- Hardcover: 268 pages
- Publisher: Cambridge University Press; 1 edition (December 3, 2007)
- Language: English
- ISBN-10: 052187257X
- ISBN-13: 978-0521872577
- Product Dimensions: 6.1 x 0.8 x 9.2 inches
- Shipping Weight: 1.2 pounds (View shipping rates and policies)
- Average Customer Review: 8 customer reviews
- Amazon Best Sellers Rank: #4,656,755 in Books (See Top 100 in Books)
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Factions and Finance in China: Elite Conflict and Inflation 1st Edition
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"This impressive new book makes several important contributions: the case studies provide never before available accounts of elite politics, with vivid details of the personal and political differences among top leaders; the model of inflationary cycles provides new insights into how financial policy changed to cool an over-heating economy. It is both a fascinating portrait of elite politics in China and a rigorous test of an analytical model. Most scholars are good at one approach or the other. Shih shows he is equally gifted at both."
Bruce Dickson, George Washington University
"Shih offers a political-economic explanation of a dual feature of the post-reform Chinese financial system-an inflationary cycle and a large amount of non-performing loans. This book will make a valuable contribution to understanding the Chinese financial system and the reasons for the lack of reform thereof."
Chung Lee, University of Hawaii at Manoa
"In this forthcoming book, Northwestern University Professor Victor Shih presents a compelling alternate framework for a key slice of Chinese politics-economic and financial policy making. He argues that rather than a duel between conservatives and reformists, Chinese policy making represents a series of compromises between a "generalist" faction that derives support from local provincial authorities vying with a "technocrat" faction supported by central government bureaucrats seeking to consolidate control in Beijing...Prof. Shih presents a statistical model that aims to prove his theory, but the book comes to life when he launches into a narrative depicting the post-1978 struggles among China's political elite...As China's role in buoying the global economy continues to deepen, building a proper framework for understanding that push and pull in elite politics-and using those tools to foresee possible outcomes of Chinese policy becomes essential. Prof. Shih's work makes an important contribution to that effort."
Rick Carew, Dow Jones Newswires, Far Eastern Economic Review
"Shih's elegant factional model provides a novel explanation for the monetary and policy fluctuations under Deng Xiaoping and Jiang Zemin...Factions and Finance in China offers an invaluable window into the workings of elite politics in a regime better known for its opacity, and will soon become a staple in literature on China's contemporary political economy."
Kellee S. Tsai, Johns Hopkins University, Perspectives on Politics
Nearly all financial institutions in China are managed by members of the Communist Party, yet economists do not have a framework with which to analyze the links between banking and politics. This book is the first to develop a framework with which to analyze how elite politics impact both monetary and banking policies.
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His road through that turbulent period is built over two substrata: first functionalist explanations of power shifts and second monetary explanations of price level changes with its threatening potential of hyper inflation and resulting social disintegration in a developing economy. If that sound ponderous Shih makes it just the opposite – intriguing, but it can be skimmed for high lights if not interested in its sources.
His two interacting factions are the Generalist and the Technocrats, and he explains well how they are formed, their self interests strengths and weaknesses, and integrates what each group desires with the causal effects of inflation and its retrenchment; an ingenious key to the personality conflicts of the period.
The leading actors are the factional patrons that struggle to maximize their power: Deng, Chen Yun, Zhou Ziyang, Li Peng, Yao Yilin, Hu Yaoban, Jiang Zemin, Zhu Rongji, Hu Jintao and Wen Jiabao.
Sprinkled along the way are persistent economic problems that never are resolved because of over riding political battles.
Perhaps Xi Jinping’s current drift toward political retrenchment can be seen as another ‘Factional Conflict’ in action where politics impact economic reforms, but this time without inflationary pressures. Professor Shih may have another work in progress; hope so.
Vic Shih draws upon extensive work on factional allegiances and policies in China to explain the core dialectic of Chinese monetary and fiscal policy: local government leaders get promoted and occasionally paid for growth in their region and do not care about inflation or fiscal solvency that much. The central government and central bank does, and the fate of provincial mayors is not their concern. Factional allegiances are drawn up accordingly and the ebb and flow of these groups' priorities and patronage networks drive most of policy.
Mancur Olson's Rise and Decline of Nations explains how interest groups ultimately become important, stagnate and then impair policy. I think there are lessons for this in China today and to get a full grip on them there really isn't anything else out there as good as this book.
According to Shih, the many committees of China are naturally divided into factions. There are many of these, but we are interested in two categories of factions, the "generalist" and the "technocratic" (both of which are, after a fashion, reformers). The generalists belong to regional groupings, such as first secretaries in provincial governments (1) or the mayor of Shanghai. The generalists favor an aggressive developmentalist agenda, with decentralized control over the money supply; the technocrats, represented by members of the State Council, favor centralized control over the money supply. Until quite recently, the contest was over control of the People's Bank of China (PBoC), the central bank and one-time universal bank (2). The PBoC, like the early Federal Reserve (1913-1933), was decentralized, with provinces having considerable influence over the money-creating powers of their branch.
During the first phase of the reform period, the two leading reformers were Deng Xiaoping and Chen Yun; both were major figures of the Chinese Civil War (1947-1949) and architects of the planned economy (1949-1957), and both were purged in the Cultural Revolution (Deng, twice). Deng led the largest faction of market reformers in the Central Committee, while Chen led the main technocratic faction. The two were in agreement on many issues, but beginning in 1980, Deng waged a struggle within the Central Committee for more investment, while Chen warned that the PBoC had lost control of the money supply. Initially, Deng won the stuggle, but in November, severe inflation struck and Deng had to capitulate to Chen.
Additional non-victories for Deng were his appointment of ally Hu Yaobang and later Zhao Ziyang to leadership of the party. Both Hu, and later Zhao, broke with Deng while serving as premiers. Western observers like Ezra Vogel (Deng Xiaoping and the Transformation of China, p.578) explained the rupture as arising from Hu and then Zhao's support for political liberalization--which Deng vehemently opposed. Shih argues that the real reason was that Hu had failed to impose fiscal discipline on the provincial governments, and Zhao had flooded Guangdong Province with all manner of local control over central government subsidies. Hu's, and more urgently, Zhao's, fiscal and monetary recklessness were extremely dangerous to the integrity of CCP rule, not to mention price stability. And in fact, China did suffer an episode of galloping inflation that culminated in the Tienanmen Square incident (June 1989) and a three year recession.
The main development was the final apparent victory of Deng, in getting his next protégé Jiang Zemin (mayor of Shanghai) chosen as General Secretary of the CCP. Soon after, Jiang succeeded Yang Shangkun as President. But Zemin would prove to be much more ideologically aligned with Chen Yun, to the point of practically restoring central planning. At the same time, his government used skillful PR to create the illusion of continued reform (3).
In the years since then, the Chinese authorities have vigorously strengthened centralized control over the money supply and the issuance of securities. One could argue that this consolidation of CCP Politburo control has paved the way for future Chinese financial hegemony.
ADDITIONAL NOTE: WHY CHINA STERILIZES ITS RESERVES
Allegations that the PRC manipulates the renminbi's exchange rate are a staple of political punditry. In point of fact, the real effective exchange rate (REER) of the RMB has risen, while the REER for the USD has fallen in recent years. As with any pair of currencies, there is a large gap between the purchasing power parity (PPP) and the exchange rate; as of this writing, the gap for the RMB:USD was actually not huge, so this has practically become a moot point (4).
China's currency is managed by the People's Bank of China (PBoC). Generally speaking, deposits of US dollars in the Chinese banking system (or, indeed, any banking system) can serve as reserves for the bank, allowing it to lend more money. Over the last 35 years, China has suffered about five distinct inflationary episodes, all short, and all arising from decentralized money creation (i.e., the provincial branches of the PBoC responded to pressure from provincial governments to create ample money for developmental projects). Monetizing foreign currency reserves would flood the banking system with cheap money and trigger the worst inflationary episode yet.
The alternative strategy, used by the PBoC, is to repeatedly increase the reserve requirement for banks. In a Western banking system, the reserve requirement is usually around 3% of deposits, or a bit less. In China it reached a high of 21.5% in June 2011. However, this could only go so far in restricting inflation. The PBoC issued bonded debt in itself (central bank bills) to soak up the liquidity in the system, then used the money raised by the bills to recapitalize the Big Four Banks--which suffer from an amazingly large portfolio of non-performing loans (NPLs).
(1) China has a State Council, analogous to the executive branch of the US government; and it has the Chinese Communist Party (CCP), with a bureaucratic system of leadership (i.e., the top leaders appoint subordinates and replacements for themselves when they retire/die.) All State Council are also members of the Central Committee, the 180-200 member body that formally controls the CCP. However, only 25 members of the Central Committee are members of the Politburo, and only 7 of those are members of the Standing Committee of the Politburo. The 1st Member of the Standing Committee is also the President of the PRC. The 2nd member of the Standing Committee is also the Premier of the Republic, i.e., head of the State Council. Source: People's Daily website
Apart from the topmost positions, there is less overlap. Two of the 7 Standing Committee Members hold no position in the state government; two more are legislative officers. Conversely, Wang Yi, the Foreign Minister of China (and high-ranking member of the State Council) is not a member of the CCP Politburo, although he is a member of the CCP Central Committee. Governors of provinces correspond to minsters in the State Council in rank, although it is rare for a governor to be a Politburo member. Source: China Vitae website.
(2) After 1978, the PBoC was reorganized to serve as a central bank, rather than the one single bank of China. The banking system of China is dominated by the four state-owned banks (Bank of China, ABC, CCB, and ICBC) and their asset management corporations (AMCs). As late as 2004, the Big Four accounted for 60% of lending (Shih-2008, p.39-45).
(3) Walter and Howie (2011) , pp.176-184, explain how this was done with the assistance of Western investment banks:
Red Capitalism, p. 178: In October 1997, and despite the evolving Asian Financial Crisis, China Mobile (HK) Co., LTD, completed its dual New York/Hong Kong IPO raising US$4.5 billion--some 25 times the average size of the 47 overseas-listed companies that had gone before. This kind of money made everyone sit up and pay attention: underwriting fees alone were said to be over US$200 million. If China was, in fact, full of [only unsuitably] small companies, as the earlier international and domestic listings show, there where had this one come from? [...] China Mobile represented the consolidation of provincially owned and run industrial assets into what is now commonly called a "National Champion." This transaction demonstrated to Beijing how it could overcome the regional fragmentation of its industrial sector and, with huge amounts of cash raised internationally, create powerful companies with national markets.
In effect, the Chinese industrial sector received a makeover that preserved the state control and patronage, but adopted the trappings of modern financial capitalism.
(4) According to the IMF, the PPP is RMB 4.28 per US dollar, instead of the current RMB 6.21:USD ratio in forex markets. See 2012 World Economic Outlook Database, purchasing power parities data. As of this writing, the RMB exchanges at a 31% discount to the USD, which is actually not at all unusual for a developing economy. India's rupee trades at a 58% discount. The USD trades at a 10% discount to the euro.