Cleantech Trip to China: Red Capitalism

To Western eyes, the Chinese economic system is a mystery.  Part communist, part state commanded, and part entrepreneurial.  How have the Chinese been able to create something brand new that has been so successful–and can it last?

Red Capitalism:  The Fragile Financial Foundation of China’s Extraordinary Rise by Carl E. Walter and Fraser J.T. Howie is an endeavor to investigate this issue.

The Communist Party “treats its banks as basic utilities that provide unlimited capital to the cherished state-owned enterprises.”  Walter and Howie describe a financial system in which the motivation for business activity is not the same as the goals of Western counterparts, but rather is to act as an arm of the state.  It is a system, they say, that is fully controlled by the central government and with few alternatives.

As a result, enormous numbers of non-performing loans exist.  Walter and Howie estimate that total debt to GDP (including non-performing loans) may be as high as 76%.  This is troubling.  Could the stage be set for a crisis like the US housing market meltdown of the last several years.

Maybe.  Ultimately, these Chinese institutions are creatures of the state.  As long as the state backs them, they won’t crash.  The worry might be better directed at the willingness of the state to back these institutions if political or economic circumstances turn.

-J Thomas Ranken

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