Free Red Capitalism by Carl Walter, Fraser Howie

capital markets and subject to greater scrutiny and higher performance standards . . . just as Zhu Rongji had planned.
    ENDNOTES
1 See Demirguc-Kuntand Levine 2004: 28.
2 “Inside the world of a red capitalist: Huang Yantian’s financial powerhouse is helping to remake China,” BusinessWeek , May 1994.
3 Li, Liming and Cao, Renxiong, 1979–2006 Zhongguo jinrong dabiang e( 1979–2006 The Great Reform of China’s banking system ). Shanghai: Shiji chuban jituan: 474.
4 Walter and Howie 2006: 181ff.
5 Ibid., Chapter 9.
6 Curry and Shibut 2000.
7 21st Century Business Herald 21 , April 13, 2010: 10.
8 Yang excludes ABC, which listed its shares later in 2010.
9 “ICBC says China’s banks need $70 billion capital,” Bloomberg News , April 13, 2010.
10 The first round of fund raising via an IPO involves the sale of new shares. This brings new capital into the bank and dilutes the original shareholdings. Thereafter, if the bank sells shares again, the Chinese state must also inject money or have its stake diluted.

CHAPTER 3
    The Fragile Fortress
“Growing big is the best way for Chinese banks to make more money . . . This model of growth, however, neither assures the long-term sustainable development of the banking sector nor satisfies the need of a balanced economic and social structure. Things are very complicated; so will be the solutions.”
    Xiao Gang, Chairman, Bank of China
    August 25, 2010 1
    When the Asian Financial Crisis threatened the stability of China’s financial institutions in 1997, Zhu Rongji sponsored a group of reformers surrounding Zhou Xiaochuan, then chairman of the CCB, to come up with a plan. The immediate threat to confidence in the banks was addressed by the MOF injecting new capital into the banks in 1998. As a second step, Zhou’s group proposed a “good bank/bad bank” approach to strengthen the balance sheets of the Big 4 banks. Modeled after the Resolution Trust Corporation (RTC) in the US, asset-management companies (AMCs) would be established for each of the banks. The AMCs would become the “bad” banks holding the non-performing loans (NPLs) of the resulting “good” banks. These bad banks would be financed by the government and be responsible for recovering whatever value possible from NPLs. The State Council approved the proposal and in 1999 the AMCs were set up. (See appendix for organizational charts of China’s resulting financial system).
    In 2000, huge problem-loan portfolios were transferred to the AMCs, freeing the banks of massive burdens and enabling them to attract such blue-chip strategic investors as Bank of America and Goldman Sachs. These international investors were brought in less for their money than for the expertise that the government hoped could be transferred to its banks. But, in a rising crescendo of criticism, conservative and nationalist critics claimed a “sell-out” to foreign interests. Even so, in 2005, CCB enjoyed a wildly successful IPO in Hong Kong, raising billions of dollars in new capital. With this IPO, Zhu and Zhou’s efforts achieved a very significant success where, several years before, few had believed such a thing possible for a Chinese bank. Unfortunately, the very success of bank reform fed the fire of conservative criticism which was now amplified by the PBOC’s institutional rivals, who wanted to cut Zhou and the central bank down to size. Among these rivals were the NDRC, the CSRC, the CBRC and, most particularly, the MOF. The impact of this concerted criticism affected the financial restructuring process, beginning with ICBC and continuing through to ABC. It also had the effect of ending Zhou’s integrated approach to capital-market and regulatory reform.
    The practical consequence for the bank reform was the creation of two different approaches to balance-sheet restructuring. Of course, the original plan for all four banks was superficially retained, even after the MOF assumed the leading position in the reform of ICBC and