Contents Preface List of Abbreviations Chapter : Looking Back at the Policy of Reform and Opening Thirty Years of Opening up: 1978–2008 Thirteen Years of Reform: 1992–2005 The End of Reform: 2005 China is a Family Business Endnotes Chapter : China’s Fortress Banking System Banks are China’s Financial System Crisis: The Stimulus to Bank Reform, 1988 and 1998 China’s Fortress Banking System in 2009 The Sudden thirst for Capital and Cash Dividends, 2010 Endnotes Chapter : The Fragile Fortress The People’s Bank of China Restructuring Model The Ministry of Finance Restructuring Model The “Perpetual Put” Option to the PBOC China’s Latest Banking Model Implications Endnotes Chapter : China’s Captive Bond Market Why does China have a Bond Market? Risk Management The Base of the Pyramid: “Protecting” Household Depositors Endnotes Chapter : The Struggle over China’s Bond Markets The CDB, the MOF and the Big Banks Local Governments Unleashed China Investment Corporation: Lynchpin of China’s Financial System Cycles in the Financial Markets Endnotes Chapter : Western Finance, SOE Reform and China’s Stock Markets China’s Stock Markets Today Why does China have Stock Markets? What Stock Markets gave China Endnotes Chapter : The National Team and China’s Government Zhu Rongji’s Gift: Organizational Streamlining, 1998 How the National Team, Its Families and Friends Benefit A Casino or a Success, or Both? Implications Endnotes Chapter : The Forbidden City The Emperor of Finance Behind the Vermillion Walls An Empire Apart Cracks in the Walls Imperial Ornaments Endnotes Appendix Select Bibliography Index Copyright © 2011 John Wiley & Sons (Asia) Pte Ltd Published in 2011 by John Wiley & Sons (Asia) Pte Ltd Clementi Loop, # 02-01, Singapore129809 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center Requests for permission should be addressed to the Publisher, John Wiley & Sons (Asia) Pte Ltd., Clementi Loop, # 02-01, Singapore 129809, tel: 65-6463-2400, fax: 65-6463-4605, e-mail: enquiry@wiley.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional person should be sought Neither the author nor the publisher are liable for any actions prompted or caused by the information presented in this book Any views expressed here in are those of the author and not represent the views of the organizations they work for Other Wiley Editorial Offices John Wiley & Sons, 111 River Street, Hoboken, NJ07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley & Sons Australia Ltd, 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany Library of Congress Cataloging-in-Publication Data ISBN 978-0-470-82586-0 (Hardcover) ISBN 978-0-470-82894-6 (e-book) ISBN 978-0-470-82893-9 (e-book) ISBN 978-0-470-82895-3 (e-book) To John Wilson Lewis Preface After three rounds of Privatizing China, our book about China’s stock markets, we felt like we wanted to look into something new Since we took our first look at the stock markets in 1999, we have been interested to note the lack of work on the financial side of China’s miracle that gets beyond the macroeconomics of things We are the first to agree that living and working in the country for 25 years may not qualify us as experts in economics We believe, however, that our experience has given us a feel for how China’s political elite manages money and the country’s economy Having worked in banks for longer than we care to remember, we wanted to try to understand how China and its ruling class finance themselves and we knew we had to begin with the banks since, in truth, they are China’s financial system Those looking for tales of corruption and princelings with their hands in the till will be disappointed though We think that the financial side of the story behind a 30-year boom that changed the lives of one billion people is much more interesting; so this is our effort at staking out modern China’s political economy “inside the system.” We not believe in Chinese exceptionalism China’s economy is no different from any other, in spite of the inevitable Chinese characteristics If there are such things as economic laws, they work just as well in China and for Chinese businesses as they in other markets We also not believe in the recent triumphalism of China’s bankers and many of its leaders; this is only a diplomatic ploy China’s banks survived the global financial crisis, as one senior banker has publicly stated, simply because the financial system is closed off from the world Having seriously studied the collapse of Mexico’s peso in 1994, the Asian Financial Crisis of 1997 and those sovereign-debt crises that have followed, China’s political elite has no intention of exposing itself to international capital markets The domestic economy and markets are, and will continue to be, most deliberately closed off 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? China’s financial system is designed so that no one is able to take a position opposite to that of the government Of course, the private export-oriented sector suffered massive losses in jobs, earnings and the closure of small companies in 2008 and 2009 But China’s banks were not exposed in any material way to this sector It is a simple fact that China’s financial system and its stock, bond and loan markets cater only to the state sector, of which the “National Champions” represent the reddest of the Red These corporations, the heart of China’s state-owned economy, are “inside the system.” The private economy, no matter how vibrant, is “outside the system” and, in fact, serves at the will of the system If nothing else, the events of the fall of 2008 added an additional seal to the Party’s determination to sustain a closed, tightly controlled, economy “Don’t show me any failed models,” is the refrain of the Chinese officialdom these days But is China’s own financial system a model for the world to study? Can China be thought of as an economic superpower, either now or in the future, with such a system? With this sort of question in mind, we began to look at the financial history of the People’s Republic of China We were fortunate that 2008 was the thirtieth anniversary of China’s highly Jiang, Zemin Jiangsu Jiangxi Jilin Jinduishen Molybdenum JPMorgan Chase K Kang, Rixin Ka Wah Bank KPMG Kumagai Gumi L Lehman Brothers bankruptcy of impact on financial reform Li, Jiange Liaoning Liaoning Publishing Lin, Changyin Lin, Zuoming Liu, Hongru Liu, Shiquan Liu, Zhenya local-government debt (see also local governments) amount of bank borrowing debt issues local financing platforms local governments (see also China public debt) 2009 stimulus package bank borrowing financial resources financing platform means of financing fiscal deficit incorporation of government bureaus provincial government debt issuance Lou, Jiwei Louis Vuitton Lujiazui Finance & Trade Zone M Maanshan Iron & Steel Mao, Zedong Marx, Karl Medium-term note (MTN) (see bonds) Mercedes Benz merger and acquisition (M&A) Merrill Lynch Military Weapons Equipment Company Ministry of Chemicals Ministry of Coal Industry Ministry of Finance (MOF) (see also China Investment Corporation) 1998 Special Bond 2007 Special Bond bank-restructuring model co-managed problem-loan account criticism of PBOC reserve management IOUs rivalry with PBOC Ministry of Labor and Social Security Ministry of Machine-Building Ministry of Metallurgy Ministry of Petroleum Ministry of Posts and Telecommunications (MPT) (see also China Mobile) Ministry of Power Ministry of Railways (MOR) Moody’s Investors Services Morgan Stanley (see also investment banks) N Nanjing Public Utility Holdings Co Ltd National Association of Financial Market Institutional Investors (NAFMII) approval process for bond issuance National Champions as jumbo investors in IPOs as the government CEOs on Central Committee creation of overseas IPOs policy need for National Development and Reform Commission (NDRC) criticism of PBOC enterprise bonds opposition to MTNs view of commercial paper National People’s Congress (NPC) National Social Security Fund National Team (see also National Champions) net asset value New York New York Stock Exchange (NYSE) Ningxia Noble Group non-government organization (NGO) non-performing loan (NPL) acquisition by AMCs as part of public debt commercial auction of spin-off of trends of write-down of O Olympics Organization Department (see also Communist Party of China) Orient Asset Management Company (see also asset-management company) P Panzhihua Steel People’s Bank of China (PBOC) anti-inflation tools as sponsor of stock markets balance sheet bank-restructuring model deposit rate financial stability costs foreign-exchange reserves inflation local branches and Party influence rivalry with MOF short-term notes Special Bills People’s Construction Bank of China (see also China Development Bank) People’s Insurance Company of China People’s Liberation Army PetroChina underpricing of IPO Ping An Insurance Postal Savings Bank provincial government debt (see bonds) Q Qinghai Qualified Domestic Institutional Investor (QDII) Qualified Foreign Institutional Investor (QFII) R Red Chips regulators regulatory fiefdoms Super Financial Regulator Resolution Trust Corporation (RTC) loan-recovery rate savings-and-loan crisis restructuring receivables as percentage of bank capital yield vs bonds and loans Rong, Yiren S SAFE Investment Corporation and China Investment Corporation Sarbanes-Oxley securities regulators (see China Securities Regulatory Commission) Shaanxi Shandong Shandong Power Shang Fulin Shanghai Shanghai Automotive Shanghai Index performance against RMB appreciation strategic investors in IPOs trading performance Shanghai Municipal Construction Investment and Development Co Ltd Shanghai Oriental Pearl Shanghai Outer Gaoqiao Free Trade Zone Shanghai Petrochemical Shanghai Pudong Development Bank Shanghai Raw Water Shanghai Stock Exchange (see also stock markets) as market for bonds Great Shanghai Bubble listed-company bonds rationale for establishment Shanghai World Expo Shanxi Shengli Oil Shenhua Group Shenyang Shenyang Municipal Trust & Investment Co Shenyin Wanguo Securities Shenzhen Shenzhen Development Bank Shenzhen Stock Exchange (see stock markets) Shi, Dahua Sichuan Sichuan Changhong Sinochem Group Sinopec Sinosteel Small and Medium-sized Enterprise Board (see stock markets) Soviet model Special Economic Zone (SEZ) Standard and Poor’s Standard Chartered Bank State Administration for Foreign Exchange (SAFE) (see also People’s Bank of China) State Committee for the Reform of the Economic System (SCRES) critique of state planning report to State Council on stock markets State Council State Council Office for Restructuring the Economic System (SCORES) State Development Planning Commission (SDPC) (see also SPC) State Economic and Trade Commission (SETC) State Grid Corporation of China State-owned Assets Supervision and Administration Commission (SASAC) and Organization Department bureaucratic classification compared to Huijin ownership of central SOEs scope of authority SOE dividend issue state-owned enterprise (SOE) (see also National Champions) Fortune 500 members IPO candidates stock speculation State Planning Commission State Power Corporation stock markets average size of IPO brokerage fees capital-raising capacity ChiNext Board comparative market capitalizations funds raised Hong Kong Stock Exchange hot money investor as speculator investors by category market capitalization by investor market infrastructure national character reason for Shanghai Stock Exchange share fever Shenzhen Stock Exchange Small and Medium-sized Enterprise Board (SME) strategic investors subscription lottery Top 10 listed companies underwriting fees Su, Shulin T Taiwan Tiananmen Tianjin T-Mobile Treasury Bonds Department Treaty Ports Tsingtao Beer U UBS United States Department of Treasury United States of America Urban Credit Cooperatives US dollar US Treasury US Treasury bond daily trading volume V Vodafone W Wang, Boming Wang, Qishan Wang, Xiaochu Wang, Yupu Wanguo Securities Washington Mutual Wells Fargo Wenzhou Lucheng Urban Credit Cooperative Western financial model Western Mining World Bank World Trade Organization (WTO) Fixed-asset investment foreign direct investment World War II Wu, Jichuan Wuhan Wuhan Waterworks Group X Xia, Yaoqing Xiamen International Bank Xiao, Gang Xie, Ping Xinjiang Xizhimen Hotel Conference Xu, Lejiang Y Yang, Kaisheng Yangzi River Delta Yantai Housing and Savings Bank Yanzhou Coal Yizheng Chemical Fiber Yuan, Jiajun Yunnan Z Zhang, Guoqing Zhang, Hanqiao Zhang, Qingwei Zhang, Ruimin Zhang, Xiaogang Zhejiang Zhou, Xiaochuan approach to bank restructuring bond markets and bank restructuring evaluation of bond market Zhu, Fulin Zhu, Rongji and Chen, Yuan bank restructuring policy character of financial-reform policy comment on GITIC collapse creation of inter-bank bond market and Hong Kong Stock Exchange Mayor of Shanghai Premier streamlining of government Vice Premier Zijin Mining “inside the system” as political geography ... have been and continue to be directed at the “system.” Improving and strengthening it has been the goal of every reform effort undertaken by the Party since 1978 It must be remembered that the efforts... curtain and peer at what is behind, to match the reality of the system’s operations with the familiarity of the names it uses to describe them and then to look into the future in the belief that... business and the loyalties of these families are conflicted, stretched tight between the need to preserve political power and the urge to business To date, the former has always won out Of course