Finance
by Carl Walter and Fraser Howie
How did broke banks become giants?
In the late 1990s China's big state banks were buried in bad loans to state companies. Within a decade they were listed in Hong Kong and Shanghai and ranked among the world's most valuable banks. Carl Walter and Fraser Howie, who spent years working in China's markets, explain how.
Hear a sample · read by Laura
In 1999 the state set up four asset management companies to take bad loans off the big banks. They paid largely with their own bonds, which the same banks held. So the banks swapped bad loans for IOUs from companies that could only repay if the state stepped in.
In 2003 the central bank used part of China's foreign exchange reserves, through a new company called Central Huijin, to put capital into Bank of China and China Construction Bank. Walter and Howie trace how state money went round in circles, with one arm of the state rescuing another.
The biggest banks and companies have shares on public markets, but the Communist Party still picks their bosses and moves them between companies, regulators and government posts. Walter and Howie argue the listings changed how these firms look far more than who controls them.
The state kept deposit rates low and lending rates higher, which guaranteed the banks a comfortable margin. Those profits helped rebuild their balance sheets. Walter and Howie note that ordinary households paid for it, earning little on their savings year after year.
When the global crisis hit, Beijing told its banks to lend, and they did on a huge scale. Much of it went to local government financing vehicles, companies set up so cities could borrow for roads and other projects. The authors warn this built a fresh pile of doubtful loans.
The Party
In China, the Communist Party picks the heads of the big banks, so lending follows politics.
Bad loans
Bad loans were moved into special state companies, which hid them without really getting rid of them.
Savers
Keeping deposit rates low makes ordinary savers quietly pay for cheap loans to state firms.
Stock markets
China's stock markets were built mainly to raise money for state companies, with investors an afterthought.
Stimulus
After 2008, banks poured loans into local government projects, piling up debts that are hard to see.
Hot take · true or myth?
China's bond market sets prices the way London's or New York's does.
Myth. The authors describe banks mostly buying bonds from other state bodies and holding them to maturity. With so little trading, prices say little about risk.
One thing to try
Pick a big Chinese bank or company in the news. Look up who owns most of its shares and who appointed its chairman. Walter and Howie would say that tells you more about how it behaves than its share price does.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Red Capitalism comes with a Hot Take round to make it stick.
Get the whole book on KnotdOpen in the appHow did broke banks become giants? In the late 1990s China's big state banks were buried in bad loans to state companies. Within a decade they were listed in Hong Kong and Shanghai and ranked among the world's most valuable banks. Carl Walter and Fraser Howie, who spent years working in China's markets, explain how.
The bad loans moved house; Reserves as fresh capital; The family business; Savers pay the bill; The 2009 lending flood.
Pick a big Chinese bank or company in the news. Look up who owns most of its shares and who appointed its chairman. Walter and Howie would say that tells you more about how it behaves than its share price does.
Yes. Knotd has the key ideas from Red Capitalism in a few minutes, in plain words, plus a Hot Take round to test them. It's one of 250+ non-fiction books in the app.
