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Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, Revised Edition


Praise for Red Capitalism

"The most important financial book of the year." —James Grant Editor, Grant's Interest Rate Observer

"Red Capitalism peels back the faÇade 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.

"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 its economy and financial system are not fully equipped to support such aspirations." —Financial Times

"This book allows us to further deepen our analysis and prepare for the tumultuous events which impend." —Socialism Today

"Walter and Howie possess a rare depth of experience in the analysis of the Chinesefinancial sector. Their hard-hitting conclusions,based on a wealth of empirical research, will stimulate debate about the future of theChinese financial system at a critical point in its evolution." —Peter Nolan Sinyi Professor of Chinese Management, Cambridge Judge Business School, University of Cambridge

"Concise and erudite, Red Capitalism is a fantastic deep dive into China's structurally flawed financial system." —China Economic Review

"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 splutter 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

"Red Capitalism is an important addition to the reading list of any China-watcher."—The Hindu

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


Carl E. Walter lived in China for twenty years and actively participated in numerous 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 was a member of the Management Committee at China International Capital Corporation, 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. More recently, he helped build one of the most successful and profitable domestic security and currency trading operations for a major global investment bank. Fluent in Mandarin, he holds a PhD from Stanford University and a graduate certificate from Beijing University. He currently lives in New York where he acts as an independent consultant.

Fraser J. T. Howie studied Natural Sciences (Physics) at Cambridge University and Chinese at Beijing Language and Culture University. For nearly twenty years he has been trading, analyzing, and writingabout Asian stock markets. During that time he has worked in Hong Kong, trading equity derivatives at Bankers Trust and Morgan Stanley. After moving toChina in 1998, he worked in the sales andtrading department of China International Capital Corporation followed by a stint with China M&A Management Company. He has contributed to the SCMP, AWSJ, China Economic Quarterly,and China Economic Review as well as being a regularChina commentator on CNBC, BBC, Al Jazeera, and Bloomberg. Currently, he is a Managing Director at a leading Asia Pacific Brokerage firm in Singaporehelping international investors invest in both the Indian and Chinese markets.

Preface to the Second Edition xi

Preface to the First Edition xvii

List of Abbreviations xxi

1. Looking Back at the Policy of Reform and Opening  1

Thirty years of opening up: 1978–2008  2

Thirteen years of reform: 1992–2005  10

The end of reform: 2005  15

China is a family business  22

2. China’s Fortress Banking System  27

Banks are China’s fi nancial system  29

China’s banks are big banks  31

Crisis: The stimulus to bank reform, 1988 and 1998  33

China’s fortress banking system in 2010  41

The sudden thirst for capital and cash dividends, 2010  47

3. The Fragile Fortress  53

The People’s Bank of China restructuring model  56

The Ministry of Finance restructuring model  66

The “perpetual put” option to the PBOC  73

The new Great Leap Forward Economy  76

China’s latest banking model  82

Valuing the asset management companies  85

Implications  88

4. China’s Captive Bond Market   95

Why does China have a bond market?  98

Risk management  102

The base of the pyramid: Protecting household depositors  116

5. The Struggle over China’s Bond Markets  125

The CDB, the MOF, and the Big 4 Banks  126

Local governments unleashed  134

Credit enhancements  141

China Investment Corporation: Linchpin of China’s financial system  145

Cycles in the fi nancial markets  158

6. Western Finance, SOE Reform, and China’s Stock Markets  163

China’s stock markets today  164

Why does China have stock markets?  168

What stock markets gave China  172

7. The National Team and China’s Government  185

Zhu Rongji’s gift: Organizational streamlining, 1998 186

How the National Team, its families, and friends benefit  196

A casino or a success, or both?  209

Implications  212

8. The Forbidden City  215

The Emperor of Finance  217

Behind the vermillion walls  220

An Empire apart 227

Have the walls been breached?   231

Cracks in the walls  235

Imperial ornaments  239

Appendix  245

Select Bibliography  249

Index  251