Financial Sector Reform in China, edited by Yasheng Huang, Tony Saich and Edward Steinfeld. Cambridge: Harvard University Asia Centre, 2005. xi + 250 pp. (Online publication: http://www.fas.harvard.edu/~asiactr/publications/pdfs/ Huang%20et%20al.pdf, accessed 16 May 2006).
This edited volume is a collection of papers from a conference on China's financial sector reform held in 2001. The time interval between the conference and publication of these papers has partly undermined the pertinence of some of the analyses and policy recommendations. This volume could have also been improved by better coordination between the editors and chapter contributors, since many of the breathtaking conceptual ideas brilliantly articulated at the beginning of the volume were not well-evidenced in the chapters. That said, I still recommend it to any reader interested in the political economy of financial sector reforms in China.
The editors' introduction is exceptionally well written. It reads like a sequel to Nicholas Lardy's China's Unfinished Economic Revolution (Washington: Brookings Institution Press, 1998), and could excite researchers who want to understand better the political economy complexities of financial sector reforms. While Lardy's work has largely focused on the linkage between financial sector reforms and restructuring of state-owned enterprises, this volume goes one step further by tracing the inefficiency of the financial system to a deficient fiscal system. By provisioning the state-owned banks to finance the ailing state-owned enterprises, which are major providers of social welfare benefits to state-sector workers, the central authority has in fact used the banking system to "substitute for a weak fiscal apparatus".
This volume has contributed to the literature on the political economy of financial sector reform in the following aspects. By examining the resolution of nonperforming loans of the state-owned banks since 1999, Steinfeld argues that inefficiencies in the financial sector stems not only from "government failure", that is, excessive government control, but also from "market failure", as a result of information asymmetries between the government (and its agents) and the enterprise employees. Despite debt-equity swaps by which the government sets up asset management companies to enable the exchange of enterprises' existing debt for equity in the company, corporate governance in the SOEs remains fundamentally unchanged; the asset management companies have neither the power nor the incentive to implement any concrete changes in the companies. According to Steinfeld, this is due to shortcomings in government regulations in tackling the problems of "market failure" typical in most credit markets. His analysis has a powerful normative implication: "the real question is not whether the Chinese state has the willingness to retreat, but rather whether it has the capacity to govern" (p. …