Via Jamie Kenny, a must-read translation of a Chinese investigative report into the case of Wu Ying, a Chinese businesswoman who is in deep trouble with the law. What's interesting here is that the report provides a deep view into some of the most important interfaces in the political economy of China - between the official and shadow banking sectors, between both and the Party, and between the Party and organised crime. It's been suggested by quite a few people, notably Ken Livingstone's economic advisor John Ross, that Chinese macro-economic policy is basically all about investment - whereas other countries might target inflation, the money supply, nominal or real GDP, an exchange-rate peg, or full employment with a range of fiscal or monetary tools, Chinese policy makers have a primary policy target of maintaining sufficient employment growth to keep up with the growth of the urban workforce, and a primary policy tool of controlling the rate of capital investment. This is achieved through a combination of fiscal policy through the government budget, both formal regulation and informal influence over the banking sector, and monetary policy, specifically the management of the RMB exchange rate and the terms on which central bank intervention is sterilised or not.
An investment-centric view of the economy could be characterised as both palaeo-Keynesian - investment, driven by animal spirits and radical uncertainty, is the swing item in the national accounting identity and therefore the driver of the business cycle, and should be managed by government in order to maintain a stable growth path - and also Marxist, in that it puts the accumulation of capital and its allocation between sectors centre-stage and suggests that it's too important to be left to capitalists.
An alternative view, which we might pin on Patrick Chovanec, is that investment is the driver of the Chinese economy but that nobody's in anything that could be described as control. In this view, Chinese economic policy is more orthodox, leaning against the world recession in 2009 with a major stimulus plan and a monetary expansion, but its impact is very noisy. Much of the stimulus money went into an unsustainable property bubble, which is now deflating messily.
In a sense, these arguments are not all that different. The major differences are the degree of agency the central government is perceived to have, and the underlying call on the future of the economy. John Ross would argue that the surge in investment is creating the capital goods needed for future growth and removing inflationary constraints. Some Americans wonder at the system's capacity to pour money into a massive windpower infrastructure. On the other hand, the San Francisco Fed reckons that a very large proportion of Chinese goods exported to the US consists of imports to China, notably from the US - it's been estimated that out of the production cost of an iPhone, more of the value-added represents US than Chinese production. Isn't this strong evidence that there has been huge overinvestment in a very particular kind of low-margin export processing, plus property?
Now, back to Wu Ying's cell. This story is all about how the system tries to control investment, how Chinese entrepreneurs and officials try to subvert this control, what happens when it breaks down, and how it is then restored. It's fairly typical of economies with strong official controls on bank balance sheets that a big market in direct inter-company lending develops (it happened in post-war Britain). If you can't get a loan from the bank, perhaps you could arrange something with a business that happens to be awash with cash. Obviously, this is a lot easier if there is some sort of intermediary who can make the deal. And in China there are specific, geographically linked networks of entrepreneurs who have become specialised in this unofficial shadow-banking sector. Technically it is entirely illegal, so it's up to the intermediary to enforce the terms of the contract in their own sweet way. Which of course brings in another actor, organised crime or privatised protection.
This being China, though, it's more complicated than that. Wu Ying's creditor, Lin Weiping, was a former Cultural Bureau official turned moneylender or rather "funding coordinator", who acted as a sort of broker between savers and borrowers. Well, it started off like that but the business prospered and pretty soon people were depositing spare cash with him overnight. This is an important moment - he wasn't just introducing the two parties to a private arrangement any more, but rather, he was now operating a bank. The demand for credit outside the official system, and for high-yielding (2-5% monthly interest) deposits, was enormous. Fascinatingly, it turned out that the official banks were also keen to find sources of wholesale funding that let them get around the People's Bank of China's monetary policy - they started borrowing from him on overnight terms. This was implemented by sending a straw-man to open an account and deposit the cash. Lin, having turned himself into a bank, now went a step further and became a central bank. You might wonder how long it would have taken him to start issuing his own currency.
But Wu Xing would bring him down. He very rarely extended credit outside his home province, but made an exception for two of her projects, a tourist resort and another unofficial banking operation (which he may have thought of as being a branch of his own). It turned out, though, that she actually had an entirely different project in mind, in real estate. She justified this as necessary to influence important officials. In fact, the story was about to become a classic case of an entrepreneur who over-does the leverage and eventually runs out of credit, with the twist that one lot of creditors had her kidnapped by thugs in an effort to collect payment. However, Wu had become too big to fail, and eventually there was something like a race between Lin's shadow-banking empire and the very official Agricultural Bank of China to put together a lifeboat package, which Lin eventually won. A syndicate of unofficial lenders bought out the loan portfolio at 70% of its face value.
It seems that this was intolerable to the authorities, as Wu and Lin and many others were then arrested. Lin got six years and is now back on the out and apparently dedicated to studying Chinese culture, specifically the bits relating to keeping his mouth shut. Wu is still in the court system, facing charges of running an illegal bank.
Chinese regulators quoted seem to be more interested in the sources of capital going into the shadow-banking system, on the grounds that quite a lot of it is deeply illegal in nature, and also that concentrated rather than diversified sources of funding tend to cause systemic risks. In so far as it's the marginal transaction that matters, if this was to work it would represent an effort to make sure that it's the official financial sector that represents the marginal lender and that state control of investment continues.
But that's going to be very difficult in an environment where the central bank might be you.