The Red Dream

In just 20 years China has become the second-largest economy in the world. Xi Jinping's China Dream appears to be that he intends to make it the most powerful as well. The Red Dream: The Chinese Communist Party and the Financial Deterioration of China looks at this achievement and the past 40 years of China's history from a financial viewpoint. It asks how in just the last 20 years China has risen to such prominence. The answer is similar to answers for other countries: it borrowed the money just as it borrowed some of the technology. In China, borrowing is endemic from the start of the reform era in 1978. It began with local governments having their budgets deliberately underfunded by Beijing. Over time this rendered not just local governments but also state enterprises highly vulnerable to those that had capital: real estate developers and foreign multinationals.

Until 1997 such money was small but the Asian Financial Crisis and US$4 billion public offering of shares by the nation's telephone network showed the way forward. The decision to go forward with Western-style capital markets was momentous. It began with Beijing to adopt Western capitalism to restructure and recapitalize the banks. At the same time China's entrance into the WTO in 2001 created fantastic wealth in the private sector. This provided the new banks, perhaps at that point the strongest in the world, with the ammunition - that is deposits - to make loans. Then the financial crisis broke out in 2008; China's much praised response at the time was a massive financial stimulus to boost the economy. The banks had the firepower to step in. But this stimulus program became policy and went on for years.

How did China's banks, now arguably the largest in the world, listed in Hong Kong, audited by international audit teams and considered Globally Systemically Important Banks (GSIBs) regulated by Basel, manage? Bursting with loans to local governments and state enterprises, the book shows how banks spun off assets and manipulated accounting principles to create performance metrics acceptable to both market and regulators. The final two chapters take a step back to assemble a holistic picture of the Chinese state itself with the aim of showing how the government, Xi Jinping's party, has used the nation's resources over the past four decades. By creating a balance sheet for the government sector alone, the book can demonstrate how the party has financed China's growth, what the political and economic implications are and what the party's current financial position is.