An in­sider’s view of a re­mark­able trans­for­ma­tion

Bangkok Post - - BOOKS & ARTS - CHRIS BAKER

Ev­ery cou­ple of years now, a book ap­pears pre­dict­ing the im­mi­nent cri­sis, break­down, col­lapse or dis­in­te­gra­tion of China. The pro­fes­sor Cas­san­dra tout­ing a re­cent ex­am­ple passed through Bangkok last week. Among such works there is a sub­set that fo­cuses on fi­nance, es­pe­cially bank­ing. These books and ar­ti­cles ar­gue that China’s banks are in­ef­fi­cient be­cause of gov­ern­ment con­trol; that they are rack­ing up debt, much of which is hid­den; and that, un­less they are quickly pri­va­tised, they will be the spark for the afore­said cri­sis, break­down, col­lapse, or dis­in­te­gra­tion. In the last month, I have twice been treated to this ar­gu­ment first-hand, once from an Amer­i­can and once from a Ja­panese.

James Stent begs to dif­fer, and has taken the trou­ble to write a 281-page book telling the world why. Stent was a prom­i­nent farang in Bangkok’s bank­ing com­mu­nity for over two decades, work­ing first at Citibank and then Bank of Asia. Be­fore that, he had stud­ied Chi­nese his­tory and cul­ture at Berke­ley, and be­come flu­ent in Man­darin. On re­tire­ment in 2002, he moved to China in­tend­ing to fo­cus on travel and some ac­tivism over en­vi­ron­ment and her­itage. Within a year, he was sucked back into his ca­reer, and spent 13 years as an in­de­pen­dent di­rec­tor on two of China’s tier-one banks (Min­sheng Bank and Ever­bright Bank). He thus had a grand­stand seat, and a par­tic­i­pant role, in what he calls the “night and day” trans­for­ma­tion of China’s bank­ing sys­tem.

He ad­mits that this bank­ing sys­tem up to the 1990s was a mess. Un­der Mao­ism, there was a sin­gle state bank with lim­ited func­tions. In the early stages of Deng’s Re­form and Open­ing from 1978 on­wards, this state bank was bro­ken up and sev­eral joint stock banks ap­peared, but they strug­gled as “dam­aged relics of the planned econ­omy”. How­ever, Stent ar­gues, China’s top pol­i­cy­mak­ers, es­pe­cially Deng and Zhu Rongji, un­der­stood that the fi­nan­cial sys­tem was fun­da­men­tal to their am­bi­tious plans to de­velop China’s econ­omy. After watch­ing the dam­age that fi­nance could cause in the 1997 Asia cri­sis, they cleaned up the ma­jor banks, put very tal­ented peo­ple in charge, and set a tar­get of be­com­ing in­ter­na­tional-stan­dard in­sti­tu­tions.

In the three core chap­ters of the book, Stent ex­plains how this worked, draw­ing on his per­sonal ex­pe­ri­ence, es­pe­cially in Ever­bright Bank, and on a wide read­ing in the aca­demic lit­er­a­ture and con­tem­po­rary journalism. He ar­gues that China’s bank­ing sys­tem took on in­ter­na­tional prac­tices, but within a con­text shaped by China’s deep-seated cul­ture and unique po­lit­i­cal his­tory. The ex­per­tise was eas­ily avail­able from many Chi­nese re­turn­ing from spells work­ing in Western banks, es­pe­cially in the US, sup­ple­mented by con­sul­tants and chance “im­ports” like Stent him­self. The 17 tier-one banks took on in­ter­na­tional prac­tice from credit man­age­ment to ser­vice de­liv­ery. From around 2000 the Big Four were launched on in­ter­na­tional stock ex­changes so that they would be al­ways sub­ject to scru­tiny.

But, Stent ar­gues, this bank­ing sys­tem ex­ists within a con­text formed by the Con­fu­cian fo­cus on har­mony and by China’s po­lit­i­cal cul­ture in which, from the Man­darin bu­reau­cracy to the Com­mu­nist Party-state, le­git­i­macy comes from good per­for­mance. Banks should be ef­fi­cient and make profit for their share­hold­ers, but they should also serve the in­ter­ests of so­ci­ety and state, mean­ing they should be ac­tive agents in the eco­nomic de­vel­op­ment of China. The banks were cor­po­ra­tised not pri­va­tised, mean­ing only a mi­nor por­tion of their shares were traded on stock ex­changes. Gov­ern­ment re­mains the prin­ci­pal owner (of all but three tier-one banks), ap­points the di­rec­tors and ex­ec­u­tives, and su­per­vises the banks closely through over­sight bod­ies. Stent calls this a “hy­brid” sys­tem, com­bin­ing the cap­i­tal­ist profit in­cen­tive with the oc­to­pus-like gov­er­nance of the Com­mu­nist Party-state.

The re­sult fol­lows a pat­tern that runs from Friedrich List’s “Na­tional Sys­tem” in late 19th-cen­tury Ger­many to the re­cent “de­vel­op­men­tal states” of South Korea and Tai­wan. The banks suck up sav­ings from the mass of the pop­u­la­tion and pro­vide it to en­trepreneur­s as cheap credit, guided by gov­ern­ment in the choice of sec­tors and firms. Ini­tially they played this role as part of the re­struc­tur­ing of the state-owned in­dus­tries in­her­ited from the Maoist era. From the 2000s, they were di­rected to fo­cus more on the emerg­ing sec­tor of small- and medium-scale pri­vate en­ter­prises. They have fi­nanced the fastest eco­nomic trans­for­ma­tion the world has seen.

So far so good. Stent makes a strong case that the trans­for­ma­tion of the ma­jor banks, ac­count­ing for 60% of the bank­ing sys­tem, has been re­mark­ably rapid and com­pre­hen­sive. Be­yond this, the pic­ture is murkier. There are thou­sands of smaller banks and other lo­cal fi­nan­cial in­sti­tu­tions. Some are hand-in-glove with lo­cal gov­ern­ments. There is a ris­ing trend of “shadow bank­ing”, pro­vid­ing credit to bor­row­ers who can­not ac­cess the ma­jor banks, at higher lev­els of in­ter­est and risk. Mon­i­tor­ing is more dif­fi­cult be­cause of the scale and dis­per­sion. What is go­ing on in these lev­els of the fi­nan­cial sys­tem is more dif­fi­cult to judge.

Be­sides track­ing the trans­for­ma­tion of bank­ing, Stent also dis­cusses why the stock mar­ket is a mess, why bonds have de­vel­oped slowly, why HSBC is the only for­eign bank to have made a suc­cess in China, and how fast in­ter­net bank­ing is de­vel­op­ing.

Stent ex­plains that he has writ­ten this book be­cause the “night and day” trans­for­ma­tion of the ma­jor part of China’s bank­ing sys­tem is poorly ap­pre­ci­ated out­side China. He at­tributes this mis­un­der­stand­ing mostly to ide­ol­ogy. For the past three decades, the ne­olib­eral be­lief that mar­kets should be left to work with­out state in­ter­fer­ence has been dom­i­nant in the US and else­where. Ne­olib­er­als be­lieve that state in­ter­ven­tion must in­evitably make in­sti­tu­tions less ef­fi­cient. By this to­ken, China has to pri­va­tise its banks as soon as pos­si­ble. First po­litely, and then rather bluntly, Stent ar­gues that this is a form of big­otry un­der­pinned by wil­ful ig­no­rance — quite sim­ply, a claim that “our” sys­tem is the only good sys­tem. Yet ne­olib­er­al­ism, es­pe­cially in the fi­nan­cial sec­tor, has been sub­stan­tially dis­cred­ited by the string of fi­nan­cial crises across the world, fi­nally hit­ting the US it­self in 2008. Re­turn­ing to his po­lite mode, Stent in­vites these crit­ics to learn from China that a dif­fer­ent model might ac­tu­ally work bet­ter.

Stent not only re­views the re­cent past but peers into the fu­ture, and here his mes­sage is more un­set­tling. China is now en­ter­ing the “new nor­mal”, mean­ing that it has done the easy bits of catch-up growth, its econ­omy is slow­ing, and that this is hap­pen­ing against the back­ground of a world econ­omy in the dol­drums. The emerg­ing pri­vate firms will be the first to suf­fer in the slow­down. The banks will have to grap­ple with ris­ing lev­els of non-per­form­ing loans (NPLs). Some banks will get into trou­ble. This is in­evitable.

But Stent does not see a ma­jor cri­sis. He pre­dicts that NPLs will peak at 5% of all loans. He thinks the big banks will be able to up­grade their credit pro­ce­dures and risk man­age­ment, just as they have up­graded other pro­ce­dures. There is enough lee­way in the na­tional bal­ance sheet for the gov­ern­ment to man­age a few bumps in the road. A big­ger threat may be the emer­gence of mas­sive FinTechs which may prove more dif­fi­cult to reg­u­late.

The book is very lu­cidly writ­ten, with min­i­mal jar­gon, al­ways well ex­plained. It has no charts, only one ta­ble, and se­verely ra­tions its num­bers and statistics. For a quick read, Chap­ter 1 is ef­fec­tively an ex­ec­u­tive sum­mary, while Chap­ter 5 con­tains most of Stent’s per­sonal ex­pe­ri­ence. The book of­fers an in­ti­mate and de­tailed pic­ture of the trans­for­ma­tion of the banks, but also uses bank­ing as a win­dow onto the work­ing of con­tem­po­rary China’s po­lit­i­cal econ­omy. The book is also a polemic about the need to un­der­stand China dis­pas­sion­ately, rather than al­low­ing “one’s hopes and pol­icy pref­er­ences to ob­struct an un­der­stand­ing of what China is do­ing, and why it is do­ing it”. The book was re­searched and writ­ten be­fore a shifty en­tre­pre­neur with a sec­ond ca­reer in re­al­ity TV be­came the most pow­er­ful per­son in the world, and ap­pointed an anti-China fa­natic to his team. Stent stands for a view of China that will be more dif­fi­cult but more im­por­tant to up­hold.

With his ed­u­ca­tion in Chi­nese, his ca­reer as a banker work­ing in Asia, and his first-hand ex­pe­ri­ence in Chi­nese banks, Stent is in a unique po­si­tion to write this book. Some will see him as a China-lover with rose-tinted spec­ta­cles, but they will have to con­front the well-in­formed and so­phis­ti­cated ar­gu­ments of this book. Es­sen­tial and fas­ci­nat­ing read­ing.

James Stent in­vites ne­olib­eral crit­ics to learn from China that a dif­fer­ent model might ac­tu­ally work bet­ter

China’s Bank­ing Trans­for­ma­tion: The Un­told Story By James Stent Ox­ford Univer­sity Press 2017 US$34.95 (US$14.39 for Kin­dle edi­tion) on Ama­zon

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