Banks ready to burst
Jonathan Mirsky
THE CHINA DREAM by Joe Studwell Profile Books, £15, pp. 356, ISBN 861973705 THE COMING COLLAPSE OF CHINA by Gordon G. Chang Cemum £14.99, pp. 320 ISBN 0712614648 China's banking scandal became public about the same time as Enron in the US. Early this year, Wang Xuebing, probably the most prominent Chinese banker, a fluent English-speaker, star of international gatherings at Davos, and former president of the Bank of China and the Bank of Construction, came under investigation for alleged 'credit irregularities'. The US Trea
sury Department is conducting an investigation of the American activities of the Bank of China, a Chinese state-owned entity. A $20 million penalty has been imposed on the bank by US and Chinese regulators for alleged loan fraud, preferential loans and other corrupt activities connected to the US operations. Enron is still awaiting a penalty; $20 million would be peanuts in the US, but it is a record sum in China.
More to the point, it was the American operation which galvanised the sacking — for that is what it was — of Mr Wang. Otherwise he would either still be on the job. or made to vanish, suddenly, with as little information as possible. It is often asserted by the foreign dreamers of Mr Studwell's title that as China opens something akin to democracy may start to creep in; there is little evidence of this, but information and outside pressure are further damaging Beijing's vast but cracking economic carapace.
Joe Studwell and Gordon Chang have hit this carapace hard. Studwell's book is far better organised and is underpinned by hard information. Its clarity of expression will make it hard for even the most determined dreamers to refute. Chang's book, by contrast, relies on colourful stories and anecdotes, most of them also irrefutable, and is an easier read. But his apocalyptic language, fine for an op-ed or an evening around the bar at a gossipy club, has caused his book to be dismissed by some hard-nosed American political scientists specialising in China.
Studwell is a young Englishman with considerable experience of economic reporting and advising in China. His main point is that for centuries foreigners have dreamed of selling something, anything, to China's millions. Little has been sold, hut the foreigners have bought much. In the face of continued disappointment, the world's leading manufacturers, usually cautious when investing elsewhere, have persisted in spending wildly in China. In the last decade alone over $300 billion has poured into China, one of the poorest countries on earth ... its gross domestic product no more than Spain's and the Netherlands' combined'. General Motors once forecast sales of one million cars in China by the middle Nineties. By 2001 they were selling 30,000. The target date has been continually advanced and is now 2025, when it is still maintained that China will exceed in size the American market for ears. 'China is the magic bullet,' Studwell says. Despite an experience which across the board resembles the global internet collapse, and very low returns, if any, the China dreamers cling to their illusion, although many business men will confide that the great market appears to be a will o' the wisp. Studwell, employing reliable analyses and statistics (few statistics are Chinese; he says these are often designed to mislead), wonders how long this house of cards can stand. Although China has now secured the Olympics and entry into the World Trade Organisation and a 'tide of Chinese cultural romance is washing over the world', propelled by absurd films like Crouching Tiger, Hidden Dragon, Studwell foresees a looming national crisis when China's bank-savers, the most numerous and dogged in the world, realise that they have entrusted their paltry savings to the likes of Wang Xuebing.
For years China's state-owned main banks have 'loaned' billions to the — largely bankrupt — state industries, not because they were producing much but because they employ 60 or 70 million industrial workers who could overthrow the regime if they were cast into the maelstrom of a truly market-driven system. These banks have one asset: the savings of tens of millions of ordinary people. Most of the loans are nonperforming; many have been written off in scams which would amaze even Enron. Studwell shows, basing himself on the impeccable work of the economist Nicholas Lardy, that within a few years 'the Chinese state will likely be insolvent'. A sidelight on this welter of impending disaster is Studwell's criticism of Larry Summers, Harvard's youngest-ever tenured professor and now its president. In 1999, 'not willing to concede publicly that he might have been mistaken', when he was US Treasury Secretary, Summers continued to trumpet the vigour and promise of the Chinese market. The gamblers and the dreamers persist, Studwell insists, although 'the reasons why most fail to make a decent return are wholly intelligible'.
Gordon Chang, who has years of legal work for American law firms in China under his belt, is equally hard on the banks and on foreign dreamers. The 'collapse' he foresees will come about, he suggests, after one of several crises: a failed attack on Taiwan, a run on banks suddenly perceived to be failures, or corruption so sweeping and high-level that even the patient Chinese will rise against it. The Party, Chang observes, could begin to repair this ramshackle structure. But President Jiang Zemin, who has warned on occasion that 'corruption could bring us down', will be 'no closer to victory until he begins to prosecute his friends'. I agree with him. But Chang fails where the implacable, cool, convincing and well-armed Studwell succeeds; Chang rants engagingly, asserts but does not prove.
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