The sun can also rise on economic illusions

China is ripe with opportunity for Irish business – but beware, it’s also features a form of fragile economics and cronyism that would unnerve even the most shameless capitalists of the West

TAOISEACH ENDA Kenny’s visit to China, leading a large delegation of Irish businesspeople eager to tap into China’s booming economy, aims to find ways to unlock Chinese capital to boost Ireland’s flagging fortunes.

China’s economic transformation has been spectacular, and its economy has gone from being a footnote in the story of world growth 30 years ago to a tale of success that no one can afford to ignore.

Double-digit growth nearly every year, urbanisation on a vast scale, hundreds of millions lifted out of poverty – all giddying statistics.

Yet a new book, Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise by Carl Walter and Fraser Howie, is a sobering antidote to anyone rendered dizzy by China’s stratospheric rise of the past three decades.

The headline GDP figures mask a complicated picture, one in which business interests have come to dominate the financial system through a complicated system of political patrons. Monopolies and oligopolies are the norm.

The Taoiseach and the business leaders sharing the plane with him might be well advised to cast an eye over the story. China’s financial system is not like that of the West, and Walter and Howie’s book makes for uncomfortable reading, particularly for the leader of a government that is currently facing an enormous challenge of dealing with the fallout of shoddy banking governance and general economic mismanagement on a grotesque scale.

In many ways, this book is always going to have a tough time keeping up with the constant changes that are affecting China’s development, and the book has taken on a new urgency again since the European debt crisis and even since this month, when Premier Wen Jiabao stressed the need for economic and political stability as he cut China’s 2012 growth target to an eight-year low of 7.5 per cent and said boosting consumer demand was a key challenge.

The authors have lived and worked in China for a quarter of a century and have long familiarity with the banking and securities industry.

They argue that using GDP as a measure of China’s success is very narrow, saying nothing about its competitiveness, its power or the well-being of the population.

While acknowledging China’s success in growing the economy in the past 30 years of reform and lifting 300 million people out of poverty, this book is about the frailty at the heart of Chinese reform, and reckons that, since around 2005, the image of modern markets and successful reform in China are only a sheen.

China has a war chest of nearly €2.45 trillion in foreign exchange reserves, and the book’s authors say that the best thing China could do with those reserves is pay off all credit-card debt in the US, all Fannie Mae and Freddie Mac mortgages, and Sallie Mae student loans, because it would encourage a boom in the US that would work wonders in supporting China’s development model for the next cycle.

The value of the foreign reserves “is illusory, since they are too big to spend, impossible to diversify and falling in real value.”

China’s banking system remains an unwieldy entity, made up of 3,769 financial entities, with 196,000 outlets and around three million staff. But of these, only the four biggest actually matter – Bank of China, China Construction Bank, Agricultural Bank of China, and the biggest bank in the world by market capitalisation, ICBC. Together, these banks, all of them resolutely state-owned, control 45 per cent of China’s financial assets. Foreign banks control less than two per cent of Chinese financial assets.

Former premier Zhu Rongji is seen as the true reformer in this book, who can count among his achievements reform and restructuring of the banking system, especially in areas such as governance and risk management. These reforms by Zhu helped save the banking system, but many of his achievements were brushed aside during China’s response to the global financial crisis in 2008. The spending spree produced a whole raft of non-performing loans (NPLs), which will need to be paid for.

Much of the book examines how these NPLs are moved around and parked in various agencies, thereby putting off the day of reckoning, which will come. Ultimately, this is all funded by Chinese savers, who only receive small returns on their investments, but are barred from investing in vehicles that might provide higher returns, such as properly functioning stock markets – China’s stock markets basically are there to list tiny sections of state monoliths. One of the reasons for the real estate bubble in China is that there are no other outlets for these savings.

The book divides China’s economy into two: the state-owned domestic economy, and the foreign-owned export-oriented economy.

For anyone looking for a crash course in how China’s state sector functions within the broader economic picture, Red Capitalism dovetails nicely with The Party, by former Financial Times Beijing bureau chief Richard McGregor, in the way it describes the system of political patronage that lies at the heart of China’s state-owned enterprises.

More than 60 per cent of foreign direct investment (FDI) and 70 per cent of Chinese exports are concentrated in the private companies that have driven the success of Guangdong, which includes Guangzhou and Shenzhen, and the Yangtze River Delta, which includes Shanghai and Jiangsu province. China’s economic rise has turned the old Treaty Ports, granted to the foreign powers during the colonial era, and long seen as a symbol of China’s humiliation at the hands of the colonial powers, into “the most vibrant parts of the country, and indeed, of all Asia”.

“China’s banks are strong, but they are fragile; in this they are emblematic of the country itself,” they write.

“In summary, China’s banks operate within a comfortable cocoon woven by the Party and produce vast, artificially induced profits that redound to the same Party.”

You hope the Taoiseach has got this book on his reading list for his flight to China. While recognising China’s strengths and growing importance is important, it is also crucial not to be dazzled by the world’s second-largest economy.

FARMLEIGH FELLOWSHIP: CLOSER RELATIONS WITH ASIA

THERE IS GROWING recognition of Asia’s importance to helping boost the Irish economy, and one of the most successful bridges from Ireland to Asia in recent years has been the Farmleigh Fellowship.

The programme aims to equip 1,000 young Irish professionals within the next five years with the business, cultural and communication skills needed to succeed in the world’s biggest continent.

Now into its second year, the fellowship is a voluntary group tied in with the Global Irish Network and it is led by members of the Irish diaspora in Singapore.

“Last year was the pilot programme and it went very well. Twenty-three started and 23 finished, so that’s a good result. All of them are employed and the majority opted to stay in Asia,” said Fred Combe, who is chairman of the fellowship.

The fellowship runs the Masters in Asian Business, established in 2011, between UCC and NTU in Singapore. It is supported primarily by Irish and multinational companies with some funding from the Irish Government.

The group has secured former Tánaiste Dick Spring as a patron, and former Singapore foreign minister George Yeo has just agreed to act as the Fellowship’s Asian patron.

“We also want to get Asian students to Ireland, so it’s more of a two-way thing. We need to get it up to a different level of scale,” said Combe. “We need to get the diaspora in the rest of Asia more fully engaged. It’s got lift-off now, last year was a big success. We set a vision of 1,000 Irish professionals and we want to accelerate that.”

Of particular interest is China, and many of those taking part in the programme focused on China during their fellowship. One of last year’s fellows, Denise O’Riordan, found the fellowship a vital introduction to Southeast Asia.

“The most useful thing about the fellowship for me was the fact that it combines academic and practical experience. On the academic side of things, the focus was not solely on business, and we learned things such as the history, politics and social systems of countries in Asia,” she said.

She believes that while Irish people have a lot to learn from Asia, there is a lot that Irish people can bring to the region in terms of fresh ideas or a different outlook, and thinks there should be some kind of exchange programme in the future.

The traditional focus in Ireland has been to look towards the United States and Europe, but Asia has been largely ignored, which means that often Irish people have only limited knowledge of what is the most vibrant region in the global economy these days.

“We cannot complain about countries in Asia not having an awareness of Ireland when our own knowledge of the region is weak,” she says. “It would be great if, in the future, school pupils were given the opportunity to learn Asian languages and were taught Asian history.”

Earlier this month, the fellowship launched an internship programme.It is open to candidates of all educational backgrounds who are interested in pursuing their career in Asia.