Your rating(Clear)Rate this item


There was a problem filtering reviews right now. Please try again later.

34 of 37 people found the following review helpful
on March 21, 2011
Carl Walter and Fraser Howie shine ruthlessly, their projectors, on China's still-opaque, stunted capital markets. The authors demonstrate convincingly that China's major banks have been for the most part simple financial utilities directed by the Chinese Communist Party (Party) to extend whatever loans are necessary to achieve its economic growth goals. Chinese households' high savings are the foundation of the banks' capacity to lend. Walter and Howie wonder what will happen to this bank funding if the Chinese households learn to borrow and spend with the same enthusiasm as their American counterparts have done. The authors show clearly that Chinese households are poorly rewarded for their thriftiness due to inadequate yield returns in light of the prevailing inflation rate. Only stocks and real estate, both highly speculative and risky in nature, offer Chinese households investment opportunities which can possibly allow them to beat inflation.

The clean-up of non-performing loans (NPLs) and the ensuing recapitalization of China's major banks are a recurring feature in the management of the country's major banks by the Party. The veneer of credibility that the (Western) financial community has provided to China's major banks cannot hide the fact that these banks are subservient entities not only to the Party, but also to the major state-owned enterprises (SOEs), the greatest beneficiaries of the financial status quo. Walter and Howie wonder whether the major SOEs control the Party due to their great economic and political power. The authors point out correctly that the non-state companies can only thrive in sectors such as consumer, food, certain areas of high-tech, pharmaceutical, and other light industrial sectors in which the Party and SOEs have had little interest. Allowing direct, fair competition from the non-state sector would oblige SOEs to shape up without the support of a complaisant financial system.

Furthermore, Walter and Howie debunk the myth that China's public debt burden is low. Central government obligations, local government obligations, and NPLs already represent over 75% of China's GDP. The authors remind their audience that the cost of public debt interferes increasingly with growth the more that this cost is above 60% of GDP. China's unfavorable demographics will only make this challenging situation worse in the coming decades. However, Walter and Howie believe that China's use of debt can continue for a long time due to the country's still opaque economic and political system. In addition, the authors remind their audience that the Party is keen to keep the renminbi as undervalued as possible, regardless of the relentless pressure of China trading partners. The Party does not forget what happened to Japan after the country freed up the yen to appreciate and deregulated its financial markets. Japan has not yet fully recovered from its wild asset bubble burst that occurred in 1991.

Walter and Howie call for their emergence of a strong leader who can bring the reform of the Chinese capital markets back on track. The authors deplore ad nauseam that former Premier Zhu Rongji's thorough financial reforms are unraveling under the pressure of special interests such as SOEs.

In summary, Walter and Howie offer their readers an opportunity to go beyond the hype by uncovering the lid on China's still-opaque, stunted capital markets.
22 commentsWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
31 of 35 people found the following review helpful
on February 27, 2011
I really enjoyed the description of China's financial setup. I think this book makes a relatively dry sounding subject quite enjoyable and I finished reading this book in about a day -- the only real concerns I have are two 1) Man the writers have a giant man crush on ex-Premier Zhu. For about 90% of the book, Zhu is the peerless reformer of the financial system...and then suddenly in the penultimate chapter Zhu's reforms are made to appear as the fundamental cause of the deepening corruption among China's 'princeling' party. 2) Despite the relatively grim description of the financial system and the growing corruption in China the writers, in less than a page, conclude that "China will not follow Japan's path because its geographic and population size, and the constrained nature of its banking system" which I must admit did not make much sense to me, malinvestment is malinvestment. I am also unsure about their argument that because it took 20 years for Greek perfidy to come to light regarding their financial and fiscal state the PRC's opaque system is safe from a crisis of confidence.

Still, this is a great book and I would definitely recommend it to anyone even remotely interested in China...and by extension the rest of the world.
0CommentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
16 of 17 people found the following review helpful
on March 29, 2012
Format: HardcoverVine Customer Review of Free Product( What's this? )
Red Capitalism attempts to explain Red China's economic rise and the economic system behind it. The book did expand my understanding of the economic system, but the economic system created by the Chinese Communist Party is complex and much of it is hidden from outside view. The book explains this, but the lack of insight results in a lot of confusion about how it all works.

What is clear is the four big Chinese banks are at the center of the system. These banks create the money that runs the system. Behind this is the Communist Party. Nothing happens in China without the OK of the Party. The Party and the banks loan money, BIG money, to the businesses and governmental entities at great loan rates. Many of these loans go bad, which should reflect on the bank's balance sheet, but do not because these bad loans are spun off to "bad banks" which absorb the bad debt and keep the big four banks clean.

Within the system there are multiple agencies borrowing lending money to and fro to such an extent that figuring out who really owes what is all but impossible. The stock markets and bond markets do not analyze risk so the amount paid for bonds or stocks do not reflect the reality of the financial instrument. In addition, China keeps its banks and companies isolated from the outside Western financial system so they are not heavily impacted during a world economic crisis. The result seems to be a very stable system that creates enormous amounts of liquidity and grows it economy without the periodic meltdowns of the outside capitalist world.

The problems within the system mostly revolve around the disposition of bad debt - one bond issue simply ceased to exist after awhile - and the lack of risk analysis. Can a system that creates money from expectations keep going? If it does not keep going what will happen to the world markets? For the moment, and for the foreseeable future, the Chinese economic system works well and will keep on working. If cracks do exist in Red Capitalism they are difficult to discern although the authors try to explain them while also explaining that the system has no immediate exceptional problems.

The book makes it clear that capitalism does NOT exist in China. Everything is ran by the Party and exists for the Party. The capitalist institutions that appear to exist do not run like Westerners think they do. Stock markets are not real markets and IPO's are manipulated for the benefit of the few chosen by the Party.

The book goes into detail about the inter workings of the various institutions that run the economy, but the relationships are not all that clear. For example, the China Investment Corporation is said to be the linchpin of the financial system (page 145), but how and why are not clear. The authors state that the big four banks are the keys to the system, and the Party runs all, but then they state that the China Investment Corporation runs the economy. I could never understand the interplay. Perhaps that is because the Chinese do not want anyone to understand the relationships so it cannot be clearly explained. Nonetheless the authors do not manage to make this understandable. In many areas of the book I found these internal inconsistencies. There are several charts in the book showing the organizational relationships, but charts cannot explain the complexities of the financial arrangements between the institutions.

How the Chinese continue to attract investments from abroad is still a mystery to me. If meaningful risk analysis is not possible why would Western financial corporations pour money into the place? The book does not explain this anomaly.

The authors of Red Capitalism are in love with abbreviations. The problem is they do not list all the abbreviations in one place (or even in the index) so the reader can easily remind themselves of what these numerous listings mean. On page XXI there is a list of abbreviations; however, it is much too short. Not listed but often used, for example, are: RMB, SOE (state owned enterprise), SPC (state planning commission), NAFMII, NAO, PTA, SETC, NGO among others. If the reader sets the book aside for a day or two then comes back to read it this lack of a complete abbreviations listing is literally crippling.

The dangers of China collapsing are not well explained. How a Chinese implosion might impact world markets is only lightly touched upon. A complete explanation of how various financial institutions in the USA would react would be interesting and enlightening.

If the reader is not knowledgeable in economics and finance the book will be impossible to understand. The authors fail to explain even the most basic economic principles. They often fail to tell the reader how Western financial corporations operate and, instead, explain only how Chinese banks and financial institutions operate. Without some understanding of how Western banks and financial institutions normally do business one is left in the dark about Chinese business practices. The authors simply assume the reader has a working knowledge of economics and financial institutional operations.

AD2
0CommentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
11 of 11 people found the following review helpful
VINE VOICEon April 2, 2012
Format: HardcoverVine Customer Review of Free Product( What's this? )
"Red Capitalism" by Carl E. Walter and Fraser J. T. Howie is an expertly written deconstruction of China's financial system. The authors have deep subject matter expertise with decades spent in China as financial industry analysts, traders and managers. Narrowly written for readers who have a keen interest in finance, the author's clinical analysis makes clear that Western- and Chinese-style capitalism are practiced very differently; with significant flaws in the Chinese system threatening to become a major problem for us all.

Mr. Walter and Mr. Howie briefly review China's economic history to reveal that the same revolutionary families who control the Communist Party maintain tight control over the country's banking system, which is essentially closed to outsiders. Mr. Walter and Mr. Howie discuss how the big banks are used as "utilities" to fund the state owned industries and public works projects that employ the proletariat mass of Chinese workers, thereby maintaining social stability. Unfortunately, the related pressure to grow the economy has produced slews of nonperforming loans which in turn have been hidden within an opaque, Enronesque maze of financial reshuffling that has to date succeeded in passing the problem on to future generations of Chinese leaders. When the day of reckoning might come remains uncertain, but the evidence presented by the authors through dozens of detailed charts, graphs and tables - many available for the first time to a Western audience - paints a devastating picture.

So why is it that the Western world generally perceives China to be a good bet? Mr. Walter and Mr. Howie suggest that American bankers have helped build up and hype China's image and stock market by creating IPO-worthy companies from dozens of small provincial companies rolled up into larger ones. The authors go on to discuss China's "primitive" bond markets which they believe are impossible to value accurately but are designed mainly to throw off cash for the Party faithful. Through this highly informative discussion, the reader comes to understand that while China's economy might resemble free market capitalism on the surface, the underlying reality is that the economy works mainly for the elite members of the Party; not the Chinese people (whose hard-earned savings essentially keeps the banking system solvent) or outside investors.

Mr. Walter and Mr. Howie do not speculate about what the future might hold, but it is reasonable to believe that China's debt problems could explode in the not too distant future. The authors suggest that China's fiscal challenges will be aggravated by the burdens of caring for an aging population and a political Party that refuses to put real reforms on the table for fear of losing its grip on power.

I highly recommend this eye-opening book to everyone interested in China and the global economy.
22 commentsWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
10 of 10 people found the following review helpful
on September 7, 2011
Chinese Capitalism isn't magic. Some parts are a little sketchy. There are several difficult to sustain aspects of Chinese economic/financial policy.

1) The banks are basically extensions of the Chinese government.

2) Loans that the banks make are often politically motivated, made to those connected within the party; many of those loans are not economic, and the loans don't perform.

3) Asset management companies are formed to absorb the bad debts when they become a risk to the banks. These are funded by the Ministry of Finance, which effectively shifts losses back to the government in an indirect way, often via the People's Bank of China.

4) China has massive foreign currency reserves, but the ability to use them domestically is limited.

5) Since 2008, forcing the the banks to lend has accelerated. In understanding the indebtedness of the Chinese nation, one must aggregate and net the debts of the banks and other financial entities sponsored by the government. In the US, that would mean adding and netting the debts of the GSEs.

6) The financial markets of China are bank-centric. The bond market does not play much of a role, except that the banks absorb many of the bonds, sometimes at negative interest spreads.

7) Chinese finance can be very complex, with difficult-to-understand flowcharts for cashflow and promises, some of which hide bad debts eventually absorbed by the PBOC. They are another example of how structured finance can obscure economic results.

8 ) When companies went/go public in China, the rewards often disproportionately went/go to party leaders and friends/family thereof.

In short, what privatization has happened in China has benefited those connected to the Party, while the banking sector the economy is the slave of the Government, despite the offering of shares to the public.

I recommend this book highly, and think the authors did a good job in being realistic about China and its financial economy. China has a weird economy. They could subsidize and own businesses explicitly, but instead, the subsidies are hidden inside financing.

But wait, what is the endgame here? If all of the banks are mere extensions of the government, once inflation gets large enough, the Chinese government will have to modify/abandon what they are doing. China steals from its consumers (financial repression) to aid its producers, who in turn give money to the Party, with whom the producers are in league.

Quibbles

None.

Who would benefit from this book: If you want to understand the Chinese economy, you will like this book.
0CommentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
6 of 6 people found the following review helpful
on May 25, 2012
China's banking system is built on an incredibly shaky foundation. The U.S. and many other nations are investing heavily in its financial sector. This book attempts to explain the incredibly complicated system. However, because the authors are seasoned Wall Street investors and the book is written so, it is difficult for the laymen to understand some details. Overall it explains the modern financial systems of China and how it got to this point. After reading this book my inclination is to never invest in China's financial system for as long as it is configured the way it is now. A communist nation can never have a truly free market. Although the banks are supposed to be commercialized they basically just funnel investors money into state owned enterprises while maintaining a high level of bad debt. They then pass off that bad debt to Asset Management Companies who were specifically created to remove bad debt from the national bank's balance sheets.
0CommentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
7 of 8 people found the following review helpful
Many people are familiar with the story about how China's economy was forged from the embers of the Cultural Revolution; how it went from an insolvent, antiquated, Soviet-style system to a white-hot and unstoppable free-market beacon. After Mao Zedong's death, Deng Xiaoping worked to replace the memories of the chairman's assault on the Four Olds (old culture, customs, habits, and ideas), along with the subsequent Gang of Four, with his (Deng's) Four Modernizations (agriculture, industry, science and technology, and the military). The communes came down and the special economic zones went up. Methods that didn't work were abandoned; ones that did were adopted, and the Communist Party worked closely with its citizenry to ensure a reasonable rate of acceleration during this, to quote Marx, primitive accumulation of capital. In the early 1990s, responding to the popular notion that some people had gotten too rich too quickly, the Party refitted "socialism with Chinese characteristics" to take it into the future and ensure all Chinese had a stake. Since then, it's been full steam ahead. China has become the world's second largest economy, on its way to becoming the largest economy. The Asian leviathan was virtually unfazed by the 2008 economic meltdown, etc.

Stuff and nonsense, say Carl E. Walter and Fraser J. T. Howie in their book Red Capitalism: The Fragile Foundation of China's Extraordinary Rise. After reminding the reader that China's rise really is extraordinary, and that if not for a few key figures and events the country might have remained a monetary basket-case like it was prior to 1978, the writers reveal a series of unflattering truths through the medium of commentary embedded in case study.

China's much-lauded model is a derailed version of the one envisioned by former vice-premier Zhu Rongji, not Deng Xiaoping. Zhu hoped to internationalize China's economy, to create a break between it and the Party - to set it free. But the Party has too many competing special-interest groups, i.e. elite families and other cliques whose chief special interest is themselves. The face of China's economy, its vaunted and gargantuan state-owned enterprises (SOEs), may have the veneer of Western corporations (they employ accountants, lawyers, are listed on stock exchanges at home and abroad), but are "not autonomous" and can "hardly be said to be corporations at all." Instead, they are "completely dependent on their political patrons" (special-interest groups), never mind that the SOEs are Western creations (including the 20 or so listed in the Fortune Global 500) birthed by Wall Street. The aims of Zhu Rongji and American investment bankers have been thwarted by the state and its petty, factionalized interests with the upshot that China's major companies are publicly listed, Fortune 500 communist oligopolies.

This situation makes for an atmosphere of instability, the authors argue. The Party, or rather: the dominant interest groups, can remove CEOs, order up mergers, initiate expansion into unchartered territory, or whatever they please. It's not about what's best for the "corporation," it's about what's best for the political elites and their dependents.

In China, nothing is as it seems, and with this in mind the writers take us on tours of the banking sector, the bond markets, the stock markets, etc. The fulcrum of China's economy is its banking system. By the year 2000, each of China's major banks was badly managed and bankrupt. The government stepped in to recapitalize and, with the aid of Western advisors, restructure and reform. But the Party continued with its bad old ways, meaning it continued to order banks to lend to the SOEs, even though bad loans were still outstanding. Debt and losses accrued from non-performing loans are hidden, whatever it takes to keep the SOEs afloat in cash so the economy can continue to grow by eight percent per annum. Debt is removed from balance sheets, record profits and low problem-loan quotients are announced, and the boom-bust cycle begins again. While huge piles of debt are shifted from pocket to pocket, cadres lecture Westerners on the weaknesses of their financial systems.

And on and on it goes. The reader sees that the system and all its constituent parts appear fine on the outside, but are moribund and rotting on the inside. Any bona fide internal reform is trumped by a state-backed culture of myopic incompetence. The stock exchanges are state-of-the-art - and state manipulated. Institutions meant to work in tandem jockey for clout and position. The government has become addicted to debt (and burying that debt) to ensure momentum. The train can't stop; if it does, its passengers might lynch the engineers. In 2009, rather than deal with unresolved loans from the 1990s, the banks went on a $1.4 trillion lending spree.

The subtext is that the Chinese are only fooling themselves, a perennial theme to the observant China watcher. Someone will be left holding the bag, and what a big, burdensome bag it is. According to Red Capitalism, China's public debt (as of 2009) could be as high as 76 percent of its GDP.

So, that's what I learned. But is the book any good?

As someone who's familiar with Chinese history, culture, and society, but who only has a theoretical understanding of business and finance, I found this book engaging, but choppy. There are far too many acronyms, and a way of dealing with this issue should have been to use them sparingly or not at all. There's a "list of abbreviations" (they are not abbreviations) on p. xiii, but not all of the acronyms are present, and, as mentioned, there are just too many of them. Here's a sentence from p. 63. "By the end of 2006, BOC, CCB and ICBC had completed their IPOs and the AMCs shortly thereafter had finished their workouts for their NPL portfolios." On p. 114, because there's a chart, there are just 17 lines of text, but there are 14 acronyms. For a business report, perhaps that's all right, but for a book, it's unacceptable.

Another issue is consistency. We see National Champions, and then "National Champions"; Who's Who and then Who's Who, italicized (different and both incorrect - it should be who's who). We see `every body' when it should read `everybody', and `a top' when it should say `atop.'

The book also repeats itself - often. It requires summaries, but not repetition. Using a one-chapter-per-topic approach, the structure of a chapter should have been: introduction, main body, conclusion - like a textbook. If one must repeat, one should at least reword statements and consult a thesaurus.

Esoteric terminology is introduced and not defined. Amounts are sometimes written in dollars, sometimes in renmenbi, sometimes in both. There is little understanding of parallelism: you cannot write MOF and Ministry of Railways in the same sentence, just like you cannot write 1:23 p.m. and two-thirty in the afternoon in the same sentence.

Finally (and I hate to say it, but someone's got to) there are too many interrogatives; sometimes they come in bunches, and it's not always easy, or at least for a layperson like me, to know if they're rhetorical or not. Chapter Four, "China's Captive Bond Market" ends with the line: "So the question again presents itself: why did China build its fixed income market?", to which I mentally rejoindered, `Uh, I don't know. Did I miss something? Are you going to deal with that in the next chapter? I was kind of hoping you would tell me.' 'Never form an argument from questions,' and 'Avoid asking the reader questions,' are fundamentals a professor would tell a first-year student.

Nevertheless, Red Capitalism is interesting and necessary. Like China itself, Westerners believe China's economy is doing fine because that's what's reported and people don't understand how it functions. Although privatized to a degree, financial entities and mechanisms are shackled to the state - and this is debilitating, not invigorating. China is sitting on a mountain-sized pile of bad debt, and, as Walter and Howie point out, it's possible that pile will only grow. They understand China well enough to know that problems, even mammoth ones, can fester and go unchecked for ages. Though enlightening, extracting pertinent information from this volume is, at times, tedious and in between the engaging bits and shocking facts one wonders where the editor was.

Troy Parfitt is the author of Why China Will Never Rule the World
11 commentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
4 of 4 people found the following review helpful
on November 21, 2011
In their book, Walter and Howie provide a compelling and informed assessment of the Chinese "capitalist" system in the late 20th and early 21st century. The central premise of the work is the understanding that although China has made great strides to effect Western-style reforms to their overall economy, the changes have more or less created and preserved only a veneer of open market style capitalism. Behind the proverbial smoke and mirrors, China utilizes capitalist instruments, form, and language, to funnel resources into strategic institutions and targets identified by Central Planning in Beijing.

Thoroughly documented with primary sources and utilizing an extensive arsenal of dizzying acronyms of state organizations, there's no doubt these guys have their facts straight. But for the uninitiated to the Chinese economy, the overwhelming number of acronyms poses a challenge; thankfully there is a glossary provided for just this reason. When the reader is finally able to get past the incalculable number of players in this economic shell game, the narrative unfolds nicely.

Although reformers such as Deng Xiaopeng and Zhu Rongji have made measurable strides in the direction of reform, the character of the Chinese markets remains the same as always: closed, internally focused, yet now more savvy to the benefits of global capitalism combined with strategic and limited foreign investment.

One of the most enlightening examples of the nature of Chinese markets is that of valuation of equities. Since the scope of permitted investors is limited by government controls, and in the case of many corporations the majority shareholder of a given equity on the market is a state owned entity, market caps don't follow traditional norms for valuation. Chinese corporations can't be valued by free market standards, because they are not controlled nor "owned" by the true players in the free market. And in most cases capital raised internationally or domestically is managed by the government or their proxies to supply resources to local governments and favored corporations in the manner of a "public utility" for money.

My final take? China is more leveraged in the red (no pun intended) than the US ever has been. Central Planning is banking on current dividends and worldwide financial speculation with China as the new "Wild West." With imminent social demands and rapidly changing labor demographics, there may just be a meltdown in the making. So as the Romans would say, "Caveat emptor," as regards investors in this market - but certainly not regarding the purchase of this book.

As for follow up reading, a better understanding of Zhu Rongji and Deng Xiaopeng would be useful to painting a more holistic picture of the modern Chinese economy, and there are a number of excellent biographies available on the two men.
0CommentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
3 of 3 people found the following review helpful
on March 12, 2013
Chinese Capitalism isn't magic. Some parts are a little sketchy. There are several difficult to sustain aspects of Chinese economic/financial policy.

1) The banks are basically extensions of the Chinese government.

2) Loans that the banks make are often politically motivated, made to those connected within the party; many of those loans are not economic, and the loans don't perform.

3) Asset management companies are formed to absorb the bad debts when they become a risk to the banks. These are funded by the Ministry of Finance, which effectively shifts losses back to the government in an indirect way, often via the People's Bank of China.

4) China has massive foreign currency reserves, but the ability to use them domestically is limited.

5) Since 2008, forcing the the banks to lend has accelerated. In understanding the indebtedness of the Chinese nation, one must aggregate and net the debts of the banks and other financial entities sponsored by the government. In the US, that would mean adding and netting the debts of the GSEs.

6) The financial markets of China are bank-centric. The bond market does not play much of a role, except that the banks absorb many of the bonds, sometimes at negative interest spreads.

7) Chinese finance can be very complex, with difficult-to-understand flowcharts for cashflow and promises, some of which hide bad debts eventually absorbed by the PBOC. They are another example of how structured finance can obscure economic results.

8 ) When companies went/go public in China, the rewards often disproportionately went/go to party leaders and friends/family thereof.

In short, what privatization has happened in China has benefited those connected to the Party, while the banking sector the economy is the slave of the Government, despite the offering of shares to the public.

I recommend this book highly, and think the authors did a good job in being realistic about China and its financial economy. China has a weird economy. They could subsidize and own businesses explicitly, but instead, the subsidies are hidden inside financing.

But wait, what is the endgame here? If all of the banks are mere extensions of the government, once inflation gets large enough, the Chinese government will have to modify/abandon what they are doing. China steals from its consumers (financial repression) to aid its producers, who in turn give money to the Party, with whom the producers are in league.

Quibbles

If you aren't good with finance and international trade in a normal context you will have a hard time with this book. If that's true of you or the person that you would give this book to, you might want to get a different book, perhaps Michael Pettis' recent work, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.

Who would benefit from this book: If you want to understand the Chinese economy, you will like this book.
0CommentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
3 of 3 people found the following review helpful
on January 12, 2013
Very few westerners have worked in the Chinese financial sector for twenty years. The two writers of Red Capitalism both have. Being residents of Beijing and Hong Kong they have managed Chinese investment banks, worked in investment firms and played roles in the early IPOs of state owned companies. When two persons with the background of Carl Walter and Frasier Howie write a book about "the fragile financial foundations of China's extraordinary rise" we should listen. The writers are not "bears on China" (to talk with Jim Rogers). However, they point to the unbalanced state of local governments, state owned banks and the property market. The picture of a power house flush with cash might not be the only one.

After a brief recap of the economic reforms after the death of Chairman Mao the rest of the book describes the current state of the economic and financial system. Most of us have read about the risk of a property bubble. In my view the combination of state owned banks with close to free access to peoples deposited money and corrupt local government business entities is the really scary picture. China, to some extent, is still a commando economy. The communist party officials state an economic growth target and then it is the task of those "inside the system", i.e. state owned companies and local government entities to carry out the investments in infrastructure that create the growth and the state owned banks to fund the party with low interest rates that's politically decided. Need I say that credit control and making sure the return on invested capital is higher than the cost of capital is not really prioritized in this process?

It's like a mystery by Agatha Christie. One piece of the puzzle after the other is presented: the banking system, the handling of historical credit losses (they were hidden), the shadow banking system, the equity and bond markets, the local governments, the property market and the risk for coming credit losses. In the end a picture emerges that reveals a public debt of the Chinese state close to 80 percent of GDP. Not far from the Rogoff and Reinhart danger line of 90 percent. Yes. China has huge foreign currency reserves but as long as the currency is not exchangeable these funds are of very little use inside the country. It's a story well told and it certainly changed my perception of the Worlds second largest economy.

I still think the future of China is bright but it might be a rockier ride on the way to the future than most people believe. As China is a large part of global GDP, of global trade and the country practically IS the commodity demand in the world, the imbalances the authors point to should be on every investors radar screen. Most western investors have a surprising faith in that a few elderly communist officials can steer this huge economy through any trouble and this often without really understanding the troubled waters they have to navigate through.

Not wanting to bring anything that might annoy a customs official I read the book prior to going to China a few months ago. It greatly increased the benefit of the trip. On site you mainly get the bull picture. However, most people you meet are fully prepared to discuss any worry the pessimistic foreigners might have regarding the property market or the risk of credit losses, always with the conclusion that there is little to worry about. The Chinese optimism today is very much how I imagine the western optimism in the 1950's. The future is bright and shiny.

Read this book. You will understand the world economy better and many of your competitors will not have read it.

This is a review by eqtbooks.com
0CommentWas this review helpful to you?YesNoSending feedback...
Thank you for your feedback.
Sorry, we failed to record your vote. Please try again
Report abuse
     
 
Customers who viewed this also viewed


Inside China's Shadow Banking: The Next Subprime Crisis
Inside China's Shadow Banking: The Next Subprime Crisis by Joe Zhang (Paperback - May 14, 2013)
$15.95
 
     

Send us feedback

How can we make Amazon Customer Reviews better for you?
Let us know here.

Your Recently Viewed Items and Featured Recommendations 
 

After viewing product detail pages, look here to find an easy way to navigate back to pages you are interested in.