The Red Dream

Chapter 4Trees Can Grow to Heaven!

Discussions (on rectifying WMPs) went back and forth between regulators … “It was like walking on eggs.”

—Regulatory official, 2017¹

The truth about making banks look good by using “bad banks” is that the bad banks are usually very bad. In the case of China's four national asset management companies (AMCs) the fact that the largest of them burst like a balloon with an estimated US$300 billion in bad assets is a reflection on the banks, not just the balloon's corrupt management. How could state banks grow at double-digit rates over a decade when the size of China's economy in 2008 was 30 percent of that of the United States? There just couldn't have been that much to lend to and, over time, where the money did go to was increasingly redundant, the principal example here being the real estate sector and the bullet train network. The banks lent to them because they provided scale opportunities to lend, and lending, said the party, equals economic growth. High-speed lending, however, creates bad loans, and the AMCs alone were simply not sufficient to absorb the volume banks wanted to send their way. There had to be other channels, and with the help of regulators and support of the party over time there were.

Regulators had little choice but to find ways to protect the major state banks since they are the critical financial foundation of the party's ability to govern by patronage. And as results have shown, their efforts appear to have succeeded. ...