Sometimes it takes a while to prove there is no third way. Nor is there a second way. There is only Capitalism, and how well you do it. Apparently, Chinese Communists are not doing it well. If you've been looking for an investment opportunity, you are hereby strongly reminded investing in semi-reformed Communists is a bad idea:
According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion ($1.18 trillion), including $US225 billion in potential future NPLs in the four largest state-owned banks.
This equals 40 per cent of gross domestic product and China has already spent the equivalent of 25-30 per cent of GDP in previous bank bail-outs.
The revelation shows that half-hearted reforms have addressed merely the symptoms of China's financial fragility. Poor business practices are blamed for NPLs but the real source is political. As long as the communist party relies on state-controlled banks to maintain an unreformed core of a command economy, Chinese banks will make more bad loans.
Systemic economic waste, bank lending practices, political patronage and the survival of a one-party state are inseparably intertwined in China. ...
The World Bank estimated that in the 1990s about one-third of fixed investments made in China were wasted. The Chinese central bank reported that during 2000-01 politically directed lending accounted for 60 per cent of NPLs. Such disregard for economic efficiency has bred a culture of irresponsibility and unaccountability in Chinese banks....
Banking reform of the past few years has failed to address these flaws. Its five main features - write-off of NPLs, capital injection, flotation in Hong Kong, minority stakes for Western strategic investors and improvement of corporate governance at headquarters - do not alter the defining characteristics of China's capital allocation system.
Nearly all senior bank executives are appointed by the party, which maintains an extensive organisational network within the financial system. That is why an IMF study finds no evidence that these reforms have improved risk management and credit allocation by banks.
I sincerely hope you're not one of those Western strategic investors, but I bet I know one man who is. In the 80's he helped send a couple billion down "South of the Border" and after that tanked made eloquent arguments about why it was such a good idea. Yeah, AFTER it tanked he thought it was still smart. It's a cinch he thinks ChiCom's are golden.