China’s Oligarchs Tighten Grip, With Assist From Goldman

"BLOOMBERG:
To hear analysts talk, Industrial & Commercial Bank of China Ltd. is one sizzling stock. Of 43 recommendations on its Hong Kong shares, 88 percent advise “buy” or “outperform.” Not a “sell” in sight.

What does a share in China’s largest bank represent, though? Not ownership, let alone control. The government holds some 70 percent of Industrial & Commercial, and its executives obey Communist Party bosses, as Carl E. Walter and Fraser J.T. Howie show in their sobering book, “Red Capitalism.”

Set aside, for a moment, the vapid chatter about the Chinese “miracle.” Forget that clever clogs at Goldman Sachs Group Inc. invested in the bank before it went public.

Recall instead the $42 billion that investors poured into Industrial & Commercial and two other state banks in initial public offerings. What happened to that money? It cascaded right into the state’s coffers as dividends, the authors say. Call it free cash flow with Chinese characteristics.

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The Western guise serves a purpose. It camouflages what the state sector really is: “a patronage system centered on the Party’s nomenklatura,” the authors explain.

The chairmen and chief executives of the national champions hold ministerial rank and are, in many cases, former ministry bosses. The country’s biggest banks, by contrast, are classified as vice-ministerial entities. Imagine the clout these executives wield over the banks.

“What would the chairman of China’s largest bank do if the chairman of PetroChina asked for a loan? He would say: ‘Thank you very much, how much and for how long.’”

All of which helps explain why new Chinese loans soared to a record $1.4 trillion in 2009 -- and why the banks then scrambled to raise more capital. The Party ordered the banks to lend more money to companies that, by this account, are in no hurry to repay.

That leaves the elite families and their retainers free to plunder China’s vast domestic markets for more profits. Who’s going to stop them?"