Entering the world: consolidating capitalism in the 2000s

Foreigners wanted it both ways. They wanted the Chinese market to develop, but they wanted the Chinese state to step in to make it safe too. Why should the Party do this? Foreigners are not the concern of the Party.

Retired financial cadre, Beijing1

The period 1998–2007 saw China entering the WTO and deeply embedding itself within the global economy, even as it came to grapple with the international discrediting of the East Asian growth model following the Asian financial crisis and the debt burdens brought about by its own unbalanced growth trajectory that had emerged over the preceding seven years. By the eve of the 2008 financial crisis, it was clear that China’s financial sector had experienced sweeping institutional change over the preceding ten years. Now spearheaded by publicly listed banking titans and a central bank with an emerging international reputation for effective and technocratic macroeconomic management, the financial system appeared to have served effectively as a lynchpin of China’s years of heady rates of economic growth that peaked at 14.2 per cent in 2007. Yet, despite the extent of financial reform between 1998 and 2008, it is also clear that the reorganization of state and market within the financial sector had resulted in the predominance of neither. As would become clear in the final months of 2008, when China’s economic stimulus package came into effect, the banking system that had been such an area of concerted focus by both Zhu Rongji and Wen Jiabao in only very limited ways bore a functional resemblance to the liberal financial systems that had supposedly been the model for China’s own path of financial reform, but which were now themselves embroiled in existential crisis.

From a standard liberal perspective, this process of financial reform was thus a failure; the market-based elements of the system were immature according to the standards of orthodox financial theory, and the financial sector remained a long way from playing the fully fledged ‘mature’ role of financial systems in more ‘advanced’ economies. Although a broad sweep of changes took place within the financial sector during Zhu Rongji’s tenure as Premier, as Shih has observed,

It is evident that the financial sector was little more market-oriented than when he had first taken office. Although some of his efforts furthered market allocation of capital, other policies pulled China back to the planned economy. Thus, explanations that rely on his reform orientation, the capability of technocrats, or the diffusion of market-oriented ideas cannot satisfactorily account for the lack of significant financial sector reform during his administration; those conditions were all present at the beginning of his administration. (Shih 2008, 162)

This is only paradoxical if it is assumed that the ultimate objective of financial reform was in fact to institute a fully market-oriented and liberalized financial sector. The corollary of this assumption is that along with the rationalization and downsizing of the Chinese state in the process of economic reform, so too would the role of the Party be diminished and even eliminated, presumably even more rapidly and deeply than the state itself. This chapter demonstrates how this misplaced assumption obstructs an accurate assessment of how state and Party interacted during this period. It argues that the key to explaining these developments is to focus upon the way in which the CCP was able to reduce the uncertainty inherent in this path of reform, but also to reduce it in a particular way, such that trajectories of growth and development, even whilst highly rapid and stable, were simultaneously unbalanced and unsustainable. Unless we account for the role that the management of uncertainty played as a key driver in the evolution of the financial sector during this era, it becomes difficult to plausibly make sense of why both the market and the CCP enhanced their ability to influence not only the rate but also the structure of economic growth.

As China developed from what had been a position of (relative) international isolation to (partial) integration with the global economy, it was necessary to develop a set of financial and macroeconomic policies that would support trade and attract investment. China’s leaders sought to construct an internationally oriented modern financial system, which to all appearances was now geared towards competition with foreign banks both at home and eventually abroad. This process of institutional rationalization within the financial system was not a chimera; policymakers, banks, and regulators each conceived of their roles within the financial system in terms substantively different from those of the mid-1990s. Yet, as would become apparent when financial crisis emanated from the USA in 2008, the premise of reform during the 2000s had not been to replicate a Western financial system, but to transform the banking system into a more effective tool for achieving the broader politico-economic goals of the CCP.

Rather than the path of reform being one of failure or of settling into a partial reform equilibrium as a result of bureaucratic or elite politics, the ways in which the CCP was negotiating a number of risks and uncertainties by way of instituting its own distinctive mode of economic development meant that reform was less about pursuing market-led liberalization or state-led planning, but rather about maintaining capital-led economic growth and accumulation. The duality of the financial sector’s role that emerged during the process of reform in the mid-1990s continued to be reflected in the frames, institutions, and networks that evolved between 1998 and 2007. It was only by retaining the foundational role of the financial sector as a centrally controlled lynchpin of an increasingly marketized and globally integrated economy that the CCP was capable of achieving economic growth whilst guarding against the destabilizing implications of relinquishing control over capital flows.

Mounting pressures, international and domestic

As Zhu Rongji ascended to the pinnacle of economic leadership of the CCP in late 1997, the potential for ‘crisis’ was supposedly pervasive. Although in 1997–98 the economy was in a relatively healthy condition as a result of Zhu’s fiscal recentralization, and contractionary monetary policy from 1994 to 1996 (Bramall 2009), this balancing act also heightened policymakers’ sensitivity to possible threats to economic growth and stability. At the macroeconomic level, economic growth slid downwards, dipping below 8 per cent in 1998–99, whilst China experienced deflation for the first time in the reform era. The drivers of financial policymaking in this period reflected a number of both domestic and international concerns. China experienced its first modern era failures of financial firms, each of which had connections to international sources of capital, and the AFC represented a salutary warning of the possible effects upon domestic monetary policy and currency stability of any wide-scale relaxation of control over transnational capital flows.

The reforms of the 1990s provided a path of navigation through the uncertainty of the immediate post-1989 political economy by framing the financial system in terms of a combination of CCP authority over an expanding market economy. Yet these reforms had themselves given rise to new financial risks, which were now further entwined with China’s deepening international integration. Not merely unquantifiable in purely economic and financial terms, these risks and the uncertainty whence they emerged were deeply embroiled in a continuing set of debates as to how China’s society and politics were going to confront a critical new phase in the country’s contemporary development. This uncertainty surrounded the fundamental questions of who or what was responsible for maintaining the integrity of the financial system, and how they were going to achieve this as China’s domestic economy and its position within the global economy continued to evolve. Accordingly, there were two broad interrelated strands of uncertainty that needed to be addressed. First was the concern that the banking system was unable to maintain its own internal integrity, and that at some point existing domestic stakeholders in the banking system – ordinary household and corporate depositors – would lose confidence in the financial system. Secondly, it was clear that the financial system was precariously exposed to destabilizing external competition, and that WTO entry and China’s need to attract foreign capital would potentially catalyse financial instability and crisis.

Crisis and the domestic

Although the AFC influenced China in real economic terms, its real significance was normative. It had a deep impact upon perceptions of and attitudes towards the dynamics of the global financial system, and the interpretation of specific aspects of China’s integration into this system. This would have tangible effects on how debates unfolded and discourses emerged around the challenges of pursuing financial reform, the cognitive frames that emerged out of those debates, and the actual policy measures that eventuated. In immediate terms, however, the crisis gave rise to two potential risks within the Chinese economy: first a currency crisis, resulting from balance of payment problems or heavy capital outflows, and secondly, a banking crisis caused by loss of depositor confidence and banks’ insolvency. However, the AFC was not immediately viewed as a threat with existential ramifications by the Chinese leadership.2 As Yu Yongding observed at the time,

For many years, observers have criticized China’s slowness in developing financial markets and liberalizing its capital account. The Chinese government itself was also worried by the slow progress. Rather theatrically, the disadvantage has turned into advantage. Owing to capital controls and the underdevelopment of financial markets and the lack of sophisticated financial instruments, such as stock futures and foreign exchange forwards, RMB escaped the attack by international speculators. (Yu 1999, 15)

However, the AFC nonetheless revealed the depth of a potential conflict between the risks posed by China’s economic opening and the ability of the financial system to contain and manage those risks. Immediately following the Fifteenth Party Congress in September 1997, Jiang Zemin stressed the importance of drawing the correct lessons from the AFC and ensuring that the risk of financial instability was comprehensively managed by the CCP (Zhu 1998b). He drew the link explicitly between the financial system and broader social stability, stating that ‘if the financial system is unstable, then it will also affect economic and social stability’ (Jiang 2006 [1997], 422). The financial sector had to prove capable of withstanding integration with foreign capital, but it had to do so in a way that would safeguard the stability of the financial system as had clearly been lacking in other East Asian economies. Capital controls and a tightly regulated financial sector had prevented the transnational flow of destabilizing capital. From the earliest days of reform, FDI had played a central role in the Chinese growth story, and despite the experience of the AFC there was widespread recognition amongst the leadership of the increasing indispensability of FDI to China’s future economic growth (Chang 1998).3 In practice, financial reform and internationalization following the AFC would therefore maintain a sharp distinction between speculative portfolio and fixed investment capital.

Against this backdrop of the crisis, between 17 and 19 November 1997 the Central Committee of the CCP and the State Council convened an emergency National Financial Work Conference in Beijing.4 It called for the establishment of a financial system compatible with the socialist market economy and for the strengthening of the risk management capacity of financial institutions over the next three years (Historical Research Unit of the Central Committee of the CCP 1999). Zhu Rongji saw the AFC as demanding a redoubling of efforts to deepen financial reform, stating that it ‘has caused us to be determined to solve these problems at the most fundamental level – we can hesitate no longer’ (Zhu 2000 [1997], 322). The AFC precipitated a vigorous discussion amongst economic policymakers and researchers as to the nature of these problems. The views about the causes of the crisis fell into two broad camps, one stressing the destructive power of international speculative capital (Pang 1998), the other emphasizing the weaknesses of the financial systems in those countries most heavily affected by the crisis (Ding and Li 1998, Zhu 1998a). Yet insofar as the ultimate direction of post-crisis policy development was influenced by these debates, it was to adopt both messages as mutually compatible. Foreign and transnational capital was a potentially destructive and destabilizing force for China, and the financial foundations of a number of the countries were weak. However, they were weak not because they departed from the strictures of the so-called Washington Consensus, but because of the weakness of mechanisms in place for managing both the domestic and international financial demands of economic development.

It was in this context that China was progressing steadily towards WTO accession. Accession and the consequent opening up of financial services under the General Agreement on Trade in Services (GATS) was considered an important step in the overall reform process, principally in terms of gaining greater exposure to foreign expertise, but also for its potential to foster greater commercial discipline upon the sector (Allen et al. 2005; Leigh and Podpiera 2006). The idea that the CCP has used global economic integration in order to apply pressure for domestic economic and financial reform is not new. Nevertheless, the course of financial reform in the years 1998–2007 demonstrate the extent to which global economic integration precipitated a particular kind of reform, one which utilized significant elements of ‘modern finance’ but utilized them in substantively very different ways. Although the circumstances in which the Chinese economy was operating were no longer the same as those of the early 1990s, the risk environment remained functionally highly similar. The banking and financial system was still fundamentally there to provide certainty for domestic financial actors, a function that continued to be reflected in the course of its reform.

In the face of inevitable globalization, a number of questions were being asked of the Chinese economy and financial system in 1998. What was the appropriate relationship between domestic and foreign capital? How did the political implications of international as opposed to domestic financial liberalization differ? What did it mean for the socialist market economy, or for socialism with Chinese characteristics itself? The AFC was an exogenous juncture that, whilst not exposing any direct link between China’s path of reform thus far in the 1990s and the potential for financial crisis, certainly both reflected on the frames that had guided financial reform earlier in the decade, and in doing so provoked further reflection amongst the Chinese policymaking elite as to the future path of reform. It reinforced two messages: first, that the East Asian developmental state was by no means immune to financial crisis precipitated by external actors and factors, and secondly, that devising ways in which to generate economic growth whilst maintaining those institutions and characteristics that preserved China’s financial stability was therefore crucial to China’s management of the ‘inevitable’ fact of economic integration and globalization. These challenges were intimately bound up with the condition of domestic financial institutions, and as circumstances simultaneously evolved within this domestic sector, the extent to which the realms of foreign and domestic capital were in fact intertwined became increasingly apparent.

Debt and the international

After having ‘tamed’ inflation through 1995–96 by coupling financial restructuring to a financially repressive and investment-oriented growth strategy, the domestic financial challenges that emerged in the late 1990s were significant. Prominent amongst these was the accumulation of debt relationships that linked together financial institutions of three kinds: state-owned commercial banks, China’s international trust and investment companies (ITICs), and the foreign creditors of those ITICs. Amidst the macroeconomic slowdown, a number of financial institutions experienced distress and failure.5 Principal amongst these was GITIC which, after having accumulated over USD 3.7 billion in liabilities to foreign financial institutions, in October 1998 became subject to a central government inquiry headed by Wang Qishan and entered bankruptcy in January 1999 (Landler 1999). Trust and investment companies, both domestic and international, had always occupied an ambiguous position within the financial ecosystem, thereby being subjected to a constantly changing regulatory environment. The industry had experienced a number of ‘rectifications’ [整顿] since the beginning of the reform period in 1978, the latest of which had begun in 1995 and was still unfolding throughout 1996.

These internationally exposed financial failures were themselves an indirect product of Zhu Rongji’s recentralization of fiscal relations, as provincial governments found themselves deprived of funds that they had come to take for granted after years of progressive decentralization. Instead they turned to foreign financial institutions in order to source capital for development-oriented investment. Foreign investors were assuaged by the presence of implicit guarantees from provincial governments, and such ‘comfort letters’ predictably undermined the rigour and strictness of credit risk analysis undertaken by foreign financial institutions in their purchase of ITIC-issued corporate debt (Chang 1999). Following the AFC, these foreign sources of capital had begun to dry up because of concerns both about the integrity of China’s financial institutions themselves and the prospects for economic growth amidst a difficult international economic environment. Foreign lending to China’s financial system had already in fact declined prior to the GITIC bankruptcy, registering declines in the second and third quarters of 1998,6 in a sharp reversal of a USD 5.2 billion increase in 1997 (BIS 1999).

The international reaction to the GITIC closure was ‘swift and unforgiving’ (Chang 1999). Following the episode, a number of banks suffered ratings downgrades (Harding 1999; Moody’s Investor Service 1999). Both Moody’s and Standard & Poors had assumed that the creditworthiness of both GITIC and the China International Trust and Investment Corporation was synonymous with that of the central government, and assigned them both investment grade ratings (Lardy 1995). The PBOC governor Dai Xianglong attempted to reassure investors and creditors in the aftermath of the GITIC collapse (China Securities Bulletin 1998). One of the legal counsel assisting in the drafting of the 1986 bankruptcy law itself believed that the handling of GITIC heralded far-reaching advances in the Chinese business environment:

In the long term, China has established clearly that it will not fall into the moral hazard trap of rescuing badly run companies just because they are too big to fail. In the future, Chinese companies will no longer be able to obtain easy credit on the basis of opaque financial statements, personal connections (guanxi) and vague comfort letters from their parent governmental authorities. (Chang 1999, 43)

The crisis prompted Zhu Rongji to state rather truculently that contrary to the beliefs of international financial investors that ‘China is already in the midst of a financial crisis and does not have the capacity to support its payments and is not creditworthy, … we are completely able to repay our debt’ (Li and Zeng 2007, 474). For Zhu the question was one of moral hazard: ‘The issue is whether or not the government should repay this kind of debt’ (Li and Zeng 2007, 474). Yet Zhu’s distinction between central and local government is crucial, and points to how the GITIC episode represented very different things for foreigners than it did for domestic financial elites. The crucial element of his statement was that

This affair sends a message to the world: the Chinese government shall not repay the debt of any particular financial sector, if responsibility for those debts is not accepted by every level of government. This is to say, if foreign banks and financial institutions wish to invest in these financial industries, then they should undertake risk analysis and ‘steer a careful course’. (Li and Zeng 2007, 475)

Through such comments, Zhu was making the point to foreign capital holders that the central government was willing to assume the role of guarantor where it saw fit. This was in contrast to the message sent to creditors within the domestic system, which was that there would be political consequences if they failed to generate greater financial profit through their activities. A marked cleavage therefore opened up between how domestic and foreign creditors conceived of the role of the market in underpinning financial stability. The experience of GITIC led policymakers to a greater appreciation of the need to find more effective ways to mediate the relationship between domestic and foreign capital:

They [central policymakers] realized that the [trust and] investment companies were a clumsy and difficult to manage way of accessing foreign capital. Zhu Rongji was outraged that the local cadres in Guangdong had been so foolish to make these kinds of guarantees. If they wanted foreign capital and foreign investors, then they would have to do it the proper correct way.7

Following GITIC, the nature of the relationship between state-owned financial institutions and the funding needs of both local governments and SOEs in this management of the relationship between domestic and foreign capital would increasingly come to depend on central government attitudes towards debt and the threat that it posed to broader financial stability. The failures of government-and bank-owned TICs were closely linked to the emergence of large numbers of NPLs in the Chinese banking system following the rapid investment-led growth of the early 1990s. The scale of these NPLs was significant, with most Chinese analysts calculating it at between 20 and 40 per cent (Yi Gang 1996; Li Xinning 1998). Zhu Rongji’s administration was therefore caught between the real economic needs for capital to maintain an investment-led trajectory of growth, and the imperatives of maintaining the integrity of the financial system as these sources of capital became increasingly internationalized. The policy basis for addressing these challenges would be laid by constructing cognitive frames that emphasized both the rationalization of the state and the enhancement of distinctively Chinese structures of authority and power that would anchor and stabilize this process of reform and rationalization.

Frames: becoming big, becoming strong [做大做强]

The increasing diversity of actors and the interests that they had in the ongoing evolution of the Chinese financial sector meant that the process of managing uncertainty therefore became significantly more complex than it had been during the earlier years of reform. The international economic environment and the domestic pressures of growth and reform precipitated a deepening of reform guided by a set of frames that served to maintain stability as well as enable growth without derogating from CCP power. These cognitive frames were not just convenient rhetoric, nor were they purely instrumental tools to be deployed within a broader game of bureaucratic power plays. The frames that emerged were not just significant in providing guidance to policymakers and CCP leaders in determining the path of institutional change. They were also central to the process of interpreting institutional change, thus generating expectations of how China’s political economy was to further evolve and develop in the following years. They accordingly played a deeper and more fundamental role in generating the stable reciprocal expectations that were essential for three purposes. First, they underpinned the political process of reshaping the institutional landscape of China’s political economy by shaping the policy parameters of institutional change. Secondly, they served a microeconomic function by enabling the continued intermediation of investment capital throughout the economy by providing the reference point for investors, shareholders, and corporate decision-makers to construct mutual understandings of the politicized and hierarchical power over risk management. Finally, they acted as mechanisms for broader macroeconomic stability within the financial system by anchoring expectations of policy and regulation in the underlying political objectives of the CCP.

The overarching frame that guided the leadership was that of economic growth. Yet such growth narratives were themselves further conditional upon particular discourses that rendered them feasible. These underlying discourses revolved around the preservation of the socio-political structures of the CCP in parallel with the construction of new market and state structures. In this context a broader discourse of economic growth resolved into two frames concerning two interrelated imperatives in the process of reform and opening; that of confronting globalization, and that of transforming and rationalizing the state-market relationship itself. These frames operated at different levels, but each revolved around the central role of the CCP as a means of managing uncertainty, in the process opening up opportunities for the simultaneous exploitation of that uncertainty. The first focused attention on the need to retain authority over the power of capital within China, whilst the second homed in on the consequent need to preserve the locus of that authority within the CCP itself. In this way they respectively focused on the capacity to capitalize upon foreign openings and thus foreign capital, and domestic wealth, without ceding control over the institutions and networks of growth. They were clearly intertwined. The potential challenges posed by ‘entering the world’ [入世] could only be met through the transformation of the state. In order to confront the challenge of globalization, the state was to be transformed into an internationally palatable as well as functionally effective set of institutions, but power was to remain firmly embedded within the CCP. The distinct yet interdependent roles of state, market, and Party were thus central to achieving these equally interdependent economic and political objectives.

In broader context, the role of the CCP as a functional bedrock of society was not withering in the face of the increased commercialization of economy and society of the 1990s, but rather evolved naturally and was actively enhanced through the eras of Jiang Zemin and Hu Jintao (Jia 2004). Following Deng Xiaoping’s death in 1997, there was a brief interlude in which Jiang looked to be emerging from Deng’s shadow and embracing a more liberal political and economic perspective (Fewsmith 2008). The discursive demolition of the ‘East Asian Miracle’ (World Bank 1993) in the aftermath of the AFC, and what appeared as ominous signs of the potential ramifications of allowing ‘crony capitalism’ to spread in the absence of democratic checks and balances (Li Zhenzhi 1998), led many intellectuals to anticipate further liberal movement. Following lengthy debate, Jiang proclaimed in 2000 that the CCP should open itself to private entrepreneurs and permit them membership (Jiang 2001). Yet at the same time he instituted the ‘Three Emphases’ or ‘Three Talks’ [三讲] movement at the beginning of 1999, which deepened and hardened the conservative elements of Jiang’s authority.8 As Gore (2001, 197) has put it, it seemed to many as if the ‘forces of the communist polity and forces of the capitalist economy were pulling the country in opposing directions’. But this was to misperceive the way in which the economic fortunes of China’s expanding private sector and the ‘shadow’ finance that fuelled it were not only compatible with the political fortunes of the CCP, but also in many ways were entirely dependent on them.9 Not so much the exposure of an entrenched political system to liberal currents of thought, let alone the potential transformation of existing institutional structures of one-party rule, Jiang’s steps in opening the Party were in hindsight a concerted attempt to ensure that the development of the private sector and the forces of commercial enterprise remained under the close authority of the CCP (Dickson 2003; Tsai 2007).

The ideologically infused frames and policies that emerged in this period of great uncertainty provide indications of how the political and the economic were thus to be reconciled. Those who advocated reform, liberalization, and receptiveness to globalization did so more on the basis of their perceived utility as rational tools for pursuing national economic strength than any committed fundamental belief in the freedom of the market or the value of liberal individualism (Wang 1998; Chen 2000; Zhang 2004). The detachment of these two aspects of political economy provided scope for developing and implementing novel and sometimes inadvertently innovative conceptions of the market as well as conceptions of the state. And this novelty can be traced back to the distinctive position of the CCP at the nexus of this state/market complex, a position that had profound influence upon the path and nature of China’s socio-economic development.

Confronting globalization 中体西用

China’s deepening integration within the global economy and the experience of the AFC brought positive economic benefits and also awareness of the attendant risks of diminishing economic sovereignty. The challenge of managing this process had a profound effect upon the orientation towards economic and political reform. The lesson drawn by the CCP from this period of financial instability was not that China had to make its financial system more like those of Western countries. Rather, it should appropriate those aspects of Western financial institutional form and practice that would aid it in its pursuit of broader national objectives. These ideas provided the reference points towards which actors straddling both the market and the state could orient themselves. In so doing they further lay at the heart of the construction of an increasingly capitalist political economy whose integrity continued to centre on the CCP’s control and authority over capital.

China’s leaders thus began to articulate more determinedly how the increasingly inevitable process of coalescence with the global economy might be reconciled with domestic challenges and priorities at the time. On 10 March 1998, Jiang Zemin stated that

The Asian financial crisis has proven to be both a revelation and a lesson for a number of Asian countries. We have to recognize and treat properly the issue of economic ‘globalization’. Economic globalization is an objective trend of world economic development, from which no one can escape and in which everyone has to participate. The key point is to see ‘globalization’ dialectically; i.e., to see both its positive aspects and its negative aspects. This issue is particularly important for developing countries. We must therefore have both the courage and the virtue to participate in this process of globalization by both cooperating and competing. (People’s Daily, 10 March 1998)

The AFC in particular gave rise to a vigorous debate within the Chinese intellectual community as to the nature of globalization in the late 1990s and what it meant for China. As will be explored below, in the process of institutional change within the financial sector this dialecticism would come to manifest in a more fluid perspective of ‘Chinese learning for its essence, Western learning for its utility’ [中学为体,西学为用]. Zhu Rongji saw the reform of the economy in ‘the same way that the self-strengtheners of the previous century had – as selectively borrowing Western methods and techniques in pursuit of wealth and power but on Chinese terms’ (Schell and Delury 2013, 348–9).

In the midst of a series of episodes during the 1990s through which many Chinese intellectuals felt as if China was being increasingly ostracized and discriminated against by Western countries,10 many Chinese intellectuals, especially those who had been educated in the West, began to believe that those in the 1980s who advocated the potential universality of liberal ideals had been at best naïve and at worst had themselves been partially responsible for deepening China’s social and ideological fissures.11 However, it was in the economic realm especially that signs of the discrediting of the ‘Western liberal model’ were even more apparent, and more specific than the rise of popular nationalism. In the aftermath of Deng’s Southern Tour, Lin Yifu had co-proposed a free market theory of comparative advantage (Lin et al. 1994), and this acted as a lightning rod for a strong critical backlash from prominent ‘New Left’ intellectuals (Hu 1995; Cheng 1994). As Gao Debu (1997, 44) emphasized,

It is impossible to think sensibly about how to open to the global economy without paying attention to how we protect our national economy. It is a basic principle to develop our national economy, and in doing so we can ensure that the globalization has positive benefits for us.

More importantly, it precipitated new thinking about the institutional development of China’s socialist market economy in an era of globalization. In 1997 Cui Zhiyuan (1997) published his theory of the ‘second thought liberation’, which sought to break down the false dichotomies of the market and the state that saw the former as the embodiment of justice through individual liberty and the latter as the guardian of a socialist egalitarianism. Rather, he argued that ‘institutional innovation’ was dependent upon strengthening both the market and the state, and on doing so under the ‘guiding principle of economic and political democracy’ (Cui 1997, 13). Modern capitalism from this perspective was regarded as both liberating and oppressive, the challenge being to unpack its complexity and cut through reified institutions and ideologies. According to Cui, none of the received categories of ‘Western’ thought were guarantors of either economic prosperity or political democracy, but rather had to be reassessed and reimplemented in light of China’s historical experience and circumstances.

It was also in 1997 that Deng Xiaoping died. Jiang Zemin had already given some indication of his neoauthoritarian perspective, and his ability to operate in a highly instrumental manner when it came to the relationship between political and economic reform: economic reform was not just to be permitted but actively fostered in circumstances where it contributed to the political structure that supported him. In Jiang, therefore, could be seen the most overt manifestation of the ‘paradoxical’ evolution of Chinese political economy – a desire to be a part of the ‘modern’ world that was matched equally strongly by an insistence that the construction of that modernity within China could only possibly take place under the socio-political auspices of an organization such as the CCP. The death of Deng Xiaoping removed the last check on Jiang’s neoauthoritarian instincts (Bramall 2009).

Globalization as ‘an objective trend of world economic development’ (People’s Daily 1998) was therefore a matter for both economic and political reform. The experiences with GITIC, the onset of the AFC, and the change in leadership provoked new consideration within policymaking and intellectual circles as to where new sources of economic growth were to be found and the political mechanisms through which they could be managed. One of the most critical factors in mediating this relationship between the political and the economic in the process of international economic integration was the question of the management of capital. Both the domestic and the transnational dimensions of the financial uncertainty that had emerged in the late 1990s cohered in a hardening of an instrumental attitude towards the relationship between foreign and domestic capital. For Chinese policymakers, the presence of foreign institutional capital in China was linked closely to the process of domestic financial restructuring. Confronted with a need to carve out NPLs and debt restructuring, key officials within both the PBOC and the MOF believed that there were great risks involved in allowing foreign financial institutions to acquire either loan portfolios or take ownership stakes themselves.12 As was the case for outward-oriented and inward-focused reform alike, maintaining domestic financial stability and preserving centralized macroeconomic control over the flow of capital were to remain the most fundamental policy priorities for China’s leadership. Just as perceptions and understandings of the broader global economic order were in flux, China’s institutional response reflected significant contingency in how state, market, and Party would evolve in tandem to meet these challenges.

Transforming the state [ 政企分开]

Following the recognition of the scale of NPLs and the shock of the AFC, calls for a deepening and acceleration of reform resonated throughout the economics profession and policymaking circles (Wu 2000). The policy to ‘grasp the large and release the small’ [抓 大放小] remained the basic guiding line of enterprise reform, and formed in turn the strategic pathway towards the ‘going forth’ [走 出去] objective. The ‘large enterprise strategy’ [大企业集团战 略] and other industrial sector reforms of the 1990s had taken cues from the South Korean chaebol model (Heilmann and Shih 2012). The AFC cast doubt upon the soundness of this strategy, although the reaction amongst economic policymakers was not to reject its overall salience, but rather to take steps to ensure that China’s ‘National Team’ would not be vulnerable to the same financial pressures that had so affected South Korea’s large enterprises. The link between the real economy and the financial remained the focal point of attention, and in this respect the ‘separation of government and business’ [政企分开] and reform of the SOE sector were considered central to confronting external threats (Liu 2002).

As Chapter 4 detailed, the origins of this guiding line were clearly to be found earlier in the 1990s, as Zhu Rongji had sought to begin to introduce more modern forms of macroeconomic control [宏观 调控] into the financial system. The discourse of regulatory reform and the separation of government and business deepened markedly in 1997 with the change in CCP leadership, and terms such as ‘corporate governance’ began to appear for the first time in CCP documents (Liu 2002). However, just as in the earlier period, it did not produce a linear and unambiguous movement towards a liberal financial system. As Opper (2007, 10) has observed, the ‘official policy line was indeed to encourage a separation of government and business to support a rationalization of the economic sphere. In retrospect, however, reforms revealed a high degree of ambivalence and inconsistency’. Rather than being the product of ‘partial’ or ‘failed’ reform, though, this inconsistency and ambivalence arises from the fact that even as the state administrative apparatus was rationalized and downsized in order to interfere less with economic processes, the role of the CCP within the broader political economy was preserved, and even bolstered. This took place via a sophisticated system of Party committees as ‘control mechanisms’ (Dotson 2012), buttressed by cadre performance benchmarks and evaluation criteria, and the enfolding of career advancement not just into networks or patronage, but further and more fundamentally into broader imperatives of Party-building and progress. In the financial sector, the Central Financial Work Commission (CFWC), established in 1998, stood at the apex of this system. Government [政] is not synonymous with the Party [党] in either institutional, ideological, or functional terms, and accordingly any efforts to increase the efficiency of the state were not to come at the expense of Party control. As Wu Bangguo, then Vice-Premier of the State Council and Politburo member, stated explicitly in 1997:

Even if the government administration does not interfere with the enterprises, the Party must absolutely not lose its political leadership powers with regard to the enterprises… . The Party should take part in the decision-making in the enterprise with regard to major issues. (Xinhua, 14 December 1997)

The result was that the streamlining and rationalization of the state infrastructure simply meant that it became a more effective ‘host organism’ (Dotson 2012) for the CCP. The desire for China to build up its national economic strength and power was related to the process of ensuring that those big firms that would lead the vanguard of China’s economic rationalization and globalization were not only represented within the political system, but were also symbiotically connected to it (Naughton 2003a).

The Central Financial Work Conference of November 1997 was therefore not merely concerned with the threat of the AFC but also the need to address the NPL problem (Yi 2011, 293). In his address to Conference, Zhu Rongji had stressed the opportuneness of deepening reform following the crisis. The failure of GITIC and other TICs provided significant impetus for increasing the stability, transparency, and commercial footing of the banking sector (Lou 2001). Although he argued that great successes had been achieved in the years following the Fourteenth Party Congress in 1992, he also argued that

We must recognize that deep problems in the financial sector have not yet been touched upon, and that serious historical problems that have built up over many years have not yet been resolved. (Zhu 2000 [1997], 411)

The first of the problems identified by Zhu was that government is neither separate from banking, nor from enterprises (Zhu 2000 [1997]). This was seen as central to a variety of issues afflicting the stability and effectiveness of the financial system, including overheating in real estate and development zones, capital shortage and excessive debt amongst SOEs, redundant investment construction, and inappropriate practices in the process of bank credit appropriation (Zhu 2000 [1997]). As a result, Zhu saw the separation of government and banking as a core component in the streamlining and modernization of the financial system. Nonetheless, he went to great lengths to emphasize that this streamlining was possible only with the reconsolidation of CCP authority within the financial sector, and that the establishment of the CFWC and the Central Financial Disciplinary and Inspection Commission, as well as the concomitant revamping and restructuring of the Party committee system within the PBOC and SOCBs, were all to serve as ‘the backbone’ [骨干]13 for the rationalization of the state’s role in the allocation of financial capital (Zhu 2000 [1997]). Most accounts of financial reform perceive the CCP as a constant source of interference either in the smooth operation of free markets or the technocratic developmentalism of the state bureaucracy. What is clear, however, is that even amongst the most pragmatic and rationalist of the economic policymaking elite, it was precisely the inverse: it was excessive state interference that was obstructing ‘the centralized and unified leadership of the Party over financial work, … the Party’s strength in political ideology, and … the Party Central Committee’s line, programs, and policies’ (Zhu 2000 [1997], 325). It was therefore at the nexus of the two trends that the organizational role of the CCP became increasingly apparent, as a functionally crucial structure for maintaining faith in the viability of economic growth in changing circumstances and as a pathway to reconciling the increased role of the market with the continued resilience of a one-party state. This role was to be embodied within the capacity of the CCP to both manage and exploit uncertainty through the course of institutional change in the financial sector.

Institutional transformation: competitiveness over competition

The range of challenges that characterized the policymaking environment in the late 1990s came to influence the priorities of China’s leaders as well as conceptions of how those objectives might be achieved. The Beijing economic policymaking community was deeply affected by the experience of the AFC, and the need to confront the challenges of financial globalization through the centralization of political authority over a process of commercialization of the banking sector was reflected across policymaking institutions and networks. The group of ‘comprehensive reformers’ [整体改 革派] led by Wu Jinglian continued to rise within policymaking circles, and the foremost members of this school, including Zhou Xiaochuan, Guo Shuqing, Wang Qishan, and Lou Jiwei would come to occupy some of the highest executive positions within the financial system during the early and mid-2000s. Their ideas and attitudes concerning the goals necessary for the rationalization of the financial sector in the face of increasing globalization were embedded within the broader cognitive frames that placed the CCP at the centre of what otherwise was still seen as an antagonistic relationship between the state and the market – one which all agreed needed to be addressed.14 Reform embodied movement towards greater international financial integration, a deepening of market-oriented reforms in the ownership, regulation, and organizational behaviour of the state-owned banking sector, and yet also significant bolstering of mechanisms of Communist Party control over how both of these processes would unfold.

The PBOC comes into its own: the growth of mutual dependency

The PBOC underwent significant institutional change in the years following the Asian financial crisis. Its increasingly evident role as lynchpin of macroeconomic coordination was reflected in the bolstering of its independence from both local provincial actors and the SOCBs. This, however, did not produce an increase in the overall independence of monetary policy, exchange rate policy, or the practice of banking supervision. These reforms were part of a process of commercializing state–enterprise relationships, but they did not reduce the nature of interdependence between the core wielders of political authority within the CCP and the key holders of technical financial expertise within the financial bureaucracy. It was thus a transformation that rendered the PBOC more entrenched in a state of mutual dependency with the CCP. Its status within both the bureaucracy and the broader financial community as the deepest repository of technical financial expertise rendered it indispensable in the policymaking process, and lent credibility to the decisions of the State Council.15 Conversely, the credibility of this status as technocratic macroeconomic manager became closely tied to the positions occupied by the PBOC’s leaders within the political hierarchies of the Central Committee and the CCP. This was a product not just of the rational interplay of bureaucratic interests within either a fragmented post-socialist system (Lampton and Lieberthal 1992), but emerged out of their joint embeddedness as Party elites within a shared understanding of the functional imperatives of the CCP’s role as the ultimate authority with responsibility for preserving financial and macroeconomic stability. Even as the deepening reform was viewed as a necessary and inevitable process, China’s top financial officials continued to stress the importance of accepting the differences of not only the goals but also the mechanisms of China’s monetary policy (Zhou 2006). These dynamics of mutual political dependency remained in place throughout the deepening of reform across the Jiang/Zhu and Hu/Wen regimes, as the institutional framework within which the PBOC operated was seen as highly successful in both managing the expectations of Party elites and stimulating an increasingly active array of financial market actors.

The November 1997 Financial Work Conference produced a wholesale restructuring of the branch network of the PBOC along macro-regional rather than provincial administrative lines (Lou 2001). Until 1998, the PBOC branch network was based on the administrative system, with thirty-one offices located at the provincial level, a situation that provided provincial Party officials with significant leverage to influence local bank branches’ decision-making processes. This negatively impacted the allocative efficiency of capital as provinces duplicated investments and pet projects of local administrators were more easily able to attract bank credit (Laurenceson and Chai 2003, 19). The reform merged or closed 148 city-level PBOC branches, and replaced the provincial offices with nine regional branches that were better placed for financial supervision, and which were later to become the architecture of the CBRC (PBOC 1999). This institutional restructuring came into force in 1999, having been preceded in 1997 by the formation of the Monetary Policy Committee. This enhanced the monetary policymaking effectiveness of the PBOC as the monetary policy target began to shift towards overall money supply rather than the scale of credit finance (Wu 2012b).

In 1998 the PBOC abolished the system of directly controlling credit quotas [信贷规模计划] (PBOC 1998; Luo 2003). The transformation of the credit plan from compulsory [控制性] to a consultative target [参考指标] within an overall ‘guidance plan’ [信贷规划] reflected an intention to move away from direct [直接跳空] to indirect regulation [间接调控].16 These were all seen as efforts to stymie local provincial officials’ efforts to exploit their political superiority over the local branch offices of SOCBs, a dynamic that had produced both NPLs and inflationary pressure (Tong 2007). Yet this notion of ‘indirect regulation’ was and remains a complex one. It refers to the replacement of the administrative structures of pre-reform central planning with more flexible systems of management more responsive to the exigencies of macroeconomic conditions.17 This meant also being more attuned to the overall political priorities underpinning monetary policy, and resulted in a much more effective ‘crisis management’ [危机 处理]18 capacity than either the unwieldy strictures of comprehensive credit plans or the unpredictable volatility of market-led corrections.19 Not merely a matter of controlling lending practices through the promulgation and enforcement of clear legal guidelines, indirect regulation thus manifested in the use of these consultative targets within a broader framework of indirect guidance.

The role of the PBOC in mediating between its political embeddedness and its role in guiding financial markets thus developed into a particular form of ‘window guidance’,20 through which the evolving tools of monetary and macroeconomic policy such as open market operations and the frequent adjustment of reserve ratio requirements (RRRs) have been enclosed within a network of officials (including the heads of SOCBs, joint-stock commercial banks (JSCBs), and regulatory officials) who meet regularly in order to develop consistency in the interpretation of policy and manage shared expectations of the macroeconomic and monetary environment.21 The PBOC began to intervene in the interbank market for government bonds in May 1998,22 and began to issue its own PBOC bills in 2002. By mid-2008 the PBOC had issued RMB 14.8 trillion of such securities, a forty-fold increase over that at end 2002 (PBOC 2008). As China’s current account imbalance deepened after 2003, the capacity of the central bank to credibly sterilize inflows of foreign capital increasingly depended upon a combination of these market operations with the ability of the PBOC to compel SOCBs and other state-owned financial institutions to maintain their holdings of PBOC bills.

Banking reform and ‘public’ listing

The banking system also underwent radical institutional change between 1998 and 2007. At the end of a long and complex process, the banking system looked a lot more like commercialized, rationalized, and internationally confident financial institutions. Yet even as they were increasingly all of these things, they were nonetheless rationalized tools of the CCP whose key position in supporting the broader macroeconomic demands of reform and development was clear to all stakeholders in this process. The institutional forms that emerged from both the process of disposal of NPLs and the course of ‘share reform’ [股改] were strongly hierarchical in nature, reflecting the continued paramount position of the political system and also the containment of this hierarchy in modern institutional forms.

The dire state of the balance sheets of the SOCBs was viewed as a significant impediment to China’s credibility on the international economic stage just as China was preparing for a significant increase in its interaction with the global economy (Zhan 2000). The AFC further underscored the extent to which a robust financial system was essential for managing this process of globalization, but it further reinforced – to Zhu Rongji especially – the extent to which this ‘immunity from the Asian bug’ was premised upon a deepening of the ‘rectification’ [整顿] that had guided financial reform and policymaking since 1993. In this context, a number of research reports emerged that argued for the combination of political retrenchment and greater rationalization of linkages between the state authorities and financial institutions in order to address the problem of debt within the banking sector (SETC and PBOC 1997). The dissemination of these findings and arguments was encouraged by Hua Jianmin, who was Chief of the Office of the Central Financial and Economic Leading Small Group from 1996 until 2003,23 as well as a variety of Zhu’s protégés within the comprehensive reform group.24

Through this process of institutional change the SOCBs were recapitalized, large tranches of NPLs were cleaved off from their official balance sheets, and they all began – and in some cases completed – the process of listing publicly on the Shanghai and Hong Kong stock exchanges (HKSE). Mainstream liberal perspectives on this course of banking reform have remained premised on a linear teleological notion of financial reform. Walter and Howie’s (2011) effort to trace the strategies adopted through the PBOC and the MOF for disposal of toxic assets, recapitalization, and finally public listing produced an ultimate conclusion that the dependence of China’s banking system on opaque transfers of capital through complex channels of ownership, debt, and fiat meant that the artifice was likely to come tumbling down at any moment. Yet a more nuanced analysis of these developments within the institutional sphere of China’s banking sector reveals a logic at play that is occluded by Walter and Howie’s assumption that the only logical route to an effective role for the financial system is one of unadulterated market liberalization. This underlying presumption of a unidirectional process of transition to a liberal market financial system is problematic. Cai Esheng, then deputy governor of the PBOC, made the point clearly in 1999 when stating that the concept of reform in the financial sector is ‘different and more profound’ than that used ordinarily by many of those interested in China’s ‘reform’, and that ‘the issues … today will not be solved simply by principles of market economies’ (Cai 1999). At the end of this process, ‘like the People’s Liberation Army, the banking apparatus would remain a preserve of the Party and subject only to its control’.25 The principal reason for this was not that conservatives had prevailed in a pitched bureaucratic battle with pro-market reformers, but rather the simple fact that neither a model of free market competition nor one of arm’s-length administrative regulation was considered capable of generating the incentives for rapid economic growth whilst also preserving centralized political control. Accordingly, from this perspective it becomes possible to shed deeper light on an otherwise paradoxical trajectory of economic commercialization and political retrenchment. One real motivation was to change corporate culture and to modernize the banks themselves in organizational and operational terms. A further real motivation was to draw upon international capital. Both of these were in order to foster economic growth. What made this economic growth possible and therefore was the most important determinant of partial marketization – was the strengthening of the CCP’s capacity to undergird macroeconomic management in the face of greater international market forces and the increasing rationalization of the state. Given the CCP’s performance legitimacy, and the growing inevitability of global integration, economic growth was thus only possible through partial marketization.

The restructuring process commenced in 1998. The PBOC reduced the required reserve ratio from 13 to 9 per cent, freeing up RMB 270 billion in spare deposits within the SOCBs. These funds were used to purchase RMB 270 billion of special government bonds issued by the MOF. The MOF then recapitalized the SOCBs directly with these funds.26 Four asset management companies (AMCs) were established in 1999 between April (Cinda) and October (Huarong, Orient, and Great Wall).27 They were established as ‘solely state-owned non-bank financial institutions’ (PRC State Council 2000) whose operations are opaque and financial situations largely undisclosed. These AMCs were capitalized themselves with RMB 40 billion from the MOF, but in order to purchase the troubled assets from the Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), and the China Construction Bank (CCB), issued bonds worth RMB 811 billion to each of the banks (Table 5.1). With a further RMB 604 billion of credit extended from the PBOC, in 2000 they purchased RMB 1.415 trillion of the NPLs held by the SOCBs. This process enabled the SOCBs to replace RMB 1.4 trillion in non-performing debt with an equivalent amount in sound and secure assets ostensibly backed by the MOF.28 That the MOF stood behind the repayment of these bonds, even as they were evergreened and extended in 2009 for another ten years, has been an open secret within the financial system since the plan was first implemented in the aftermath of the AFC.29 As one interviewee from a SOCB stated,

The debt was still there, and of course someone was going to have pay for it, but it made sense to place the debt somewhere between the MOF and the banks themselves whilst it was being worked out. The banks needed it off their books, and the MOF didn’t want to write it all down immediately and leave a huge hole on their books, so it was convenient for everyone to put it somewhere else and pretend that it didn’t really exist.30

Over the course of the ten-year maturation of the bonds issued by the AMCs, the recovery rate was estimated at averaging 20 per cent (CBRC 2010). This was, however, of little consequence; as one interviewee pithily but rather cryptically expressed it, ‘the AMCs served their purpose which was to make everything else possible’.31 One interviewee queried the seemingly insistent focus of some commentators on the desirability of dealing with bad loans through the ‘chaos of transparency’:

What would be the preferable option? To abide by abstract principles, or to make sure that there are funds when and where they are needed?32

From this perspective, it was the very lack of transparency around the AMCs and the nature of their operations and relationships to other financial institutions that was crucial for generating the conditions necessary for Chinese state officials, domestic depositors, and foreign investors, to each in their own way interpret the process of banking reform as conducive to financial stability. In this way, the use of the AMCs to support the banking sector itself would come to reflect the dependence of financial stability upon the liquidity of financial institutions, rather than their technical solvency per se (Anderson 2006, 85).

Table 5.1. Sources of funds for AMC purchase of NPLs, 1999 (RMB billions)

Source: Interview, 5 June 2012, Beijing – Chinese Academy of Social Sciences.

This first round of recapitalization and NPL disposal left the SOCBs with a remaining RMB 2.2 trillion of NPLs still on their books. The terms of China’s WTO accession in 2001 included a five-year window until 2006 for the granting of full access to China’s financial sector to foreign financial institutions. The PBOC was seen as the clear candidate to assume primary responsibility for further reform of the SOCBs, given the technocratic expertise at its disposal and the rising status of its newly appointed governor Zhou Xiaochuan. The MOF-led recapitalization and NPL disposal of 1998–99 had been achieved by drawing upon fiscal resources; these were now overstretched, and it was therefore seen as necessary to either draw upon domestic or foreign private capital. Either option involved change in the ownership structure of the banks, and the PBOC was caught between the expectations of an evolving market environment and an imperative that notwithstanding the status of either foreign or domestic private actors in the process of shareholding reform, the banking system would remain subject to ultimate authority vested in the CCP. In this respect, despite greater receptiveness to the utility of markets in the financial sector on the part of the PBOC (Bell and Feng 2013), the perceptions of MOF and PBOC officials towards the rationale for banking reform were both rooted in Zhu Rongji’s plans for rationalization and streamlining of the state, and thus evinced a continuity from the late 1990s to the 2000s following Zhu’s retirement. Some sense of this can be seen how, in response to a question about China’s ‘privatization’ process, a ‘taken aback’ Zhu Rongji remarked to former US President George H. W. Bush in 1998 that,

Mr Bush, China isn’t privatizing. We’re creating a shareholding system, and a shareholding system is only one of many forms of public ownership. (Zhu 2011, 248)

As Schell and Delury (2013, 342) have argued, ‘Zhu was categorical on this point… . The ultimate goal of these reforms … was not to dismantle the state sector, but to streamline it and thereby make it a stronger element of Deng’s new form of marketized socialism.’

The goal of transforming the banking system from a scattered assortment of liabilities into a source of national economic strength was thus closely bound up with the ‘public’ listing of the SOCBs. Liu Mingkang (2004), chairman of the newly established CBRC, argued in 2004 that the government actions in 1998–99 had been focused on reducing the financial difficulties of banks rather than on overhauling inherent structural problems, and it had become clear that the banks should do more to streamline and rationalize their organizational structures. The policymaking process was underpinned within the Party through the Central Leading Group on Shareholding Reform of the State Banks [中央国有商业银行 股份制改革领导小组], which was established by Wen Jiabao in January 2003. This brought together all of the senior financial figures under CCP authority and was chaired by Vice-Premier and PSC member Huang Ju. Zhou Xiaochuan enjoyed Huang’s support (Davis 2011), and this further bolstered the ability of the PBOC to enact its vision of banking restructuring reform from 2003 onwards.33

Central Huijin Investment Ltd [中央汇金投资有限责任公 司] was established as a subsidiary of SAFE, which in turn is an agency subordinate to the PBOC. Guo Shuqing, then also director of SAFE, was therefore its first administrator. It was created in order to bypass the prohibition upon the PBOC from taking a direct ownership stake in any commercial bank (National People’s Congress of the People’s Republic of China 1995). Huijin was authorized by the State Council to make ‘equity investments in major state-owned financial enterprises, and … to the extent of its capital contribution, [to] exercise the rights and perform the obligations as an investor on behalf of the State in accordance with applicable laws’ (Central Huijin Investment Ltd. 2008). Thus in 2003, when the PBOC determined that BOC and CCB were financially sound enough to write down further capital losses, China’s rapidly increasing foreign exchange reserves were utilized through SAFE in order to provide USD 22.5 billion to BOC and CCB for these purposes. In May 2004, RMB 475 billion in NPLs were transferred to the AMCs from these two banks, for consideration from the AMCs of RMB 145 billion. The PBOC then extended direct credit of RMB 700 billion to fund a second tranche of NPL disposal from ICBC, which transferred RMB 705 billion of NPLs to the AMCs. Finally, in 2004 the PBOC extended Special Bills totalling RMB 567 billion to BOC, CCB, and ICBC, which were due to mature in 2009. In 2005, Bank of Communications auctioned off RMB 64 billion in NPLs, for which the bidding AMCs paid RMB 32 billion. On 22 April 2005, following the State Council’s approval of the joint stock reform plan, ICBC was again recapitalized, but this time followed the course of BOC and CCB in drawing USD 15 billion from the foreign exchange reserves through SAFE. One month later on 27 May 2005, ICBC then transferred RMB 246 billion of NPLs to Huarong AMC at book value, before signing further agreements on 27 June 2005 with all four AMCs to sell RMB 459 billion in NPLs also at book value.

This second round of recapitalization and NPL disposal was closely oriented towards the goal of attracting foreign capital. Foreign investors were actively encouraged to take direct equity stakes in Chinese banks, which led neither to serious competition from foreign financial institutions within the domestic Chinese market nor to dramatic shifts in the patterns of authority within the banking sector. The dual rationale for reform and internationalization – tapping foreign capital and improving the organizational efficiency of the banking sector – was pursued within the encompassing frames of state rationalization, global integration, and continued supervision and control by the CCP. Following the listing process, the most significant holders of equity in China’s banking system are Huijin and the MOF (see Table 5.2). Other state entities that possess major ownership stakes include the National Social Security Fund Council (NSSFC), and a Hong Kong-incorporated entity, Hong Kong Securities Clearing Company Ltd, which is 50 per cent owned by the HKSE and 50 per cent owned by the five largest banks operating in Hong Kong.34 These changes in the institutional and asset structure of the banking sector following WTO entry were, from one perspective, merely symbolic (Chen 2002). Although now listed publicly on the HKSE and SHSE, these steps reflected an instrumental attitude to the public listing of the institutions, rather than regarding it as an end in itself (Bell and Feng 2013, 281). Whereas the conventional rationale for public listing includes the improvement of corporate governance and transparency in addition to the raising of capital, the non-market tradability of two-thirds of the shares of the state-owned banks and the retention of state control over both traded and non-traded stocks means that market price signals and market-actor oversight still play a highly limited role in determining the market capitalization of the banks.35

Table 5.2. Equity structure of China’s largest banks, 2010

Source: Annual Reports, various years

Note: the year 2010 was selected in order to be able to incorporate ABC, which listed publicly in 2010.

Following the combination of domestic restructuring and public listing, the core of the banking sector came to resemble an internationally competitive set of institutions dedicated to international best practice. However lines of ownership and the lines of control within the banking sector are not coterminous. The formal ceiling of 25 per cent for foreign ownership in a single domestic bank and that of 20 per cent for any single foreign investor preserved the ongoing paramountcy of formal state ownership. Reflecting the continued paramountcy of the political system to emerge from ‘share reform’ [股改], the shareholding structure of the SOCBs therefore introduced a new legal entity into the Chinese corporate landscape; that of ‘large and small non-[traders]’ [大小非].36 The distinction between these categories is closely related to the nature of the stock market as a ‘policy market’ [政策市场] in which the hierarchy of political control over the banking sector – and thus its role within the implementation of macroeconomic and monetary policy on a national scale – comes to enter into a symbiotic relationship with the market value of the banks themselves. Strict ownership is thus not conclusive in determining how control rights are actually exercised over a state-owned entity, even one that has been legally incorporated for the purposes of operating within a competitive market environment.37 The CCP’s powers are not mentioned in the charters of any of the SOCBs, however, neither would it be appropriate to relegate this influence to informal means of control and governance.

The structural embeddedness of the state within the capital markets in this manner, and the concomitant awareness on the part of market participants that these enterprises are in turn embedded within a political hierarchy with the CCP at its apex, is what enables the CCP to act simultaneously as ‘the most important controller of risk as well as the largest source of uncertainty’38 Thus, ownership structures are characterized by retention of predominant state ownership, and it is precisely because those state institutions are embedded in an institutional hierarchy whose coherence depends upon the CCP that they are able to function effectively as mechanisms for corporate governance acceptable to the political elite. The continued role of the CCP anchored the expectations of domestic and foreign investors alike:

Whilst it is generally acknowledged that privatization goes hand-in-hand with improved efficiency, this might not be the case in China because the very fact that the banks are owned by the state reassures the depositors. (Xie 1999, 329)

Despite the presence of independent directors, foreign strategic investors, and mechanisms for corporate accountability, the most important source of faith and confidence in the banking system remains the simple fact of CCP control over the actions and practices of the biggest banks.39 What is most important is not whether such a state of affairs is actually always true, but that investors, shareholders, and corporate decision-makers alike construct mutual understandings on the basis of the ultimate repository of power over market risk and uncertainty being retained within political hierarchies that extend from the implementation by banks of regulations on loan classification,40 to decisions made at the highest levels of the CCP on the impact of interest rate movements.41

Upgrading financial discipline: vertical supervision

The problems in the banking sector and the threat the sector posed to the deepening internationalization of the Chinese economy were seen by Zhu Rongji in the aftermath of the AFC as equally a problem of personnel as of institutional structure. The Central Committee and the State Council issued a notice following the November 1997 conference, identifying the following problems as central to the financial situation at the time:

In the process of transformation from a planned economy towards a socialist market economy, the organization of the financial system has not been appropriate to the needs of reform and development, laws have been incomplete, financial supervision has been weak, management has been disorderly, discipline has been lax, and a small number of employees have demonstrated their inferior quality. (PRC State Council 1997)

According to Liu Mingkang, in 1998 Zhu told the bank presidents:

Let’s say goodbye to all these excuses. No more government-dictated loans. I’ll give you money in one shot. Carve off all your existing non-performing loans – I don’t care where they came from, but I do care about your future behavior. I’ll get proper benchmarks to measure your performance from here on. [For new bad loans] I will hold accountable those who are responsible. (Liu, cited in Kuhn 2010, 266)

There was clear recognition within China’s regulatory apparatus of the challenges faced by China’s banks by WTO accession, however, the CCP sought the pursuit of increased commercial competitiveness through a deepening of the existing macro-framework of centralized supervision.42 Zhu’s vision of increasing accountability therefore involved the centralization of control and supervision over the banking sector, even as the state bureaucracy was being rationalized and streamlined. This challenge was met through the establishment of the Central Financial Work Commission and the ‘correspondingly’ established Central Financial Discipline and Inspection Work Committee (CFDIWC) [中央金融纪律 检查工作委员会].43 The CFDIWC was designed to provide far greater capacity for the active monitoring of those engaged in ‘financial work’ [金融工作], so as to ‘strengthen the unified leadership of the Party in financial work’ (PRC State Council 1997, n.p.). This also coincided with a restructuring of the Party organization in all the major financial institutions, as emphasis was placed upon the construction of stronger systems of ‘vertical leadership’, in order that all the necessary duties and functions were carried out according to law.

The overall process of banking and regulatory restructuring was underpinned by the essential guiding principle of ‘leadership of the Party’ through the Party committees within financial institutions that were each linked vertically to the Central Finance and Economic Leading Small Group (CFELSG) (Dai 2010).44 As a policymaking and policy coordinating body, the CFELSG was functionally separate from these horizontal and vertical mechanisms of governance, although it exercised ultimate responsibility and control over them as well. The processes of institutional change traced in the previous section were themselves underpinned by an increase in CCP oversight in order to manage uncertainty. As Heilmann (2005, 3–4) observes,

As soon as China’s top leaders had agreed [in 1997] on the need for centralization to counter financial risk, they were able to achieve comprehensive regulatory reform by leaving state institutions intact on the surface for the time being while swiftly changing the internal rules governing Communist Party-appointed ‘leadership cadres’ and creating a powerful, yet mostly invisible Party body for monitoring financial executives.

Although Zhu Rongji introduced plans to reform the Party structure where organizational overlap existed amongst different parts of the Central Committee, these were not intended to weaken the Party apparatus, but rather to streamline it and increase its efficiency. Where it mattered most to Zhu – the economic realm – the organizational depth and authority of CCP regulatory oversight and capacity for intervention were enhanced. Zhu’s response to the problem of reform both in the financial system and SOEs thus emphasized much more strongly the management of people and ideas, rather than institutions and structures. As a senior academic observed in 1998, Zhu did ‘not think there [was] anything particularly wrong with the existing structure. He [had] been telling managers that the problem [was] more themselves – sloth, inefficiency, and corruption – than the system’ (Yang 1998, 236). This meant that, ‘improving the moral quality of cadres was a prerequisite to solving problems ranging from corruption to SOE efficiency’ (Lam 1999, 371fn). Just as the evolution of cognitive frames and the path of institutional change reflected the importance of continued CCP control to managing the uncertainty of deepening reform, the most effective mechanism available to Zhu Rongji – and Wen Jiabao after him – for achieving economic growth without permitting the establishment of alternative bases of financial and political power was the control exercised by the CCP over the networks of financial relations.

The primary mechanism for the CCP’s tightening of the means of policy diffusion through the financial sector was the CFWC, a body established in 1997 and directly and exclusively answerable to the Central Committee (PRC State Council 1997). In contrast to the agenda setting and decision-making functions of the Leading Small Groups,45 it was the primary organization devoted to supervision and management of cadres, as the overseer of horizontal networks linking the executive ranks of China’s key financial institutions both amongst themselves and to the Central Committee itself. It was mandated explicitly to ‘implement the Party line, guidelines, policies, and lead the work of Party-construction throughout the financial system, but not to engage in financial business or provide financial services’ (PRC State Council 1997). It complemented the COD, which in 1998 refocused significant attention on the work of cadres within the financial system (Central Organization Department 1998b). Wen Jiabao, at that stage a Vice Premier and member of the PSC, served as chair of the CFWC. It effectively leapfrogged the PBOC, the MOF, and subsidiaries such as CIC and Huijin in enabling direct CCP appointment of senior management throughout the banking sector (Heilmann 2005). It worked closely in tandem with the COD, which already shouldered responsibility for the ‘position-list’ system of leading cadre appointment (Central Organization Department 1998a). Thus, between 1998 and 2003 the CFWC controlled the appointment of senior executives across all key institutions in finance, including regulators, administrative agencies, and banks.

In 2003 Wen Jiabao’s assumption of leadership over the Central Finance Leading Small Group coincided with a concerted refocusing of attention on the banking sector. Further, his establishment of a new leading small group (the Central Financial Safety Leading Small Group [中央金融安全领导小组]) was not merely a rebranding of the CFWC.46 Some also saw the CBRC as something of a successor to the CFWC (Naughton 2003a). However, the CFWC, having served its function of reasserting centralized control over personnel and financial leadership following the shock of the GITIC bankruptcy and AFC, saw many of its core functions of cadre appointment transferred to the CCP Organization Department,47 and thus retrenched within the Party apparatus itself, rather than dispersed through the channels of the governmental bureaucracy ministries (Heilmann 2005). Until the CBRC came into being in 2003, the PBOC retained jurisdiction over supervision of the banking sector. The macro-regional restructuring of 1998 produced the regulatory architecture that would become the institutional foundation for the CBRC, the establishment of which was delayed beyond that of other regulatory bodies,48 not only because of the reluctance of the PBOC to relinquish jurisdictional turf, but more fundamentally because of broader concerns (both within and beyond the PBOC) that it would usher in instability at a crucial moment in China’s financial reform, when the current PBOC-rooted supervisory system was itself being fundamentally restructured.49

Upon its establishment, it became increasingly clear that even as the CBRC was intended to assume the regulatory functions of the PBOC and thus present a ‘modern’ institutional structure for financial regulation, the functional nature of state regulation was to take on a distinctive form that continued to reflect a CCP-dominated political hierarchy. The Chinese notion of regulation embodies the notion that the CCP is both umpire and player, reflected in regulatory authorities asserting a sense of ownership over the banks and their overall regulatory approach.50 The ambiguity of objective legal standards is intentionally designed to provide space for normative moral standards to be provided by leaders; the CCP therefore commands arbitrary and decisive power. As with other government agencies, the CBRC is subject to an ostensible tension between its roles as both supervisor and CCP agent (Brehm 2008). The regulatory goal of financial stability coexists with the political interpretation of economic needs, providing the legal basis for the CBRC to act within the context of political objectives. This reflects the fact that personal statements by political leaders have institutionalized the norm-setting character in China, and are not just individual personal opinions (Fewsmith 2008). That is to say, they do not reflect simply upon the individual and their position within political structures and discourse, but rather upon the nature of those structures and discourses themselves.

Sterilizing the money markets

Commencing in 1997, a policy of gradual interest rate liberalization was instituted, when a 10 per cent band of flexibility was initially introduced for loans to small and medium enterprises (SMEs). In 1998 this relaxation was extended to all borrowers, before being increased to 20 per cent above the benchmark rate set by the PBOC. This liberalization coincided with the onset of the NPLs crisis in 1997, and represented a concerted effort by the Zhu Rongji administration to instil greater capacity for the pricing of risk within the commercial banks, the previous absence of which had undoubtedly been a significant factor in the buildup of an enormous stock of toxic debt within the banking system. However, the cap on deposit rates was maintained, and the floor upon lending rates was maintained at 10 per cent below the benchmark rate, thus guaranteeing that a highly profitable interest rate spread remained at the disposal of the banks. The specific management of deposit rates became especially pronounced after 2003. Prior to this, the PBOC would make rapid adjustments to nominal deposit rates to reflect increases and decreases in consumer price inflation. However, beginning in 2004 the PBOC responded to inflation increases with a lag, whilst reducing nominal deposit rates rapidly in line with decreases in inflation (Lardy 2012). With the band of flexibility within which commercial banks were free to deviate from the PBOC-set benchmark rates maintaining a rate floor of 90 per cent of the benchmark, competition amongst the major banks virtually guaranteed the uniformity of lending rates at the lowest level sanctioned by the PBOC.

Deepening economic integration presented clear challenges for the management of China’s exchange rate, as reforms were undertaken in a number of domestic manufacturing sectors in order to pave the way for WTO accession (Lardy 2002). As with the institutional change in the banking sector itself, the CCP leadership approached the management of the currency as a further tool with which to pursue economic growth in tandem with the preservation of political control. The confrontation of economic globalization unfolded through the construction of an increasingly rationalized set of relationships between the state and market, yet one that was coordinated and underpinned by the continuing authority of the CCP. From 1998 onwards, monetary policy was subordinated to exchange rate policy. In turn, exchange rate policy was subordinated to preserving internal stability, which demanded the retention of ultimate regulatory authority over capital.

As China acceded to the WTO in the aftermath of the AFC, a ‘mercantilist objective’ (Yu 2012) became evident in the drive to accumulate foreign reserves as a ‘foreign-exchange-creating economy’ [创汇经济]. During this period the exchange rate thus was not viewed as ‘a price to be determined by the market but rather as a tool in China’s broader development strategy’ (Kroeber 2011). The banking sector formed a central component in implementing this policy of exchange rate undervaluation. Beginning in 1998, the PBOC was tasked with two potentially conflicting policy objectives: maintaining export competitiveness through currency devaluation at the same time as ensuring monetary stability. An export-driven current account surplus will have an inflationary effect upon the domestic money supply in the absence of central bank intervention to prevent the capital it expends on accumulation of foreign exchange reserves from entering the domestic money supply. From 2003, the PBOC began to sterilize this surplus capital through two methods. First, it directly imposed bond quotas upon the SOCBs, which require them to hold a certain amount of interest-bearing bills issued by the central bank, thus reducing the money supply.51 Secondly, it increased the required reserve ratio, forcing banks to deposit greater shares of their capital with the central bank and thus curtailing their lending operations. The effect of these sterilization methods was to reduce the portion of the total money supply in circulation and reduce inflationary pressure (Gang 2010).

The ongoing viability of both of these sterilization methods depended on the maintenance of low interest rates (Zhang 2012). Since the intervention in the foreign exchange markets from 2003 to 2007 was continuous, large scale, and unidirectional, investors in central bank bonds would bet that the sterilization efforts could not remain sustainable and viable in the long run. If interest rates were flexible, this calculation would force up interest rates upon the PBOC bonds, and thus significantly increase the costs of sterilization borne by the central bank, since a difference between the interest earned on foreign currency-denominated debt instruments that comprise official reserves and the interest paid on the bonds issued to the SOCBs would emerge and continuously increase. Thus, by setting interest rates at a low rate, the PBOC avoided these increased sterilization costs, but in doing so implicitly taxed the banks that held these bonds rather than other, more lucrative investments (Zhang 2012). The PBOC then offset this tax by reducing the costs of capital for the banks; it shifted the burden onto household depositors by depressing the benchmark deposit rate. In this manner, the preservation of an exchange rate regime with highly limited flexibility for the purposes of domestic stability within a weak institutional and regulatory environment was symbiotically connected to the broader and deeper repression of the financial system.

Accelerating growth and the deepening of imbalances

These institutional transformations laid foundations for the deepening of a highly unbalanced growth trajectory. As Figure 5.1 indicates, the year 2000 marked a major inflection point in the development of severe imbalances in the composition of GDP growth, when the share of consumption commenced a decrease from 47 per cent to reach 34 per cent, and investment rose from 35 per cent to reach 43 per cent by 2006. Two primary trends therefore emerge from the trajectory of growth between 1998 and 2007: first, the significant increase in investment between 2000 and 2004, and secondly the significant increase in net exports between 2005 and 2008. Following the AFC, therefore, it was first investment and then exports that led to a final headline rate of over 14 per cent in 2007.

Figure 5.1: Shares of investment, consumption, and exports in GDP, 1978–2012

Source: World Bank, CEIC

Following the AFC, the CCP prioritized the stimulation of domestic demand through expansion in investment projects in order to sustain a rapid pace of economic growth (Chen 1999). Rather than industrial projects, capital was channelled towards infrastructure, which was perceived as still constituting a fundamental bottleneck in the economy. Knight and Ding (2012, 177) have found that from 1998 onwards the return on capital in industry rose substantially across both the state and non-state sectors:

Enterprise reform and marketization achieved efficiency gains through the reallocation of resources toward more productive uses – from the state sector to the private sector, from agriculture to industry, and from domestic to foreign markets. Entrepreneurial expectations of rapid economic growth were crucial for high investment and the resultant path of economic growth.

The immediate impact of the post-AFC financial restructuring was to produce more effective mechanisms of capital allocation, even if levels of gross capital formation increased relative to other drivers of growth. This is to draw attention to the qualitative nature of that investment in contrast to that of either the investment that produced inflationary pressures in the mid-1990s or the increase in investment that followed the 2008 financial crisis. The newly restructured banking system continued to provide significant loans to enterprises whose loans had been the target of the debt restructuring efforts beginning in 1998. Financial statements indicate that corporate clients still accounted for over three-quarters of total lending by the four SOCBs that had listed publicly by the end of 2007: BOC, Bank of Communications (BOCOM), CCB, and ICBC (BOC 2007; BOCOM 2007; CCB 2007; ICBC 2007). Of these loans to the corporate sector, loans to SOEs still weighed heavily, with loans to non-SOEs comprising 34 per cent in ICBC’s case (ICBC 2007, 167), and 36 per cent in the case of CCB (CCB 2007, 197).

Figure 5.2 demonstrates how, following the rapid reduction in reliance upon government budgetary outlays for the financing of investment, enterprises came increasingly and steadily to rely upon their own savings for their capital outlays. This reflects the fact that China’s investment-led growth has been driven by endogenous factors; even as FDI increased, this was directed primarily towards the manufacturing sector, a phenomenon that was increasingly prioritized by the Chinese government as the country’s integration proceeded apace following WTO accession (Huang 2003). These investment levels and the entrepreneurial expectations underpinning them were highly dependent on the financial repression engineered through the SOCBs and the interest rate regulation that was a central element in these policies. The direct effect of these negative real interest rates was to repress growth in household disposable income relative to a less repressed financial environment. Two further indirect effects began to emerge. The first was that the savings rate as a portion of household disposable income increased,52 since the objective of savings in a society without a strong social safety net is to reach a target level of financial assets (Chamon and Prasad 2010). The second was that this financial security-motivated increase in savings, the unattractiveness of depositing these savings with commercial banks, and the limited range of other attractive consumer investment options produced a heightened demand for residential property. As wealthy urban households began to attempt to capitalize upon a speculative real estate bubble, a further transfer of household wealth into the construction and infrastructure sectors began to take hold, accentuating the divergence between consumption and investment.

Figure 5.2: Sources of funds for fixed-asset investment, 1978–2012

Source: CEIC

The roles of investment and exports (as well as the public and private sectors) in China’s growth were thus linked closely to the institutional structure and macroeconomic role of the state-dominated financial sector. The overinvestment complex was related to the unbalanced external nature of the growth trajectory, as the relationship between the path of institutional reform in the banking sector and the emergence of overinvestment arose on the basis of policymakers’ insistence upon targeting internal balance at the expense of external balance (Yu 2012). This reflects the fact that China’s growth story has been one of domestic demand. Figure 5.3 illustrates the minor role that net exports have played in contributing to overall GDP growth, only coming to provide a significant contribution to GDP growth after 2005, the point at which China’s current account surplus experienced a significant concomitant increase to reach over 10 per cent in 2007. Yet overall trade as a share of GDP increased since 1978. Although a significant contribution economic growth eventuated from exports directly as well as domestic industries connected through supply-chain and infrastructure needs, this overall investment- and export-dominated growth model remained premised on the ongoing role of the financial system to manage the macroeconomic pressures that resulted from both.

When in 2005 China’s GDP growth came to reflect increasingly large shares of exports of goods and services, this did not coincide with a depreciation of the RMB in either real or trade-weighted terms. For this reason, it is not possible to neatly depict the Chinese exchange rate regime as part of a coherent international monetary system in the form of a Bretton Woods II system. Such a system has been characterized by the emergence of a fixed exchange rate periphery in Asia, with China at its core and motivated by an export-led growth strategy (Dooley et al. 2003; 2004a; 2004b). From this perspective, given high savings and policy-driven lending practices, it was purely by virtue of an undervalued exchange rate and the consequent opportunities for export to the US market that China was able to prevent the severe misallocation of capital. This argument focuses on the real effective exchange rate (REER) of the RMB vis-à-vis the USD. The exchange rate regime was fixed rigidly at RMB 8.27 = USD 1 from 1994 until July 2005 when it was reformed into a managed floating rate. However, although the change in exchange rate policy had an effect upon the exchange rate itself in marginal terms (and actually declined in real, tradeweighted value during 2006 and 2007) (Lardy 2012), the current account surplus continued to rise dramatically before peaking in 2008 at 10 per cent of GDP (Figure 5.4) (Gao and Coffman 2013). Were Chinese policymakers genuinely formulating exchange rate policy on the basis of the interests of export-oriented manufacturers, and concerned fundamentally with preserving employment in those export sectors, then it would not have been logical to focus on the REER at the expense of the trade-weighted real exchange rate, for a majority of China’s exports flowed and continue to flow to markets whose currencies float against the dollar (Goldstein and Lardy 2009). This trade-weighted exchange rate in fact appreciated by nearly 30 per cent between 1994 and 2002 (Figure 5.4).

Figure 5.3: Exports and imports in GDP, 1978–2012

Source: World Bank

Thus the notion that the bilateral USD–RMB was targeted out of consideration for maintaining export-sector employment is ultimately somewhat unconvincing. Rather, it was focused inwards so as to promote faith and confidence in what Calvo and Mishkin (2003, 101) have labelled the ‘key to macroeconomic success’, the economy’s fundamental macroeconomic institutions of fiscal, monetary, and financial stability. In this sense, it is reflective of the need to construct a particular financial regime around the CCP’s broader and deeper emphasis on a particular mode of control over the flow of capital within the domestic political economy. Policymakers neglected external macroeconomic balance, focusing instead upon policies beneficial to internal macroeconomic balance. Indeed, as Yu Yongding has observed, the ‘fiscal and monetary blend’ of monetary policy to control overheating and fiscal policy to avert downturn had been quite successful in maintaining simultaneously low unemployment and low inflation (Yu 2012, 558). China’s economic policymaking can be seen as directed towards maintaining domestic financial stability within a weak regulatory and institutional financial environment (Goldstein and Lardy 2005). In this sense, the peg to the USD was viewed as valuable for reasons of maintaining domestic financial stability and as an anchor for monetary policy.53

Figure 5.4: Real effective exchange rate and current account, 1994–2012

Source: National Bureau of Statistics, China Statistical Yearbook; CEIC


Zhu Rongji continues to be viewed generally by Western viewers (and to a lesser extent by Chinese financial analysts) as the consummate economic reformer and financial architect concerned with enacting a vision of market-oriented efficiency through economic competition. But what Zhu in fact achieved was the construction of a Chinese capitalism that was at its zenith from 2005 to 2008, as growth surged on the back of an increasingly unbalanced economic growth model. Western bankers, advisors, and commentators who looked to this period of economic opening and integration as commensurate with the diminishment of Party influence within the financial system were mistaken. They saw the growth of market forces and the establishment of modern institutional forms as evidence of the CCP’s need to remove itself from the financial system in order to permit continued transformation of the Chinese political economy, and yet it was precisely the opposite; the CCP’s continued salience as a crux of reform was exactly what enabled such changes to unfold. Through this system of risk management, the CCP was able to achieve its goals of stability through growth despite the socially regressive effects that this had because it was capable of constructing a system that was both market and state led; it was the CCP that crossed the institutional divide between state and market. In this sense, by strengthening the role of the CCP it strengthened both the market and the state. The course of reform and the resulting growth during this period thereby reflected a fundamental continuity in the economic sociology of China’s mode of economic and financial governance. As Schell and Delury (2013, 349) have observed,

It was an old story, but with a new ending. The Party-state’s ultimate ownership rights of the national economy and the total monopoly of political power were no more to be changed, or even tinkered with, than the basic tenets of the Confucian construct were to be altered by the early self-strengtheners a century ago.

In such a vein, this chapter has traced the evolution of the banking sector and its role at the institutional core of this retention of authority over an increasingly capitalist authoritarian political economy as it mediated the relationship between different social groupings both domestic and foreign. The eruption of the financial crisis in 2008 ushered in a new phase in the development of China’s financial capitalism, one that continues to unfold around us now and whose dynamics and implications for the longer-run evolution of global capitalism we are only just now beginning to more adequately and rigorously grasp.


1Interview, 9 August 2013, Beijing – China Construction Bank.

2Interview, 21 August 2013, Beijing – PBOC; Interview, 18 April 2014, Beijing – Ministry of Finance.

3Interview, 6 June 2012, Beijing – Ministry of Finance; Interview, 12 October 2012, Beijing – SAFE.

4This meeting was notable for the presence of Jiang Zemin, Li Peng, and Zhu Rongji. Participants also included not only central bank officials at the national and provincial level, officials from the headquarters and major provincial branches of the state-owned banks, insurance companies, and many NBFIs, but also provincial governors and provincial level finance officials.

5Five firms in particular were notable for the scale and rapidity of their demise: China Rural Trust and Investment Corp in January 1997; Hainan Development Bank on 21 May 1998; China New Technology Venture Capital Corp on 22 June 1998; Pudong United Trust and Investment Corporation in October 1998; and Guangdong International Trust and Investment Company in October 1998.

6USD 3.3 billion and 6.3 billion in the second and third quarters respectively (BIS 1999).

7Interview, 17 November 2012, Beijing – Shanghai Stock Exchange.

8These were to place emphasis on ‘politics, study, and moral integrity’ [讲政 治,讲学习,讲正气].

9This is especially evident in the way that private entrepreneurs navigated around the formal strictures of SOE-centric financing channels in ways that relied upon their ability to gain access to and favour with party officials (Tsai 2007).

10These included the defeat in 1993 of China’s bid to host the 2000 Olympic Games, the action of the US during the 1995–96 Taiwan Straits Crisis, NATO intervention in Kosovo, and particularly the 1999 bombing of the Chinese embassy in Belgrade.

11As Rana Mitter (2004, 245) has described it, a ‘shimmering time of political and cultural promise whose attraction lay in its instability’.

12Interview, 23 May 2012, Beijing – PBOC; Interview, 23 May 2012, Beijing – Ministry of Finance.

13Interview, 5 June 2012, Beijing – CASS.

14As Bell and Feng (2013) have aptly observed (yet underappreciating its significance), these individuals can be characterized neither as Weberian bureaucrats nor Machiavellian politicians.

15Interview, 23 May 2012, Beijing – PBOC; Interview, 5 June 2012, Beijing – CASS.

16Interview, 10 October 2012, Beijing – People’s Bank of China.

17Interview, 10 October 2012, Beijing – People’s Bank of China; Interview, 16 November 2012, Beijing – China Banking Regulatory Commission.

18This is reminiscent of Susan Shirk’s (1992, 76) notion of leadership and regulatory authority being intertwined together in a system of ‘management by exception’.

19Interview, 21 October 2012, Beijing – People’s Bank of China.

20Although different forms of ‘forward guidance’ have emerged as a widely recognized and important dimension of central banking internationally (such as Mario Draghi’s famous pledge in July 2012 to ‘do whatever it takes’ to save the Euro), the nature of ‘moral suasion’ or ‘jawboning’ in China remains of a qualitatively distinct dynamic between a central bank and financial institutions. Interview 20 June 2012, Beijing – Institute of Finance and Banking, Chinese Academy of Social Sciences.

21Interview, 10 October 2012, Beijing – People’s Bank of China.

22This interbank bond market itself was only initiated in June 1997.

23Upon Wen Jiabao’s assumption of the Premiership in 2003, Hua was appointed Head of the State Council itself.

24Interview, 14 April 2014, Beijing – Tsinghua University.

25Economic cadre (quoted in Lam 1999, 384).

26RMB 93 billion of this went to BOC and CCB, ICBC received RMB 85 billion, whilst Agricultural Bank of China (ABC) received RMB 92 billion.

27China Cinda Asset Management Company [中国信达资产管理公司] was closely aligned to CCB; China Huarong Asset Management Company [中国 华融资产管理公司] was aligned to ICBC; China Orient Asset Management Company [中国东方资产管理公司] was aligned with BOC; China Great Wall Asset Management Company [中国长城资产管理公司] was aligned with ABC.

28The CCB listing prospectus stated that ‘in the event that Cinda is unable to pay any interest on the bond in full, the MOF will provide financial support, … when necessary, the MOF will provide support with respect to Cinda’s repayment of the principal of the bond’. Whether this extends to all of the AMCs or just Cinda AMC is unclear (CCB 2005).

29Interview 12 September 2012, Beijing – Institute of World Economics and Politics, Chinese Academy of Social Sciences.

30Interview 17 September 2012, Beijing – Agricultural Bank of China.

31Interview 26 August 2013, Beijing – Minsheng Bank.

32Interview 21 August 2013, Beijing – People’s Bank of China.

33Interview 27 May 2012, Beijing – Chinese Academy of Social Sciences.

34Each of the following holds a 10 per cent stake in HKSCC Nominees Ltd: HSBC, Standard Chartered Bank, Hang Seng Bank, Bank of East Asia, and Bank of China. See BIS (2007).

35Interview 4 June 2012, Beijing – National School of Development, Peking University; Interview 5 June 2012, Beijing – Institute of Finance and Banking, Chinese Academy of Social Sciences.

36A ‘large non-trader’ [大非] is a large-scale holder of non-tradeable R-shares, whilst a ‘small non-trader’ [小非] is a holder of a smaller quantity of such R-shares (typically regarded as less than 5 per cent of the whole stock of the company). See China Securities Depository and Clearing Commission (2008).

37In functional terms, the similarity between the ownership structures of the publicly listed commercial banks and a non-commercial, non-publicly listed bank such as the China Development Bank is instructive. See (Li Xia 2000). The CDB has three shareholders: MOF (50.18 per cent), Huijin (47.63 per cent), and the NSSFC (2.19 per cent) (China Development Bank 2011).

38Interview 7 April 2013, Beijing – China Banking Regulatory Commission.

39Interview 7 September 2012, Beijing – National Development and Reform Commission; Interview 21 November 2012, Beijing – Primavera Capital Group.

40Interview 9 August 2013, Beijing – China Construction Bank.

41Interview 26 August 2013, Beijing – Minsheng Bank.

42Whilst the State Council formally controlled the PBOC, which in turn controlled the SOCBs, the CCP further imposed parallel methods of control through the Central Discipline and Inspection Commission, which was subordinate to the Central Committee of the CCP and which exercised control over staffing the party committees present within all SOEs (Tang 2003).

43This took place in December 1997, following the November convening of the Central Financial Work Conference (PRC State Council 1997).

44Interview 4 June 2012, Beijing – National School of Development, Peking University.

45Wen Jiabao, as the head of the CFWC, clearly saw its role as one of implementation rather than formulation of CCP policy (Heilmann 2005, 8).

46There was in fact very little continuity in staffing between the two groups (Naughton 2003b).

47The CFWC’s role in horizontal rather than vertical financial supervision will be explored below.

48The CSRC and the China Insurance Regulatory Commission (CIRC) were both established in 1998.

49Interview 14 June 2012, Beijing – Baoshang Bank; Interview 28 November 2012, Beijing – Central Leading Group for Finance and Economics.

50The term for ‘regulation’ [监督管理] is the conjunction of two different words: jiandu [监督]means that of supervision or oversight, whilst guanli [管理] refers to management. See He (2014).

51By the end of 2010, commercial banks had acquired approximately RMB 4 trillion of central bank bills at 1.692 per cent for three-month maturity, and 2.126 per cent for one-year maturity. The discrepancy between these returns and the average lending rate of 6.11 per cent constitutes an implicit tax upon commercial banks (Milana and Wu 2012).

52Thus China’s high savings rate reached an unprecedented level of more than 50 per cent of GDP in the period 2006–10 (Ma and Yi 2010).

53Interview 16 June 2012, Beijing – China Investment Corporation; Interview 8 June 2012, Beijing – China Construction Bank.

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