Investing
Carl Walter and Fraser Howie explain how state ownership, political bargains and recurring rescues shaped the financial foundation of China's growth.
The authors argue that when the state treats banks as basic utilities, their job becomes supplying unlimited capital to favoured state-owned firms rather than judging credit. Every bank then works as a policy bank, whatever its commercial label, and lends where it is directed instead of where returns are best.
The authors argue that capital is allocated by a carefully balanced arrangement among the ruling political families, not by market prices. Struggles among those families, company bosses and technocrats shape financial outcomes. In their words, the country is run like a family business.
A shock that discredits the foreign model can unravel the political agreement behind market reform. In the authors' account, the global financial crisis ended the consensus behind Western-style finance. It let factions that never backed it push the older vision of a planned economy again.
The authors argue that a banking system loaded with bad loans can stay standing only if it is sealed off. A currency that cannot be freely exchanged, hidden arrangements with non-public state bodies, and support from the biggest borrowers keep it upright. The stability is real, but it lasts only as long as the walls stay up.
The largest, most politically powerful state firms gain the most from cheap directed credit. That makes them a strong force against any reform that would price their borrowing honestly. The ones who prop up the fragile system are the same ones who would lose if it were fixed.
In the authors' account, stock and bond markets can be built to look Western while control stays with the Party. Markets supply under 30% of capital, and the new 'capitalism' grew inside the cage of the old system and adapted to its limits. The modern finance it seemed to signal was partly an illusion created by eager foreign bankers.
When a government answers a crisis by ordering banks to lend and issue bonds on a huge scale, growth is protected for now. The cost stays on bank balance sheets, swollen with loans of doubtful quality. The banks then become prizes in political struggle rather than neutral lenders.
Directed finance did not produce steady growth under stable policy. Instead, the authors find the financial sector booming and crashing about once a decade. Fast headline growth can sit alongside a financial base that is far shakier than its reputation suggests.
The authors expect frustrated reform rather than sudden collapse. Real opening of the financial sector would threaten the interests the system protects, so it cannot be on the agenda soon. They argue the arrangement is neither a model for others nor sustainable as the country seeks more influence abroad.