Review of red capitalism - Book Report/Review Example

Chinas financial success has encountered many problems and it has stabilized along several doubts of their financial system. Currently, these doubts have been great more than ever. The banking system in China is different from the banking systems in the west. Even though the biggest four banks are publicly listed and their accounts audited by international accounts, their major goal is not to maximize the returns of shareholders (Walter & Howie 12). Instead, these banks are considered as an arm of state.

Several banks that lend money are directed through favorable rates that are controlled by the state. Fraser and Carl believe that the communist party uses the banks like basic utilities for the purposes of providing unlimited capital to the cherished state. This results in banks that have large nonperforming loans and the calculation of these loans is delayed. The current history of China banks is noted as a piecemeal reform that is connected to Beijing ability to move away from bad loans. During the late 1980’s a large burst of bank lending from the request of local government ended in bad inflation and real estate bust.

12 years later, there was accumulation of nonperforming loans in companies that were owned by the state, which accumulated, in the banking system (Walter & Howie 23). There were bad debts including those from the big four banks that totaled up to 40% of the total lending. Observers from the west folded their hands and speculated that the banking system in China would cause severe problems to the economy. However, their prediction turned out to be wrong. It is only after some time did Beijing intervene and come to their rescue.

Zhu Rhongi who is a known for his reform minding strategies brought in western investors and they became partners with the Chinese banks. Wall Street was hired to instill risk management strategies to chine. In addition, China banks were relieved from their bad loans by what is Howie and Walter call accounting legerdemain. During the year 1998, The People Bank of China and the central state bank reduced the requirements of the big four reserves. This made the banks free and they were able to acquire special treasury bonds from the ministry of finance (Walter & Howie 32).

This loan proceeds were later used as capital for the banks. Beijing later established asset management companies that bought the nonperforming loans at a face value. The repositories of the toxic credit were used to issues notes to the bank. After the notes were due in the year, 2009 they were pushed to another decade. The financial magicians then used another brilliant trick in the year 2005. The ministry of finance then put other non-performing loans in a co-managed after which they issued IOUs.

The banks were supposed to repay this through a combination of bank dividends, selling of shares and loan recoveries. The matters became more complex in 2009 when banks began to get large stakes of assets from management companies that were still having non-performing loans from previous decades. These kind of accounting boost strapping has made China to avoid reckless lending to people in the society. Beijing banks are more profitable because they have spread evenly their cost of borrowing to what they charge upon lending (Walter & Howie 42).

Chinese people endure the cost since they receive low rates on their deposits. In technical terms, this is known as financial repression and in China, it is expected to be 4% GDP.