After more than thirty years of capitalist transition, and with most of its economic activities driven by the pursuit of profit, few would dispute that the Chinese economy is fully capitalist now. Yet perhaps that label alone is insufficient to capture the many twists and turns of the prc’s post-Mao development. Huang Yasheng, for example, distinguished two stages in his acclaimed Capitalism with Chinese Characteristics (discussed in these pages by Joel Andreas, with a reply from Huang). First had come the entrepreneurial capitalism of the 1980s, when growth was driven by the dynamism of rural private enterprise, as well as by collective firms, many of which were private ones in disguise. This had been followed from the early 1990s by a turn to state-led capitalism, with large, urban state-owned enterprises displacing and subjugating the private sector. The soes, no less driven by profit motives, benefited from fiscal, financial and policy advantages offered by the ccp; yet their monopoly status, across sectors from telecommunications to banking, rendered them less efficient than the competitive private sector, Huang argued.

This periodization of the post-Mao era is important, as it shows that many of the features that have intrigued critical political economists in search of progressive alternatives to Anglo-Saxon capitalism have been transient, their reproduction far from guaranteed. One such feature was the early salience of decentralized rural industries, which led Cui Zhiyuan to see a living model of Proudhonian socialism in China; while Giovanni Arrighi suggested it could be fostering a less exploitative, non-capitalist ‘market society’. Over the past decade, especially since Hu Jintao and Wen Jiabao came to power, some have celebrated and others lamented an apparent reversal of economic liberalization, with increasingly discriminatory policies against private and foreign companies. Is China experiencing yet another shift of development path?

The answer is ‘Yes’ for Carl Walter and Fraser Howie, whose Red Capitalism details the institutional arrangements underlying China’s vertiginous growth from the 1990s to the present day. The authors are veteran investment bankers (Morgan Stanley, jp Morgan) with years of experience in China helping to float major soes in overseas stock markets; both are fluent in Mandarin. In an earlier book, Privatizing China (2003), they charted the development of a national, then international, Chinese stock market, from its origins in local ‘street-level’ trading in the 1980s. It is unsurprising that their analysis is coloured by a belief that American-style capitalism, as epitomized by giant private corporations, should be the goal of China’s capitalist transition. This bias need not prevent others benefiting from the authors’ intimate knowledge of the operation and evolution of China’s financial system, which has been central to its economic rise. Walter’s and Howie’s depiction of Deng China in the 1980s does not differ much from Huang’s account: market reforms created a successful small-scale private sector which was efficient, export-oriented and open to foreign direct investment. In the 1990s, Jiang Zemin and Zhu Rongji—members of the ‘internationalist elite from the great city of Shanghai’—decided that the moribund domestic-oriented soes and state banks that had remained untouched in the 1980s needed to be reconstructed into profitable, internationally competitive corporations. To revamp the state sector, the Jiang–Zhu regime invited us investment banks to restructure some of the biggest state companies along the lines of American corporations. They then floated these restructured firms on the new Chinese stock markets and on those of Hong Kong, London and New York. In the authors’ words, ‘Goldman Sachs and Morgan Stanley made China’s state-owned corporate sector what it is today.’

Red Capitalism’s detailed account of the ‘creation’ of China Mobile illustrates what soe reform in the Jiang–Zhu era was about. The country’s fragmented telecommunications facilities had initially been provided by provincial governments. In the early 1990s Goldman Sachs ‘aggressively lobbied Beijing’ to create a national telecommunications corporation. Under the auspices of international bankers, accountants and corporate lawyers, China Mobile was formed as a new company from the provinces’ industrial assets. After years of American bankers’ efforts to build its international image, China Mobile’s ipo raised a historic $4.2bn in Hong Kong and New York in 1997, despite the Asian financial crisis. As the authors point out, China Mobile’s valuation was not based on an ‘existing company with a proven management team in place with a strategic plan to expand operations’, but on projected estimates of the future profitability of the consolidated provincial assets, as compared to existing national telecom firms elsewhere in the world. International financiers, as minority stakeholders, and China’s central government, as its owner, made a fortune by creating a ‘paper company’.

To be sure, these paper companies would turn real once they floated in the stock market. The scale of market capitalization has grown exponentially over the last twenty years, especially since China’s entry into the wto. China Mobile is now among the ‘National Champions’ of central-government-run enterprises and features on the Fortune Global 500 list. soes of this stratum are investors themselves, and were responsible for Shanghai’s stock-market bubble in 2007. The regulatory commission permitted these firms to buy blocks of each other’s shares at their issue price, prior to the formal launch of deals. Hike-ups were guaranteed, with prices set low while demand was high. Walter and Howie reckon that up to 20 per cent of corporate profits came from stock trading that year. These National Champions get to retain the bulk of their earnings rather than pay dividends to the government.

Red Capitalism does not provide much information about the actual performance of these soes, but even the official data consistently show that they have been trailing the private sector in profitability, despite all the financial and policy advantages they enjoy. In 2004 the average profit rate for soes was 2.4 per cent, compared to 6.7 per cent for private enterprises; by 2009 the respective figures were 2.9 and 10.6 per cent. Since the 1990s, favoured soes have expanded on the basis of virtually unlimited financial resources from the giant state banks, which have themselves undergone the same remodelling after the style of us corporations, but have remained tightly under the grip of the ccp. The Achilles heel of this financial structure is that the Party ‘can tell the banks to loan to the soes, but it seems unable to tell the soes to repay the loans’. Lax lending to unprofitable soes led to a surge of non-performing loans in the late 1990s, when the fever of debt-financed investment by local governments and soes ignited by Deng’s 1992 Southern Tour had cooled—partly as a result of government efforts to contain inflation and partly due to the Asian financial crisis, which hit China’s export sector hard. The pile-up of bad debts eventually exploded on the books of the major state banks. In 1999 the situation was resolved by a government bailout, based on the creation of ‘bad banks’ in the form of four Asset Management Companies, which took on most of the problem loans from the four leading state banks, which thereby became ‘good banks’ again, and eventually floated in international markets at good prices.

But the Asset Management Companies were not as well capitalized by the government as many assumed. While the Ministry of Finance had contributed rmb40 bn, the other rmb858 bn of their capitalization came from 10-year maturity bonds, issued to the rescued Big Four. The banks’ continued exposure to the non-performing loans, in the form of these bonds, meant that the bailout was in fact little more than creative accounting to postpone an npl-induced financial crisis for another ten years. That was supposed to buy time for the reforms of banks and soes to march ahead. The idea was that the Big Four would improve their transparency, risk-valuation and accountability following their flotation on international financial markets; meanwhile soe reform was supposed to deepen, so that the big firms would finally become profitable and capable of repaying most of their old loans, which had been transferred to the Asset Management Companies.