The Red Dream

An eye-opening deep dive into the sources and consequences of how China has financed it’s rise to global economic prominence

In The Red Dream: The Chinese Communist Party and the Financial Deterioration of China, veteran finance executive Carl Walter uses his unique experience in Chinese finance to deepen his exploration of how the Chinese Communist Party finances its obsession with GDP growth and social control. Overwhelmingly debt-fueled, the party’s financial strategy has driven an unsustainable growth in banking and state enterprise assets. Inevitably the party’s own financial health is being severely weakened and China’s future over the next decades put in doubt. You’ll also find:

• A discussion of the financial power of local governments and the Ponzi scheme created by their sale of land use rights
• How China’s entry into the World Trade Organization gave rise to today’s China
• How the party and China’s regulators enable banks to present outstanding performance metrics
• An exploration of the party’s financial assets and liabilities since 1979
• Examples of financial crisis management and related costs incurred by China and the US
• A look at Japan’s experience as a potential guide for China future development

An essential read for anyone interested in international economics, geopolitics, and finance, The Read Dream will also earn a place in the hands of finance professionals, bankers, policymakers, corporate strategists, and investors.

Preface xi

List of Abbreviations xix

Chapter 1: From Turning Point to Turning Point 1

An Abrupt About-Face 2

The Golden Age: A Short Story 4

Underlying Conditions 7

The Yin and the Yang of the China Dream 10

Convergence 20

Chapter 2: The Shadow Fiscal System 23

China’s “Centralized” State and Localized Financing 24

Aspirational Central Finances, Fiscal Collapse and the 1994 Budget Law 29

The Continual Local Scramble for Funds 35

Then There Was the Land but It Is Not Free, 1999–2007 38

Paving the Country Over 45

The Vulnerability of Local Governments, Banks, and Enterprises 46

Implications 48

Chapter 3: China’s Banks and the Deposit Bonanza 57

China’s State Banks and the “Tree” Model of Banking 58

Command Lending and Funding 66

Fintech and Other Challenges to Bank Deposits 72

Bank Capitalization 80

Implications 83

Chapter 4: Trees Can Grow to Heaven! 87

Evolution of Chinese Balance Sheet Management Techniques 88

Outcomes in Financial Engineering Chinese-Style 91

Channels to Support State Bank Performance Metrics 93

Implications 115

Chapter 5: Beautifying Bank Balance Sheets 119

Parking Assets— the Interbank Market and “Repos” 120

Flexible Loan Agreements 124

Local Government Bonds 127

Government “Guidance” Funds 137

Off-Balance-Sheet Items 138

Comments 146

Chapter 6: After 30 Years, Was Deng Xiaoping Right? 151

A Summary State Balance Sheet 152

Inefficient Investment Equals Extrabudgetary Funding 154

The Promise of the Stock Markets 156

Massive Growth in Deposits 164

“Opening” the Door to Foreign Investment 166

Excessive Reliance on Debt 168

Deterioration of State Finances 169

Summing Up 173

So Was Deng Right, Can Capital Markets Be Used in a Socialist Economy? 178

Chapter 7: China versus the United States: Comparing the Costs of Financial Crises 183

Summary Financial Crises, China and the United States 184

Comparisons of Crises 189

Macro Comparisons and the Role of Central Banks 203

Comparisons of State Net Worth 206

Comments 208

Chapter 8: Japanese Bubbles 211

Bubbles and Japan’s Banking Crisis of the 1990s 212

Why Did Resolving Japan’s Banking Crisis Take So Long? 215

More Points of Comparison, China versus Japan 218

Comparative Cashflow Chains 222

How Might the Party Change Its Spots? 223

The Value of Chinese State Industrial Enterprise Assets 226

Comments 232

Chapter 9: Chinese Balloons 235

The Party’s Ruling Paradigm 238

Chinese Balloons 239

Convergence Revisited 241

Appendices 245

Selected Bibliography 251

Index 257

Carl E. Walter worked in China for over three decades. He has done IPOs of state enterprises, worked in joint venture investment banks, helped build out onshore banking platforms and was a member of the board of a large Chinese bank. Fluent in Mandarin, he holds a graduate studies certificate from Peking University and a PhD from Stanford University. Carl is the co-author of Red Capitalism and Privatizing China.

PRAISE FOR THE RED DREAM

“Carl Walter has an unparalleled experience in Chinese banking stretching over 30 years. In The Red Dream he exposes the real cost of China’s obsession with GDP growth … The Red Dream shows that not only are China’s financial foundations fragile but that the state net worth is illusionary.”
—Fraser JT Howie, co-author, Red Capitalism

“Over a decade ago, Walter wrote the definitive text for a generation of China watchers trying to understand the mechanics of China’s financial system. His latest offering picks up where Red Capitalism left off, providing an invaluable accounting of the fragile financial dynamics underpinning the world’s second largest economy.”
—Dinny McMahon, author of China’s Great Wall of Debt

“Carl Walter’s The Red Dream is a must-read. It is one of the most authoritative accounts yet of China’s economic development … Walter worked inside China’s financial system, as a banker, for more than three decades. Now, the author of Red Capitalism takes us on a guided tour of a political and economic system that continues to baffle leading economists.”
—David Barboza, Co-founder, The China Wire

“Soviet-style socialism failed in China and elsewhere because it was unable to stop pouring resources into unproductive enterprises. Carl Walter shows that the CCP’s obsession with control has reproduced the same flaw in different guise, generating enormous and unsustainable debt. Unusually large by any meaningful standard, the problem portends at best the end of China’s steady economic advance, and a downside that could be much worse.”
—Andrew G. Walder, Stanford University