Red Dream

Carl E. Walter worked in China for over three decades. He has done IPOs of state enterprises, worked in joint venture investment banks, helped build out onshore banking platforms and was a member of the board of a large Chinese bank. Fluent in Mandarin, he holds a graduate studies certificate from Peking University and a PhD from Stanford University. Carl is the co-author of Red Capitalism and Privatizing China.

• Preface xiList of Abbreviations xixChapter 1: From Turning Point to Turning Point 1An Abrupt About-Face 2The Golden Age: A Short Story 4Underlying Conditions 7The Yin and the Yang of the China Dream 10Convergence 20Chapter 2: The Shadow Fiscal System 23China’s “Centralized” State and Localized Financing 24Aspirational Central Finances, Fiscal Collapse and the 1994 Budget Law 29The Continual Local Scramble for Funds 35Then There Was the Land but It Is Not Free, 1999–2007 38Paving the Country Over 45The Vulnerability of Local Governments, Banks, and Enterprises 46Implications 48Chapter 3: China’s Banks and the Deposit Bonanza 57China’s State Banks and the “Tree” Model of Banking 58Command Lending and Funding 66Fintech and Other Challenges to Bank Deposits 72Bank Capitalization 80Implications 83Chapter 4: Trees Can Grow to Heaven! 87Evolution of Chinese Balance Sheet Management Techniques 88Outcomes in Financial Engineering Chinese-Style 91Channels to Support State Bank Performance Metrics 93Implications 115Chapter 5: Beautifying Bank Balance Sheets 119Parking Assets— the Interbank Market and “Repos” 120Flexible Loan Agreements 124Local Government Bonds 127Government “Guidance” Funds 137Off-Balance-Sheet Items 138Comments 146Chapter 6: After 30 Years, Was Deng Xiaoping Right? 151A Summary State Balance Sheet 152Inefficient Investment Equals Extrabudgetary Funding 154The Promise of the Stock Markets 156Massive Growth in Deposits 164“Opening” the Door to Foreign Investment 166Excessive Reliance on Debt 168Deterioration of State Finances 169Summing Up 173So Was Deng Right, Can Capital Markets Be Used in a Socialist Economy? 178Chapter 7: China versus the United States: Comparing the Costs of Financial Crises 183Summary Financial Crises, China and the United States 184Comparisons of Crises 189Macro Comparisons and the Role of Central Banks 203Comparisons of State Net Worth 206Comments 208Chapter 8: Japanese Bubbles 211Bubbles and Japan’s Banking Crisis of the 1990s 212Why Did Resolving Japan’s Banking Crisis Take So Long? 215More Points of Comparison, China versus Japan 218Comparative Cashflow Chains 222How Might the Party Change Its Spots? 223The Value of Chinese State Industrial Enterprise Assets 226Comments 232Chapter 9: Chinese Balloons 235The Party’s Ruling Paradigm 238Chinese Balloons 239Convergence Revisited 241Appendices 245Selected Bibliography 251Index 257