done their homework, digging beneath the surface of "China's financial world to reveal uncomfortable truths about a financial system riddled with hidden land mines that threaten to undermine China's hard-fought economic success in the years ahead."?Rick Carew, former Asia M&A Reporter, Wall Street Journal

"In Red Capitalism, Carl Walter and Fraser Howie give a powerful, albeit controversial explanation of the fragile underpinnings of the financial edifice that financed the seemingly unstoppable rise of China on the global stage?which is all the more persuasive thanks to their careful mining of the data. Their thesis?that China has the trappings of a market system but not the substance?should be considered by anyone dealing with or investing in China?categories that embrace most of the world today. Their contention that China ultimately is a 'family business' explains much that is puzzling to outsiders."?Henny Sender, Chief Correspondent, International Finance, Financial Times

"Red Capitalism is a superb guide to China's financial labyrinth. It's a must-read for anyone who wants to understand the sources of Chinese economic power, and the threat posed by the nation's vast hidden debts."?Arthur Kroeber, Editor, China Economic Quarterly

"Finally, a way into the world's most important and least understood financial system. For insight into how China's economy actually operates, begin here!"?Thomas Easton, Asia Business Editor, The Economist

"A penetrating analysis that demonstrates how hard it is to follow the old adage 'follow the money,' and how rewarding it is to understand what will really drive China into the future."?Christian Murck, President, American Chamber of Commerce in China

"Walter and Howie put the Chinese financial system under the microscope to examine how an absence of leadership, institutional squabbling, and complacency have seen appetites for reform sputter out, replaced by stagnation and dysfunction. Theirs is a fascinating, entertaining, and necessary corrective to the hyperbole surrounding China's seemingly miraculous rise."?David Wilder, Beijing Bureau Chief, Market News International

"Walter and Howie's penetrating study addresses a critically important issue in China's political economy. They possess a rare depth of experience in the analysis of the Chinese financial sector. Their hard-hitting conclusions, based on a wealth of empirical research, will stimulate debate about the future of the Chinese financial system at a critical point in its evolution."?Peter Nolan, Sinyi Professor of Chinese Management, Cambridge Judge Business School, University of Cambridge

About the Author

Carl E. Walter has worked in China's financial sector for the past twenty years and has actively participated in many of its financial reforms. He played a major role in China's groundbreaking first overseas IPO in 1992 as well as the first listing of a state-owned enterprise on the New York Stock Exchange in 1994. He held a senior position in China's first and most successful joint venture investment bank where he supported a number of significant domestic stock and debt underwritings for major Chinese corporations and financial institutions. More recently, he helped build one of the most successful and profitable domestic security, risk, and currency trading operations for a major international investment bank. Fluent in Mandarin, he holds a PhD from Stanford University and a graduate certificate from Beijing University. Carl is a longtime resident of Beijing. Fraser J. T. Howie has been trading, analyzing, and writing about Asian stock markets for nearly twenty years. During that time, he has worked in Hong Kong, trading equity derivatives at Bankers Trust and Morgan Stanley. After moving to China in 1998, he worked in the sales and trading department of China International Capital Corporation followed by a stint with China M&A Management Company. He is a regular commentator on China and its financial system, having spoken in Hong Kong, Tokyo, Beijing, Shanghai, Singapore, and Cambridge. He is currently a managing director at a leading Asia-Pacific brokerage firm in Singapore helping international investors invest in both the Indian and Chinese markets.

Product details

Publisher ‏ : ‎ John Wiley & Sons Ltd; First Edition (7 Jan. 2011)
Language ‏ : ‎ English
Hardcover ‏ : ‎ 256 pages
ISBN-10 ‏ : ‎ 0470825863
ISBN-13 ‏ : ‎ 978-0470825860
Dimensions ‏ : ‎ 16.25 x 2.41 x 22.65 cm

Best Sellers Rank: 1,755,828 in Books (See Top 100 in Books)
- 989 in International Economic Development
- 3,976 in Economic Policy & Development
- 4,067 in Political Economy

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4.4 31 ratings

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George Norris

As interesting as book about China's financial markets is ever going to get

Reviewed in the United Kingdom on 5 August 2012

Verified Purchase

Two Westerners with 30 years experience in China's financial sector delve into recent history to help the reader understand how China's financial system got to where it is today. From the exterior China looks like a fighting fit capitalist economy, but its internal organs are weak.

- Missing heart. Banks are the heart of China's system (providing 73% of finance) yet risk is barely factored into lending decisions. "Peoples Bank Of China writes the cheque for party profligacy". The Party directs bank lending to State Owned Enterprises, resulting in banking sector bankruptcies (in all but name) at the end of each decade: 70s, 80s, and 90s, and one estimate of the late 90s/early 2000s bank recapitalisation is 28% of China's 2005 GDP (compared with 5% of US's GDP for TARP in 2008) We have yet to see bank recapitalisations after the credit splurge if 2009, but the authors argue it is just a matter of time.

- Missing lungs. Bond markets lack the two fundamentals of a market set price and a secondary market. They also fundamentally miss the point of a capital market, as 70% of bonds are anyway held by banks (why not just give a loan in the first place???).

- Missing stomach. The stock market is a 'policy market', and is essentially whatever level the government chooses it. "China's stock markets are not really about money, they are about power". Many of the largest "private listed" companies remain majority government owned (85% for Petrochina, over 40% for banks) with Communist Party assigned heads. "Private property is not the central organising concept of the Chinese economy; rather the central organising concept is tied to control and ownership by the communist party."

Finally, China's economy has two legs.
-One leg is 'inside the system' State owned Enterprises - "more politically competitive than economically competitive", they enjoy state bank directed lending and regulatory support. 54 of the largest SoEs have their heads appointed by the Communist Party, hold Ministerial rank in the Party and outrank (in Party terms) the bank heads. You can imagine how the conversation goes when the head of Petrochina asks the bank for money...
- The other leg is 'firms outside the system' without access to financing or power. These rely on the bewildering array of trust companies and pseudo-banks who fill the role the banks cannot (banks are forbidden to freely set interest rates which reflect the full risk, so most prefer not to lend to risky non- State owned firms). Westerners know of the export prowess of China, but this is largely In Guangdong and the Yangtzse river delta (home to 70% of China's Foreign Direct Investment), the successful 'outside the system' firms know they are better off trading with foreigners rather than China's "inside the system" tycoons.

The book is pretty critical of China, they deliberately go out of the way to counter the panglossian hyperbole in the Western media about China, and how far (or not) they have gone down the road to capitalism. It is not a light read, but useful if you need to know the detail.

Helpful

Milo di Thernan

They are on to something

Reviewed in the United Kingdom on 20 June 2011

Verified Purchase

It will take years to get to the bottom of the biggest concern facing investors in China: the credit quality of local government borrowing. We know three things. First, credit expansion since 2008 has exceeded 50% and credit booms rarely end well. Second, much of it has been incurred by local governments, to fulfil central government economic stimulus edicts. Third, this kind of debt has hit the wall before and still resides on listed bank balance sheets in the form of low yielding bonds, which keep on getting extended, rather than repaid, probably because the underlying assets can not or will not be liquidated. One possible implication? China does not write off its debt in the way that Western bank rescues do. If this carries on, and if more lumps of low yielding quasi-sovereign debt are placed on to bank balance sheets as a result of the 2008-2010 credit boom (to pay for removing the bad debts from them), their RoEs will fall, compromising their ability to pay the dividends that ultimately service debt (because the same quasi-government issuers own much of the listed bank equity and use the dividends to service their debt to the banks). I can not say how much of this is my interpretation and how much I learnt from this book, and do not want to put words into the authors' mouths with this review - even though much of my understanding has been gleaned from reading their book. It is thought provoking, timely, as factual as it can be given inadequate information, and rich with experienced judgement. You will not find a more considered or provocative analysis of modern Chinese banking, so you really should give it a go, to see how it changes the way you think. Since it replaces hunch with informed hypothesis, it will help you to get much closer to the truth of the situation as more facts and events emerge on what is still a very young and untried banking system.

4 people found this helpful

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Faulkner

Essential reading

Reviewed in the United Kingdom on 25 June 2011

Verified Purchase

In many ways, China is an amazing place but serious thought needs to be given to its strange hybrid Communist/Capitalist economy that appears (for the moment) to be defying gravity and rewriting economy theories. Finally, somebody has written the book about the extremely suspect underpinnings of the modern Chinese economic miracle.

Admittedly this is not a book for a general population but it is essential reading for anybody who is thinking of putting their hard earned capital to a 'Chinese themed' investment which runs from EM equities, commodities to even Western auto or luxury goods manufacturers. It is also a book for anybody, like me, who when visiting China doesn't stand in awe of of the new buildings, airports or roads but rather wonders 'How are they paying for this?' or 'Who is going to use this?'.

Despite the complex subject matter the book is written in a lucid and engaging style. It is very well researched and manages to capture the various politics, economics and accounting involved with how the Chinese banks are managed. Ultimately, the book shies away from delivering really hard hitting conclusions other than 'there is likely to be trouble ahead', there again the PRC doesn't like criticism. For those that are interested, I couldn't recommend this book more.

12 people found this helpful

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