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March 13, 2011

Page: 25/36

Home > 2011 Issues > March 13, 2011


The puzzle that inspires many tomes
China’s economy: firm or fragile?

By Dr R Balashankar

Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, Carl E Walter and Fraser JT Howie, John Wiley & Sons (Asia) Pte. Ltd., PP 234 (HB), $ 29.95

AFTER a deluge of books on the recession and the West, it is refreshing to read a well-researched and informative academic book on China and its style of economy that seems to be holding tight despite the depressing scenario world over. The how and why of it has puzzled many, especially since in recent years, the Chinese economy has grown enormously and is poised to replace Japan in the No 2 slot.

Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise by Carl E Walter and Fraser JT Howie details how the Chinese economy changed in the last 30 years, from a country that was always scraping the bottom to a one that scoops lavishly. There is the interesting story that when Deng Xiaoping was leaving to attend the UN session, leading a delegation in 1974, the entire central government "made a frantic search through all the banks in Beijing for funds to pay for the trip. The cupboard was bare: they could scrape together only US$38,000. This was to be the first time a supreme leader of China, virtually the Last Emperor, had visited America; if he couldn’t afford first-class international travel, just where was the money to support China’s economic development to come from?"

From there, zoom to circa 2008, the greatest ever show put up by any country ever, the opening and closing ceremonies of the Olympic games and the smooth hitch-free conduct. In just three decades, China achieved visible and stunning growth. It survived the international economic recession, apparently not harmed even remotely. How? "With a non-convertible currency, minimal foreign participation and few overseas assets beyond US Treasuries and commodity investments that will neither be marked-to-market nor sold, why shouldn’t the system survive a major international crisis better than open economies?"

According to the authors, who have both lived and worked in China for 25 years, the Chinese economy has two components, the country’s state-owned corporations that are "inside the system" and the private economy, however vibrant is "outside the system." "From the very start of political relaxation in 1978, economic forces were set in motion that have led to the creation of two distinct economies in China - the domestic-oriented state-owned economy and the export-oriented private economy." China opened to private business. Previously, foreign private entrepreneurs had to have a partner in China, deal with them from the periphery. But by 2008, nearly 80 per cent of all foreign investment assumed a wholly-owned enterprise structure, leaving the ‘Treaty Port system’ far behind.

Walter and Howie say that the Chinese banks are sustained artificially with huge government support. They are not exposed to the market forces and hence their strength has never been tested. The heart of the banking system has only four state-controlled banks - Bank of China, China Construction Bank, Agricultural Bank of China and the biggest of them all, Industrial and Commercial Bank of China. "In 2009, state-controlled commercial banks held over US$11 trillion in financial assets, of which the Big 4 banks alone accounted for 70 per cent. These four banks controlled 43 per cent of China’s total financial assets." The authors also add that the banks boomed and went bust with regularity at the end of 1970s, 1980s and 1990s. Though they appear healthy, their assets are negligible. The foreign banks have no presence in the Asian giant’s galloping economy.

In a chapter titled The Fragile Fortress, the book discusses the issue of China’s banks threadbare. It says the newspapers carry stories daily about "China’s National Champions and its new sovereign-wealth fund seeking out investment opportunities in international markets. The internationalisation of the renminbi has made headlines as China seeks to challenge the dominance of the dollar as the international currency for trade, and perhaps someday, the international reserve currency. But little is heard from China’s banks: why?" it goes on to add that if the Chinese banking system is so good, why is it not being replicated anywhere else in the world?

China, from time to time, manages public show of wealth and pomp. It periodically showcases to the world, under strict vigilant eyes of the party, the great growth story of the country. But beneath it, the foundation is not as strong as it ought to be. The hugeness of the population offers it the cushion to absorb enormous amount of fiscal losses and setbacks that the world does not even come to know. China only shows to the world what it wants to show, not what others want to see.

Powerfully painting another analogy, Walter and Howie describe the Forbidden City, in the heart of China’s capital. As one approaches it, there are huge gates and the great spaces enveloping the structure. "The courtyard’s overall design is awe-inspiring; it seems to encompass both heaven and earth. As one penetrates more deeply into the palace, however, spaces become smaller, and long, narrow corridors are punctuated here and there by small entrances. The huge walls close in, progressively blocking off all lines of sight." Similar is the perspective of the Chinese economy. It appears vast and awe-inspiring from outside, till one trudges into details, of the interior.

Walter and Howie have both travelled these narrow lanes to catch a glimpse of the intricacies of the economy that is touted as the fastest growing. The human cost of this growth has been enormous. But this book, essentially an academic exercise, does not discuss that. Both men are eminently suited to discuss China’s economy. And what they have churned out is not just interesting but educating. Walter, a long time resident of Beijing, has worked in China’s financial sector for 20 years and Howie has been analyzing and writing on Asian stock market for 20 years.

(John Wiley & Sons (Asia) Pte Ltd, 2, Clementi Loop, #02-01, Singapore 129 809)

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