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

ISBN: 978-1-118-25510-0
260 pages
March 2012
Red Capitalism: The Fragile Financial Foundation of China
The truth behind the rise of China and whether or not it will be able to maintain it

How did China transform itself so quickly? In Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, Revised Edition Carl Walter and Fraser Howie go deep inside the Chinese financial machine to illuminate the social and political consequences of the unique business model that propelled China to economic powerhouse status, and question whether this rapid ascension really lives up to its reputation.

All eyes are on China, but will it really surpass the U.S. as the world's premier global economy? Walter and Howie aren't so certain, and in this revised and updated edition of Red Capitalism they examine whether or not the 21st century really will belong to China.

  • The specter of a powerful China is haunting the U.S. and other countries suffering from economic decline and this book explores China's next move
  • Packed with new statistics and stories based on recent developments, this new edition updates the outlook on China's future with the most cutting-edge information available
  • Find out how China financed its current position of strength and whether it will be able to maintain its astonishing momentum

Indispensable reading for anyone looking to understand the limits that China's past development decisions have imposed on its brilliant future, Red Capitalism is an essential resource for anyone considering China's business strategies in today's extremely challenging global economy.

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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

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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.

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February 16, 2012
New Edition Released, ‘Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise'

Named A Best Book Of The Year By The Economist

Authors Carl Walter and Fraser Howie tell the story of China’s incredible ascension, how it got to where it is now, and what the future holds in the second edition of ‘Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, Revised Edition’.

‘Red Capitalism, Revised Edition’ explores how China's financial institutions—from banks to corporations—with emphasis on the national Communist Party, shape the country's economic choices, development, and reform. With new and expanded coverage of China's "Big 4" banks; why assigning credit ratings is still a problem; the rapid growth of Chinese national debt; and more, it examines whether or not the twenty-first century will belong to China, calling into question the sustainability of the current system. The authors go deep inside the Chinese financial system to illuminate the social and political consequences of the unique business model that has transformed the country into an economic powerhouse and investigate whether the incredible gains of the last thirty-plus years really live up to their reputation.

In contrast to the common view of China as an unstoppable freight train of growth, ‘Red Capitalism, Revised Edition’ shows how the country's decades of development have been marked not by steady ascension but rather an ongoing series of booms and busts that many corporations would not have been able to weather without large-scale government intervention.

The authors argue that we should take comfort that China’s economic system is no worse than the West’s. While they have analyzed aspects of the balance sheet quality of China’s major banks, this book is not meant to be a substitute for the work of a good bank analyst. Their objective is to show how China’s banks, all majority-owned and controlled by the Party, are part of a larger system. ‘Red Capitalism, Revised Edition’  is indispensable reading for anyone looking to understand the limits that China's past development decisions have imposed on its promising future.

Red Capitalism:
The Fragile Financial Foundation of China's Extraordinary Rise, Revised Edition
By
Carl Walter and Fraser Howie
ISBN: 978-1-1182-5510-0
Published by Wiley; February 2012
Format: Hardcover; 300 pages; US$29.95

For more information, explore: www.wiley.com/buy/9781118255100.

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