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


"Carl Walter and Fraser Howie debunk a number of common myths about China's financial markets in this excellent new book. Investors stuffing their portfolios with China stocks would be wise to heed their warnings on the fragile foundations of China's banking system. The authors have done their homework, digging beneath the surface of "China's financial world to reveal uncomfortable truths about a financial system riddled with hidden land mines that threaten to undermine China's hard-fought economic success in the years ahead."—Rick Carew, former

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"Carl Walter and Fraser Howie debunk a number of common myths about China's financial markets in this excellent new book. Investors stuffing their portfolios with China stocks would be wise to heed their warnings on the fragile foundations of China's banking system. The authors have done their homework, digging beneath the surface of "China's financial world to reveal uncomfortable truths about a financial system riddled with hidden land mines that threaten to undermine China's hard-fought economic success in the years ahead."—Rick Carew, former Asia M&A Reporter, Wall Street Journal

"In Red Capitalism, Carl Walter and Fraser Howie give a powerful, albeit controversial explanation of the fragile underpinnings of the financial edifice that financed the seemingly unstoppable rise of China on the global stage—which is all the more persuasive thanks to their careful mining of the data. Their thesis—that China has the trappings of a market system but not the substance—should be considered by anyone dealing with or investing in China—categories that embrace most of the world today. Their contention that China ultimately is a 'family business' explains much that is puzzling to outsiders."—Henny Sender, Chief Correspondent, International Finance, Financial Times

"Red Capitalism is a superb guide to China's financial labyrinth. It's a must-read for anyone who wants to understand the sources of Chinese economic power, and the threat posed by the nation's vast hidden debts."—Arthur Kroeber, Editor, China Economic Quarterly

"Finally, a way into the world's most important and least understood financial system. For insight into how China's economy actually operates, begin here!"—Thomas Easton, Asia Business Editor, The Economist

"A penetrating analysis that demonstrates how hard it is to follow the old adage 'follow the money,' and how rewarding it is to understand what will really drive China into the future."—Christian Murck, President, American Chamber of Commerce in China

"Walter and Howie put the Chinese financial system under the microscope to examine how an absence of leadership, institutional squabbling, and complacency have seen appetites for reform sputter out, replaced by stagnation and dysfunction. Theirs is a fascinating, entertaining, and necessary corrective to the hyperbole surrounding China's seemingly miraculous rise."—David Wilder, Beijing Bureau Chief, Market News International

"Walter and Howie's penetrating study addresses a critically important issue in China's political economy. They possess a rare depth of experience in the analysis of the Chinese financial sector. Their hard-hitting conclusions, based on a wealth of empirical research, will stimulate debate about the future of the Chinese financial system at a critical point in its evolution."—Peter Nolan, Sinyi Professor of Chinese Management, Cambridge Judge Business School, University of Cambridge

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Editorial Reviews

From the Publisher
“...China is bent on superpower rivalry; reserve currency status for the renminbi is a glint in the party’s eye. Red Capitalism puts a powerful case that [China’s] economy and financial system are not fully equipped to support such aspirations.”
Financial Times, January 2011

“So pervasive has this view [that the 21st century is China's for the taking] become that any effort to examine whether it's actually true comes as a breath of fresh air. "Red Capitalism" is such a work. Authors Carl E. Walter and Fraser J.T. Howie, both investment bankers, argue that China isn't so different from other economies nor so immune from normal economic laws as cheerleaders argue. An examination of the financial system—or "how China's political elite manages money and the country's economy," as the authors put it—offers a useful lens through which to view much broader issues.”
The Wall Street Journal, January 2011

“[The authors’] ongoing research is an indispensable resource for those seeking the reality behind the often nauseating and sycophantic hyperbole surrounding China’s capital markets.”
China Economic Quarterly, December 2010

“In their new book, "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Riser Carl E. Walter and Fraser IT. Howie paint a troubling portrait of the Chinese economy and financial system. Despite the nation's mind-boggling growth and images of gleaming skyscrapers and luxury cars, the authors say the Chinese growth model is flawed and fragile, and they warn about substantial risks accumutating in its banking system.”
The New York Times & International Herald Tribune Asian edition, January 2011

“If Walter and Howie are right, China may be approaching a period when it can no longer hide the systemic flaws in its banking system; the more profound and problematic question the authors of Red Capitalism want their readers to ask is what this means for China as a whole. The answer will likely impact not just the Chinese, but people around the world as well.”
Asia Times Online, January 2011

The most important financial book of the year."
James Grant, editor, Grant's Interest Rate Observer

“Red Capitalism peels back the facade of China's economy and reveals how the dominant role of the state has led to enormous financial leverage and endemic malinvestment. China's major role in the global economy makes Red Capitalism required reading for any financial industry fiduciary.”
Mark L. Hart III, Chairman, Corriente Advisors, L.L.C.

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Product Details

  • ISBN-13: 9781118255100
  • Publisher: Wiley
  • Publication date: 3/6/2012
  • Edition description: Revised Edition
  • Edition number: 2
  • Pages: 260
  • Sales rank: 827,391
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.10 (d)

Meet the Author

Carl E. Walter has worked in China's financial sector for the past twenty years and has actively participated in many of its 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 held a senior position in 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 and financial institutions. More recently, he helped build one of the most successful and profitable domestic security, risk, and currency trading operations for a major international investment bank. Fluent in Mandarin, he holds a PhD from Stanford University and a graduate certificate from Beijing University. Carl is a longtime resident of Beijing.

Fraser J. T. Howie has been trading, analyzing, and writing about Asian stock markets for nearly twenty years. During that time, he has worked in Hong Kong, trading equity derivatives at Bankers Trust and Morgan Stanley. After moving to China in 1998, he worked in the sales and trading department of China International Capital Corporation followed by a stint with China M&A Management Company. He is a regular commentator on China and its financial system, having spoken in Hong Kong, Tokyo, Beijing, Shanghai, Singapore, and Cambridge. He is currently a managing director at a leading Asia-Pacific brokerage firm in Singapore helping international investors invest in both the Indian and Chinese markets.

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Table of Contents

Chapter 1: "One short nap took me all the way back to before 1949".

1978-2008: 30 years of Opening.

1992-2005: 13 years of Reform.

2005: the end of Reform.

China is a family business.

Chapter 2: China's fortress banking system.

Banks are China's financial system.

Crisis and bank reform, 1994 and 1998.

China's fortress banking system in 2009.

The sudden thirst for capital and cash dividends, 2010.

Chapter 3: The fragile fortress.

The foundation of China's banking machine.

Bad bank performance and its implications, 2009.

The "perpetual put" option to PBOC.

China's new post-Lehman Brothers banking model.


Chapter 4: China's captive bond market.

Why does China have a bond market?

Yield curves in China.

The base of the Pyramid: "protecting" household depositors.

Chapter 5: The struggle over China's bond markets.

China Development Bank, the Ministry of Finance and the Big 4 Banks.

People's Bank of China, NDRC and CSRC: corporate bonds.

Local governments unleashed.

China Investment Corporation: the lynchpin of China's financial system.

Cycles in China's financial markets.

Chapter 6: Western finance, SOE reform and China's stock markets.

Why does China have stock markets?

What the stock markets gave China.

Chapter 7: The National Team is China's government.

The National Team, the Organization Department, Huijin and SASAC.

Chinese stock markets: Who benefits?

A casino or a success or both?


Chapter 8: The Forbidden City.

The Emperor of Finance.

Behind the vermillion walls.

Red capitalism means leverage.

The Emperor’s new financial playthings.


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Sort by: Showing all of 2 Customer Reviews
  • Posted October 13, 2011

    more from this reviewer

    Red Capitalism

    This insider's report on China's version of capitalism tells a revealing story about an economy that is poised to become the world's largest. Asia banking experts Carl E. Walter and Fraser J.T. Howie expose the interconnections of a financial system dominated by the Communist Party; the conflicts among ruling families, corporate executives and technocrats - each vying for political and personal gain; and the challenges opaque, state-run companies present to Western investors. The authors delve into the byzantine, often clandestine machinations behind the modern and sophisticated screen China presents to the rest of the world. The book provides a detailed account of major players, agencies and policies, as well as an advanced-level financial analysis of the banking and capital market sectors. The book's most interesting points sometimes bog down in historical details, but patient readers reap rewards. getAbstract recommends this extraordinary behind-the-scenes look to those who want to know what's really driving China's dazzling growth. Surprisingly, this is a story most people do not know.

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  • Posted March 21, 2011

    more from this reviewer

    Opacity Hovering Over a Sea of Red Ink Made in China

    Carl Walter and Fraser Howie shine ruthlessly, their projectors, on China's still-opaque, stunted capital markets. The authors demonstrate convincingly that China's major banks have been for the most part simple financial utilities directed by the Chinese Communist Party (Party) to extend whatever loans are necessary to achieve its economic growth goals. Chinese households' high savings are the foundation of the banks' capacity to lend. Walter and Howie wonder what will happen to this bank funding if the Chinese households learn to borrow and spend with the same enthusiasm as their American counterparts have done. The authors show clearly that Chinese households are poorly rewarded for their thriftiness due to inadequate yield returns in light of the prevailing inflation rate. Only stocks and real estate, both highly speculative and risky in nature, offer Chinese households investment opportunities which can possibly allow them to beat inflation. The clean-up of non-performing loans (NPLs) and the ensuing recapitalization of China's major banks are a recurring feature in the management of the country's major banks by the Party. The veneer of credibility that the (Western) financial community has provided to China's major banks cannot hide the fact that these banks are subservient entities not only to the Party, but also to the major state-owned enterprises (SOEs), the greatest beneficiaries of the financial status quo. Walter and Howie wonder whether the major SOEs control the Party due to their great economic and political power. The authors point out correctly that the non-state companies can only thrive in sectors such as consumer, food, certain areas of high-tech, pharmaceutical, and other light industrial sectors in which the Party and SOEs have had little interest. Allowing direct, fair competition from the non-state sector would oblige SOEs to shape up without the support of a complaisant financial system. Furthermore, Walter and Howie debunk the myth that China's public debt burden is low. Central government obligations, local government obligations, and NPLs already represent over 75% of China's GDP. The authors remind their audience that the cost of public debt interferes increasingly with growth the more that this cost is above 60% of GDP. China's unfavorable demographics will only make this challenging situation worse in the coming decades. However, Walter and Howie believe that China's use of debt can continue for a long time due to the country's still opaque economic and political system. In addition, the authors remind their audience that the Party is keen to keep the renminbi as undervalued as possible, regardless of the relentless pressure of China trading partners. The Party does not forget what happened to Japan after the country freed up the yen to appreciate and deregulated its financial markets. Japan has not yet fully recovered from its wild asset bubble burst that occurred in 1991. Walter and Howie call for their emergence of a strong leader who can bring the reform of the Chinese capital markets back on track. The authors deplore ad nauseam that former Premier Zhu Rongji's thorough financial reforms are unraveling under the pressure of special interests such as SOEs. In summary, Walter and Howie offer their readers an opportunity to go beyond the hype by uncovering the lid on China's still-opaque, stunted capital markets.

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