Arnold Kling

Financial Markets in Communist China

Arnold Kling, Great Questions of Economics
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Has China found a way to mix authoritarian politics with a free-market system? According to Red Herring (insert pun here), China's venture capital market is hot.

If any doubt remained about how far China would go to embrace Western-style capitalism, it was dispelled in July when a group of investment firms founded the China Venture Capital Association. With 50 firms, representing a total of $40 billion under management...

On the other hand, this Washington Post article on the pressures faced by a Chinese bank tells a different story.

The Kunming Department Store, a six-story retail world crowned by a 32-story office building, lost $17.8 million last year. It cannot pay the $6 million annual interest on its $113 million in debt. Even so, this year, the Bank of China -- one of the nation's four largest -- gave the company's real estate subsidiary a fresh $1.8 million loan. The choice came down to adding one more bad bank loan to the crushing national inventory, or refusing credit and perhaps forcing the shutdown of a government-owned company that employs more than 5,000 people.

...The deal also highlights the deep-seated difficulties of ridding China's banks of as much as $500 billion in bad loans, perhaps the gravest threat to the economic future of the world's most populous country.

Of course, banks in non-Communist Japan also seem to be unable to shed their bad loans.

Discussion Question. Is China a candidate for long-term growth, or is its economic and political system still too rigid?

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