The financial transformations experienced by the big emerging capitalisms such as Brazil, Mexico, Turkey, India, South Africa and China have been subject to increased study in their own right. A notable conclusion has been the variegated nature of each society's integration into financial world markets. The focus therein has been on structural transformation. The roles of particular financial institutions, that is, on the institutions constitutive of financial structures, have received rather less attention.
This is our study's empirical point of departure in the case of China. We seek to understand the emergence and transformation of China's four large asset management companies (AMCs) vis-à-vis the society's wider financial evolution. Each AMC was initially intended to be a temporary institution, destined to handle the “big four” state-owned banks’ mounting non-performing loans (NPLs): Cinda, for the China Construction Bank; Huarong, for the Industrial and Commercial Bank of China; Great Wall, for the Agricultural Bank of China; and Orient, for the Bank of China. Yet, as the AMCs enabled China's global financial integration, they also scaled up their operations, thereby assuming a lasting significance.
Theoretically, we draw on a critical geographical framework and, in particular, on ideas of state spatial–temporal strategy (SSTS). Through this analytical lens, we argue that the AMCs represent an institutionalized form of SSTS, wherein their malleable social content reflects political and class-based strategies. Over time, we see that the AMCs have become constitutive of China's financial transformation, but not necessarily as originally anticipated. This interpretation challenges mainstream accounts that often reduce China's AMCs to technical problem-solvers, and engages with critical geographical understandings of how financial crises are displaced.
In this article we present three premises that substantiate our argument. First, the SSTS analytical lens helps to uncover insights otherwise obscured by mainstream approaches. Second, China's AMCs emerged as one of several possible state strategies that were aimed at displacing and deferring escalating financial risks. Third, the newly formed AMCs subsequently underwent three phases in their transformation, which were at first meant to preserve but then to intensify China's financial transformation. We present our conclusions in the final part.
Interpreting AMCs as State Spatial–Temporal Strategy
Employing an SSTS framework reveals insights into China's AMCs that are otherwise hidden by mainstream approaches. Neoclassical studies, for example, typically use socially neutral technical language to frame AMCs as problem-solving institutions, suggesting that the largest problem has been the post-1980s spike in systemic banking crises and financial instability.Footnote 1 Notwithstanding other state-led rescue and recovery strategies, AMCs are posed as an effective policy response to rapid increases in NPLs and subsequent bank insolvencies.Footnote 2 Understood as such, AMCs just absorb the failed banks’ NPLs (“toxic” assets) so that these same banks can recover and resume normal operations.Footnote 3 While in practice the AMC strategy is market interventionist, in discourse it is framed as market friendly: competitive banking can recommence while the prospects of economic recovery are enhanced – a win–win scenario.Footnote 4
The Bank for International Settlement (BIS) dubs this the “good bank–bad bank” approach, wherein AMCs are described as “asset separation” tools.Footnote 5 A new AMC materializes as the “bad bank” that institutionally firewalls the failed banks’ toxic assets.Footnote 6 The recapitalized-cum-rescued banks are rebranded as “good banks,” which are then able to refocus on core business and financial sustainability and therefore will be attractive to investors.Footnote 7 The AMC technical fix has emerged as a viable mainstream alternative to the otherwise massive and immediate liquidation of NPLs amid crisis. Conceived of in apolitical and problem-solving terms, however, the approach obscures underlying socio-political and often contested relationships of power and class.
An SSTS framework facilitates an alternative reading. Bob Jessop defines state spatial strategies as “the historically specific practices through which state (and imperial) institutions and state managers (and the social forces they represent) seek to reorder territories, places, scales, and networks to secure the reproduction of the state in its narrow sense, to reconfigure the sociospatial dimensions of the state in its integral sense, and to promote specific accumulation strategies, state projects, hegemonic visions, or other social imaginaries and projects.”Footnote 8 As the “spatialities” of state are comprised of institutions and regulatory capacities tied to the “territorialization of political power,” it is useful to fill in such abstractions via concrete institutions like the AMCs.Footnote 9 In this way, state financial institutions, like banks or AMCs, offer a vantage point into the dynamics of wider state formation.Footnote 10 Further to this, we draw on Jessop's notion of “institutional fix” (and temporal horizons), which he specifies as “a complementary set of institutions that, via institutional design, imitation, imposition, or chance evolution offer (within given parametric limits) a temporary, partial, and relatively stable solution to the coordination problems involved in securing economic, political, or social order. Nonetheless, it is not purely technical and, rather than providing a post hoc solution to pre-given coordination problems, it is partly constitutive of this order.”Footnote 11
These analytical concepts have a long theoretical lineage within the fields of historical materialism and critical geography, the latter building on the foundational works of Henri Lefebvre and David Harvey. An advantage of this framework is that institutionalized responses to crisis, such as AMCs, are not conceived of as the seamless, unmediated unrolling of structural forces, despite structures being analytically significant. Rather, social forces (composed of individual and collective agents) pursue socio-political and spatial strategies, thus producing the “space” to help realize their interests and to manage the contradictions and crises that recurrently arise in contemporary capitalism. While such strategies are predominantly undertaken at the national level, they are nonetheless integrally linked to global and sub-national scales and processes.Footnote 12
Temporally, state spatial strategies aim to “fix” instability by shifting the financial costs and risks of ensuring current economic stability into the future. According to Jessop, should a fix succeed, so to speak, then “current zones of stability imply future zones of instability.”Footnote 13 For Jessop, crises are never really resolved, just displaced: crises and contradictions are contained by fixes for now but then they always reappear further down the road and in need of new fixes.Footnote 14
On this point, we depart from Jessop and others who see fixes as recurrently displacing but never resolving crises. Often in Marxian accounts of transformation and change, crisis is understood as “an essential and ineradicable feature” of capitalism that exposes its inherent contradictions.Footnote 15 Fair enough. But if an analytical position posits that crises are never resolved, only displaced, this implies that capitalism is always in crisis. This empties out the concept of crisis.Footnote 16
By contrast, we see specific crises as resolvable, depending on specific circumstances and class relations. According to Thomas Marois, “the ways in which minor and major crises are resolved, or not, are historically contingent on domestic social affairs, state institutional capacity, relative balance of power between capital and labor, and global pressures.”Footnote 17 Contemporary financial capitalism is dependent on state capacity to manage financial crises by pushing the costs into society: states socialize the financial costs and risks, thus resolving them.Footnote 18 And it is here that we begin to see the logic of the Chinese state authorities turning to AMCs amid crisis. This resolution process by no means precludes new crises emerging. But neither should we overlook the political agency deployed, the flexibility of prevailing social logics, and the class consequences suffered at moments of crisis resolution.
Finally, we expand on Jessop's approach by employing a Marxian-inspired social content approach to AMCs. This approach is distinguished by its historical, structural and agent-led understanding of how institutions in capitalism are formed and reformed. Both the structural imperatives of competitive capitalism and the agency of individual and collective actors matter in ways that cannot be theoretically predetermined (hence, the very opposite of neoclassical economics). This understanding draws on two aspects of Rudolf Hilferding's work.Footnote 19 First, through his focus on the historical social relations of power and class, finance capital is understood as a social and political force. Second, he highlights that progressive change is possible through social forces taking over and mobilizing banks. Building on these insights, our approach to financial institutions challenges conceptions that see banks as unmediated institutional derivatives of market processes or, for that matter, class relations. In short, not as a priori black boxes. Instead, a social content approach sees financial institutions such as AMCs as “institutionalized social relations that reflect historically specific relations of power and reproduction between the banks, other firms, the state, and labor in general.”Footnote 20 The remainder of this article combines the social content and SSTS approaches.
The Emergence of China's Asset Management Companies
The emergence of China's AMCs is closely tied to China's contemporary financial reforms, which began in the 1980s and involved moving towards a more market-oriented and commercial banking model. State authorities began by designating The People's Bank of China (PBOC), formerly the only institution handling both commercial banking and macro-economic financial policy, as the Central Bank in 1983.Footnote 21 Authorities then created four state-owned specialized commercial banks from the PBOC – the Bank of China (BOC), the Agricultural Bank of China (ABC), the China Construction Bank (CCB), and the Industrial and Commercial Bank of China (ICBC) – to handle foreign exchange, agricultural finance, infrastructure investment, and credit and savings businesses, respectively.
Chinese authorities further experimented with market-oriented reforms in the 1990s. One move in 1995 included turning the “big four” banks into commercial banks to distinguish them from the three policy (development) banks created two years earlier.Footnote 22 The government also began withdrawing budgetary support for state-owned enterprises (SOEs) and replacing it with bank loans. The “big four” banks became the main source of financing for China's SOEs.Footnote 23 This occurred as China began to show signs of structural economic change: between 1980 and 1995, domestic debt increased from 53 to 87 per cent of GDP; foreign direct investment exploded from $400 million (about 0.2 per cent of GDP) to $36 billion (4.9 per cent of GDP); and exports tripled from 6 to 18 per cent of GDP (Table 1).
Table 1: Financial Indicators, 1980–2016
Source:
World Development Indicators, http://datatopics.worldbank.org/world-development-indicators/. Accessed 25 January and 9 May 2018; *CBRCb 2004–2010.
Corresponding lending to SOEs absorbed 20 to 60 per cent of the four banks’ assets, by various estimates.Footnote 24 While this allowed state authorities to finance market reform, maintain SOE employment levels and prioritize infrastructure, it also meant a substantial accumulation of public sector debts.Footnote 25 In the wake of the 1997–1998 East Asian financial crisis, some 30 to 50 per cent of outstanding loans were non-performing, threatening to drag the Chinese economy into crisis unless action was taken.Footnote 26 Official data show this falling to just over 13 per cent by 2004 (see Figure 1), a figure which is still seen as extraordinarily high by most commentators.
Possible strategic responses to the banks’ NPLs had already been discussed during an August 1994 Beijing conference, “The next step in China's economic reform.”Footnote 27 Zhou Xiaochuan 周小川, then vice-chair of the BOC and governor of the PBOC since 2002, alongside the State Economic and Trade Commission (SETC), the top agency within the Chinese central government leading economic reforms in the 1990s, led the proceedings. The proposals focused on bank recapitalization and reducing SOE indebtedness without straining the national budget. Recommendations included converting the NPLs into SOE share capital to be held by the banks or the state (that is, debt-to-equity swaps).Footnote 28 No immediate action was taken, however, as China was yet to confront a real financial crisis, the likes of which Mexico and Turkey were then facing.
The 1997–1998 East Asian financial crisis, while largely skirting China, changed perceptions. It coincided with the 1998 rise to power of Zhu Rongji 朱镕基, an adamant reformer who quickly took steps to consolidate control over the financial sector. These moves included a one-off injection of 270 billion yuan (US$35 billion) into the banks so that they could reach the Basel recommended 8 per cent capital-adequacy ratio. But the outstanding NPLs remained significant. Zhu Rongji called on fellow reformer Zhou Xiaochuan to come up with a solution – one that drew from the 1994 Beijing conference and from which the AMC “fix” would ultimately emerge.Footnote 29
Three points stand out regarding the intended design of the AMCs. First, creating a new AMC fix was not an obvious response. Instead, their potential was linked to the political rise of Premier Zhu Rongji and an associated ideological shift. China's debt problems were to be addressed through a mix of fiscal spending and market-oriented measures.Footnote 30 This marked the AMCs’ institutional content with the political and economic stamp of China's transformation. Second, state authorities intended the AMCs to have a short life. Although not formally written into law, the official media widely reported on their ten-year lifecycle, which was affirmed by Zhou Xiaochuan.Footnote 31 The AMC bonds and debt-to-equity swaps, too, carried ten-year maturities.Footnote 32 Third, the AMCs materialized with no clear blueprint for their future development or funding requirements.Footnote 33 Official regulations only stated that the Ministry of Finance (MOF) must prepare the final bill when the AMCs closed, but nothing bound the MOF to footing the bill.
In 1999, China's State Council finally approved the formation of four AMCs, each tethered to one of the “big four” state banks. The State Council intended the AMCs “[t]o prevent and reduce financial risks, provide a lawful disposal of state-owned commercial banks’ distressed assets, and strengthen the assessment of state-owned commercial banks’ operation situations.”Footnote 34 Their primary mission was, nevertheless, the takeover, management and handling of distressed assets extracted from the “big four” banks, while their main operation targets involved the “maximization of asset preservation” and “loss reduction.”Footnote 35 Profitability was not yet a prime directive. The MOF endowed each AMC with initial equity totalling 10 billion yuan.Footnote 36 This capital stake was evidently inadequate as the AMCs were expected to take over NPLs worth some 1.3 trillion yuan.Footnote 37 The additional funds would come from PBOC loans and AMC bonds.
The emergence of China's AMCs, then, is shaped by their unique capacity as financial institutions able to displace financial risks gone bad (that is, the banks’ NPLs). This occurred spatially within the state apparatus, as the AMCs drew in, centralized and concentrated otherwise geographically and institutionally diverse financial risks. It also occurred temporally, as the AMCs shifted current state financial risks into the future. These strategies worked together to stave off an immediate financial crisis.
The Transformation of China's AMCs
From their establishment in 1999 to the listing of two AMCs in 2013 and 2015, China's AMCs transformed in ways reflective of an SSTS. Three phases help to frame these changes: 1999 to 2003; 2003 to 2009; and 2009 onwards. Far from being mere technical agents of debt-resolution, the AMCs evolved to facilitate China's integration into financial world markets.
1999 to 2003: displacing NPLs
The first phase of China's AMC operations corresponded to their intended strategic purpose: the acquisition and financing of the state banks’ NPLs in order to preserve financial stability and enable market-oriented reforms. By 2000, the “big four” banks had transferred to the four AMCs 1.4 trillion yuan (US$170 billion) in NPLs, which the AMCs had acquired at full face value.Footnote 38 Not only was there no “haircut” or reduction in the value of the loans absorbed, but the rate of interest paid was decent (the Cinda–CCB bond earned 2.25 per centFootnote 39). Up to 60 per cent of the PBOC's NPL claims were shifted to the AMCs.Footnote 40 This intra-state spatial repositioning of debt enabled the banks’ bad debts to be displaced into the future. The “big four” banks’ new lending need not be weighed down by having to monitor the repayment of their old bad loans, as past NPLs were reclassified as receivables. The scheme thus functioned as an indirect injection of capital by the state to facilitate the authorities’ market reform strategy.
It is worth noting that the Chinese authorities created “constructive ambiguity” around the official backing of the debts.Footnote 41 Specifically, the AMC bonds did not carry any explicit state backing; however, investors understood that the bonds had implicit state backing. The AMC bonds consequently enjoyed a sovereign-like zero-risk weight, which helped to improve the capital base of the recipient state banks.Footnote 42 Still, by not affirming an official guarantee, the Chinese government avoided being economically burdened by the bonds on its public balance sheet in the here and now. State authorities evaded the issue of responsibility for any ultimate losses of the banks, the AMCs, the MOF or the PBOC. As for the rescued banks, removing the NPL noose from around their necks sent them on a path of skyrocketing growth and capital accumulation. Between 2005 and 2010, all of the “big four” were listed on the Hong Kong Stock Exchange. This occurred as domestic credits ballooned from less than 90 per cent of GDP in the mid-1990s to over 140 per cent by 2010 (Table 1).
State authorities further intended the AMCs to undertake debt-to-equity swaps with Chinese SOEs. The SETC, which formed part of Premier Zhu's power base, designed and led the scheme.Footnote 43 First, the SETC identified appropriate SOEs. Selection was based on whether an indebted SOE was established during key eras of reform (and hence heavily indebted with policy loans) and/or whether the SOE fell into the group of 521 key industrial enterprises.Footnote 44 The SETC list was then passed on to the AMCs for independent assessment and vetting. As the AMCs rejected a mere 3.5 per cent of the recommended SOEs (for reasons unknown), it is likely that the AMCs had little autonomy to modify the list – itself likely pegged to a larger state strategy. The AMCs were responsible for formulating debt-conversion plans and agreements for each selected SOE, which the SETC then reviewed for approval.Footnote 45 In general, China's indebted SOEs enthusiastically greeted the plan, flocking to be included.Footnote 46 In total, district-level governments nominated 3,875 SOEs. Of these, the SETC selected 601 for assessment by the AMCs, with 580 being chosen for debt conversion.Footnote 47 The total loans converted amounted to 405 billion yuan, representing 30 per cent of the policy-based NPLs transferred to the AMCs.Footnote 48 As with the “big four,” so too with the SOEs. The AMCs managed the intra-state spatial displacement of the SOE NPLs in order to shift these financial risks into the future. The SOEs could now too undertake market-oriented reforms. By the end of 2002, the four AMCs had disposed of a total of 301.4 billion yuan in bad debts (excluding debt-to-equity conversion) and recovered 101.3 billion yuan, which included 67.5 billion yuan in cash.Footnote 49
By “fixing” selected state bank and SOE debt problems, the AMCs internalized the economic state strategies of the moment while simultaneously enabling the realization of state market-oriented strategy. This gave shape to the AMCs’ social content, initially derived from the political intentions of Premier Zhu. The realization of the AMC strategy thus helped to cement his reform agenda. According to one high-level interviewee, “Zhu values the power to distribute financial resources through loans and stock-listings, and he has used the power as chips in the political game.”Footnote 50 The SETC mobilized the AMCs to help filter and handpick the industries and enterprises that were close to Zhu Rongji's strategic outlook, thus influencing and shaping China's transformation.
The AMC strategy did not always work as anticipated. A 2003 survey looked at 24 randomly selected SOEs in north-western China that had participated in the debt-to-equity conversion programme.Footnote 51 Among these, 11 were turning a profit before the conversion. Nine of them remained profitable by the end of 2003, with six recording higher and three lower profitability. Of the 13 pre-conversion loss-makers, only one had become profitable; the remaining 12 still recorded losses – eight had reduced their losses but four had incurred heavier ones. While the AMCs could ease the financial burden for some and allow others to reform, the conditions of the industries, the markets, and the internal governance of the companies also mattered. It was possible to shift bad debts in time and space, but not to perform miracles.
Yet the AMCs were hardly a strategy confined to the national scale, coinciding as they did with China's World Trade Organization (WTO) accession in 2001. The take-off of foreign direct investment marks this internationalization: $42 billion in 2000 soon paled compared to the $104 billion reached in 2005, which again paled compared to the $244 billion reached five years on (Table 1). Among other reforms, WTO accession also involved leveraging foreign competition to weaken domestic resistance to market reform.Footnote 52 For example, in order to be WTO compliant, the listing of China's SOEs and banks meant adopting new corporate governance standards in the search for new, preferably international, investors as a way to deliver stronger balance sheets.Footnote 53 And, of course, to draw in capital from abroad. If an SOE secured AMC restructuring support, international investors then often saw greater value in the SOE, portending its potential global success and higher returns on investments.Footnote 54
At this point the benefits of the AMCs as SSTS appeared substantial, if not bullet proof, but the indefinite time period of the NPL resolution schema would generate unanticipated problems for state authorities.
2003 to 2009: transforming the AMCs
The AMCs were entering their fourth year, amid a global economic upturn, but the State Council was becoming concerned about their future.Footnote 55 Two major factors fed its concern. First, the AMCs’ progress in disposing of NPLs appeared to be stalling. While overall disposal volumes increased by about 200 billion yuan between 2004 and 2006, the cash recovery rate was proving to be largely stagnant (Table 2). On average, the recovery rate had reached about 22 per cent (with big differences among the AMCs), but this covered less than half of the AMCs’ interest costs (Table 2).Footnote 56 State authorities worried that the AMCs would be unable to meet ongoing interest obligations or to repay the bonds as they matured in 2009.Footnote 57 Put otherwise, the intra-state strategy of concentrating bad financial risks in the AMCs in order to push those bad risks into the future was confronting the fact that this spatial–temporal displacement had not meant their material resolution (or infinite displacement). Real financial commitments (and possible losses) remained, and these could trigger instability. Should this scenario occur, the knock-on effect would be significant stress on the four banks holding the AMC bonds. This risked wider market reform aspirations, hence the concern within the State Council.
Second, WTO entry meant Chinese state authorities were obliged to open up the country's borders by December 2006, notably to foreign capital in its banking sector. China's step into the financial world market now had a date. To ensure that the Chinese state banks could compete, authorities targeted the end of 2006 for the completion of banking reform and disposal of the NPLs.Footnote 58 Yet, after the first tranche of 1.4 trillion yuan in NPLs in 1999 to 2000, the “big four” still had 2.2 trillion yuan in bad loans.Footnote 59 This, together with the MOF's resurgent victory in its power struggle with the PBOC, prompted a shift in strategic direction for the AMCs.
By early 2004, the MOF had moved to assume leadership over China's financial transformation, spearheading commercialization (meaning a greater orientation towards competition and profit maximization). This signalled a qualitative shift in the strategic orientation of the AMCs as temporary institutional fixes for NPLs.Footnote 60 In February, the MOF issued a “Request for advice on questions concerning reform and development of the AMCs” to the State Council.Footnote 61 In the Request, the MOF proposed using more market-oriented measures, such as cash recovery ratio and expense ratio, to evaluate the AMCs’ performance. Upon reaching set targets, an AMC could switch to a commercial operational orientation. The State Council approved the Request, marking a new institutional shift in the AMCs’ social content.
The institutional change brought operational changes. To meet commercial targets, the AMCs could make discretionary asset investments, undertake commercial bidding for toxic assets, and establish platform companies (for example, financial leasing, trusts, and so on) for the purposes of restructuring and disposal of distressed assets.Footnote 62 By the end of 2006, all four AMCs had met their targets. This allowed them to complete their transformation into fully fledged, market-oriented financial institutions.Footnote 63 What were once politically intended as temporary fixes for economic instability had now, in the context of China's ambitions to enter financial world markets, transformed to embody a new strategic direction. In doing so, the AMCs would project themselves as powerful agents of Chinese financial engineering.
The MOF strategy to transform the AMCs into a new tool of financial and economic power did not come without complications. For one, the move by the MOF to extend the life and scope of the AMCs involved politically loaded fiscal calculations. The foundational SSTS to concentrate NPLs in the AMCs in order to displace them in the future was now coming of age. The intended closure of the AMCs within a decade, as originally envisaged by the PBOC, meant that the AMCs would have to start resolving the original losses in the present – but with the MOF footing the bill.Footnote 64 That is, the losses would have to become fixed in time and space.
Realizing in the present the past NPLs concentrated in the AMCs was politically unacceptable and likely to be economically destabilizing. So when the MOF regained ascendancy over the PBOC, authorities opted to defer the debt problem.Footnote 65 In short, the MOF kicked the original “debt can” further down the road. But to do so, the MOF needed a new SSTS. This entailed issuing notices to the banks and the AMCs in 2004 and 2005 confirming that the MOF would provide financial support for the bonds’ interest and principal payments. That is, the MOF would absorb part of the AMCs’ losses by again spatially displacing them but now by also deconcentrating financial responsibility across the state apparatus. In temporal terms, when the AMC bonds reached maturity in September 2009 the MOF would extend their terms by another 10 to 20 years.Footnote 66 It would use China's financial institutions to literally make time available.Footnote 67 Debt displacement as SSTS had worked once, why not again?
The now more mature AMCs enacted the MOF strategy, justifying their renewed lease on life. Their accumulated capital and financial expertise signalled the rise of the AMCs as an influential socio-political force. Commentators argued that there was good reason for the AMCs to remain alive, especially as they might be useful for handling any future distressed assets.Footnote 68 The four AMCs themselves lobbied hard in this direction, as evidenced by their frequent conference speeches and publications.Footnote 69 This alone, though, would have only kept the AMCs on life support. More materially, the AMC spatial–temporal fix had contributed to making domestic markets and market reform, facilitating Chinese state authorities’ capacity to bring about world market integration.
A significant factor, then, in the MOF's decision to grant the AMCs new investment powers involved the changing reproductive logic of the Chinese state in governing a more market-oriented economy and in capital accumulation.Footnote 70 The influx of foreign investment, the overseas listings of SOEs, and China's internationalization meant that the government could no longer control the economy as before. Indeed, this is reflected in the massive build-up of total official reserves (a form of state self-insurance against capital outflows) from $172 billion in 2000 to just under $3 trillion by 2010 (Table 1). Guo Shuqing 郭树清, former chair of the CCB and current Party secretary and deputy governor of the PBOC and chair of the China Banking and Insurance Regulatory Commission, captured this transformative process when writing on the challenges before the Chinese economy: “The qualitative changes … in economic operations … indicated that, in terms of managing the economy, we could no longer rely solely on administrative measures, but instead had to shift to indirect measures to influence economic performance. It became impossible not to change the entire formulation and operating mode of macroeconomic policies in China.”Footnote 71
For example, with the stakes they already held in key SOEs through the debt-to-equity swaps, the AMCs were able to take up the role of institutional investor in strategic industries.Footnote 72 This introduced a new form of ownership and control in China wherein state authorities relinquished direct ownership while retaining indirect control through other public institutions, like the AMCs.Footnote 73
In transforming themselves and their spatial–temporal orientation during this phase, the AMCs facilitated changes within China's internationalizing political economy. The AMCs’ transformation, however, was not yet complete.
2009 onwards: consolidating commercialization
The onset of the global financial crisis in 2008 sparked a shift in Chinese economic development. China had limited exposure to the US sub-prime mortgage sector and was therefore less impacted than the US and Europe. The global crisis, nonetheless, inflicted a heavy blow to global demand. China, whose strategy of development over the previous 20 to 30 years had turned increasingly to exports and foreign direct investment (Table 1), recorded severe trade shocks. Its GDP growth rate dropped from around 10 per cent per year to 6.8 per cent in the fourth quarter of 2008, before rebounding. The Chinese government responded in November with an unprecedented 4 trillion yuan (US$586 billion) stimulus package.Footnote 74 Given China's significance, foreign economists also recognized that bolstering its economy was key to prospects of global recovery.
Government- and bank-led investments designed to boost domestic demand defined China's stimulus.Footnote 75 To this end, authorities instructed the state-owned banks to more than double their lending targets from 4.7 trillion yuan in 2008 to 10 trillion yuan in 2009, especially via infrastructure, new environmental programmes and consumer spending (notably mortgages), and to reduce restrictions on corporate bond issuances and financial products.Footnote 76 These measures helped to deliver a 9.4 per cent growth rate in 2009 and 10.6 per cent growth in 2010 (Table 1). Still, domestic demand was slow to catch up.Footnote 77
There would be unintended consequences to the stimulus. Pumping billions into the economy enabled investors with excess liquidity to turn to the stock and real estate markets, supercharging speculative activities.Footnote 78 This gave rise to new problems of property speculation and mounting bad debts.Footnote 79 That is, Chinese authorities’ attempts to displace the 2008–2009 financial crisis by mobilizing massive amounts of credit in the present gave rise to present and future conditions of crisis.Footnote 80 This, in turn, would demand a new SSTS, which would again bring the AMCs to the fore of the Chinese political economy.
Resurrecting the spectre of past crisis resolution strategies, commentators and AMC senior management highlighted AMC successes in handling the previous batch of NPLs and in restoring China's banks and SOEs to economic health.Footnote 81 The AMCs were being discursively framed and increasingly seen as “a stabilizing factor” in China's unstable economy.Footnote 82 In his 2010 “Annual working report,” Premier Wen Jiabao 温家宝 specifically highlighted the need to build a sound financial system to withstand the shocks of the global financial crisis. This included the continued transformation and commercialization of the AMCs.Footnote 83
The AMCs had by this time stretched their operations into a comprehensive range of financial services, which included fund management, securities, insurance, futures, private equity, real estate and trusts, in part by taking over ownership and control of insolvent financial institutions that held the relevant licences.Footnote 84 What the AMCs now needed was more capital to absorb the emerging NPLs.Footnote 85 For this the AMCs had to project their capital-raising capacities beyond China and into world financial markets. For that to happen the government strategized to publicly list the AMCs. Whereas previously authorities were willing to displace bad debts domestically and within the state in order to push them into the future, now the SSTS would assume an outward orientation. This meant deeper commercialization.
At the time, Cinda was the strongest performing AMC (its cash recovery ratio of over 30 per cent was considerably ahead of the others, see Table 2), and so it was chosen to pioneer the listing process.Footnote 86 To do so the government converted Cinda into a joint-stock company in 2010 with the MOF as the sole shareholder – the usual first step for a Chinese SOE to get listed.Footnote 87 The next task was to deal with the original bonds issued by the AMCs for the “big four” banks’ NPLs. That is, authorities now had to explicitly resolve the first displacement of bad debts.
In a 2010 CCB announcement (confirmed later by Cinda), the MOF agreed to continue providing interest support on the CCB's Cinda bonds, with a book value of 247 billion yuan.Footnote 88 The principal, however, was to be repaid by an MOF-owned but jointly managed Cinda–MOF fund. While displacing the bad debts once more, the MOF signalled a concrete amortization period by projecting that they would last until September 2019. But where would the money for the fund come from? From enterprise income tax paid by the CCB and “other appropriations” made by the MOF.Footnote 89
The implications of this new state strategy are significant. Through MOF payments and via the CCB-paid enterprise income taxes, authorities could finally “fix” or resolve the original NPL debt problem. The resolution is as political as it is financial, and it involves explicit socialization of the debts through the state apparatus. Socialization is here understood as a constitutive state strategy of neoliberal financial transformation whereby “state authorities diffuse the worst and most costly financial risks onto workers in society through the state apparatus.”Footnote 90 This is possible because state authorities collect geographically diffuse tax payments within their territory, from individuals and enterprises to greater and lesser degrees, concentrating the payments in the public purse to be later dispersed. Governments can borrow against this because they collect taxes. Taxation links public expenditure to the general public. As such, public expenditure decisions are politically loaded. As per the AMCs, in order for authorities to explicitly resolve the initial bonds they had to firmly commit public resources, namely, the taxes paid by the CCB and other MOF “appropriations.” These public resources would enable the further market-oriented commercialization of their social content. And this commercialization was being financed via socialization, which enabled the AMCs (and by extension, the state authorities) to respond to the current crisis.
The socialization of bad debts is distinctly class based insofar as public sector resources and taxation fund their resolution. As one BIS economist explained (albeit not in class terms) vis-à-vis China's system-wide resolution of China's debts (not just the AMCs), “taxpayers, shareholders and bank customers have all shared the restructuring bill. The MoF and PBC together have taken care of 85 per cent of the bill, with the rest of the tab being picked up by bank shareholders, investors and customers. Therefore, the consolidated public sector (ultimately the taxpayers) is bearing the lion's share of the overall bill.”Footnote 91
Upon clearing the way for settling-cum-socializing bond obligations, Cinda AMC opened to strategic investors in April 2012. These included the National Social Security Fund of China, UBS, CITIC, and Standard Chartered, who together held 16.54 per cent of Cinda before its listing.Footnote 92 Cinda was then floated on the Hong Kong Stock Exchange in December 2013. It raised US$2.5 billion and was crowned the largest IPO of the year.Footnote 93 Cinda's commercial outputs skyrocketed (see Table 3). Total assets have more than quadrupled as net profits doubled from 2012 to 2016. Cinda's return on average assets (ROAA) and return on average equity (ROAE) measures have slipped since 2012, given current debt problems, but current levels (1.82 and 14.12 respectively, Table 3) still locate it among the top financial performers globally.
Table 3: Commercialization of Cinda and Huarong
Sources:
Notes:
For data on Great Wall, see http://www.gwamcc.com/GWNews.aspx?liName=11; on Orient, see http://www.coamc.com.cn/dfkx/jtyw/index.html. Only selective data is published and no annual reports are available as these two are not listed and hence have no mandatory reporting obligation.
The Huarong AMC was listed in October 2015, raising $2.3 billion, and its commercialization has delivered even more dramatic commercial results (Table 3). Total assets have ballooned four and a half-fold, with net profits more than tripling. Huarong's returns have remained steady since 2012. At 18.4 per cent ROAE and 2.0 per cent ROAA, it steadily outperforms Cinda.
As for the two other AMCs, Great Wall and Orient, the former completed restructuring into a joint-stock company in December 2016, while the latter, at the time of writing, was in the process of doing so. Both were paving the way for an eventual listing, although this was officially unconfirmed.Footnote 94 Further commercial changes are likely as the AMCs explore rebranding themselves as investment banks with ambitions of competing globally with the likes of Goldman Sachs and JP Morgan.Footnote 95 As financial instability continues to loom across China's economic horizon, the place of the AMCs in China's state financial apparatus appears assured.Footnote 96
In this phase, we see how SSTS can manifest differently. In the context of global financial instability and commercialization pressures, past implicit official guarantees needed to be replaced by explicit official guarantees and payment schemes that spatially dispersed the NPL risks onto society through the state apparatus in order to fix a date of resolution. Socializing the past bad debts opened the door to drawing in new private investors and commercialization, with resulting dividends being paid out. This further altered the original intended social content of the AMCs. The Chinese AMCs continue to feed on bad debts, as China sells off further tranches of NPLs. Now, however, the AMCs and their investors are watching closely. This is not just to see how they might contribute to managing financial instability within China's borders. Investors are also wondering how they might be able to exercise their spatial–temporal toolkit to generate lucrative new sources of capital accumulation.
Conclusion: The Significance of China's AMCs
Viewed through a lens of state spatial–temporal strategy, China's AMCs become much more than just technical problem solvers. Rather, they reveal themselves as complex and malleable institutionalizations of political and economic struggles, which themselves have class-based determinations. While first conceived of as temporary and implicit fixes for China's NPL problems of the 1990s, market-oriented restructuring during the 2000s meant that the AMCs became targets for and agents of capital accumulation. The lure of foreign investment influenced changes in the AMCs. The state modified its approach to SSTS in the AMCs to explicitly resolve their past NPL management by socializing them over a fixed term and across society. This “fix” provided private investors with the certainty they needed to buy into the “commercializable” AMCs. This enabled the listed AMCs to project their debt management dealings beyond the confines of China's borders and into financial world markets. In ways unanticipated during the AMCs’ initial formation, debt displacement has thus become an accumulation strategy in and of itself as an unintended but nevertheless core feature of their social content. The AMCs now function at the centre of China's strategy to manage ever-new financial risks going bad, within a system of financial capitalism that is characterized by recurrent crises. The AMCs thus figure as one historically specific institutional dimension constitutive of a much larger international financial structure.
Our interpretation challenges both mainstream and critical interpretations. For one, mainstream approaches hold fast to neoclassical tenets that, a priori, pose state-owned and public institutions as inherently inefficient. China's AMCs fundamentally undermine propositions that only “depoliticized” financial institutions can handle bad debts and function effectively. They clearly can handle them effectively; however, this is done more in the private rather than the public interest. For another, our interpretation suggests that crises and instabilities can be fixed and resolved – given political capacity to socialize the costs. To be sure, new financial risks and crises arise and can be displaced in time and space, as seen in China. But the concrete foundations of crisis should not be attributed to some original crisis that is then indefinitely displaced via subsequent spatial–temporal manoeuvres – with that same initial crisis lurking ever-present and ready to rear its head once more. This obscures the exploitative and class-based nature of how state authorities have pushed financial risks which have gone bad onto society through the state apparatus in ways that disproportionately benefit the reproduction of financial capitalism and private accumulation interests.
It would be a mistake, by way of closing, to draw from our study that only pro-market, pro-capital social forces can form and reform the social content of state financial institutions (or the wider state apparatus) to their benefit. Instead, who shapes and benefits from state institutions is subject to historically specific struggles – themselves influenced by structural and conjunctural political economic forces – which cannot be predetermined. If pro-market forces can shape a financial institution (more or less) to a desired end, so too can popular democratic forces. There is nothing guaranteeing a socially progressive end, but then again there is nothing guaranteeing its failure (except the failure to try). Indeed, by theoretically and concretely dismantling the fixed and ahistorical categories of mainstream economic theory, a whole world of historically informed empirical research into the potential of financial institutions becomes not only possible but desirable.
The significance of this insight is urgent. China is mobilizing massive financial resources (some $900 billion) towards spatial transformation vis-à-vis regional infrastructure (that is, the Belt and Road Initiative). So, too, is China a lead investor in a promised green transformation. Who will benefit? Who will define or redefine the social content of these state spatial–temporal strategies? These are questions hardly limited to China. They must also be asked of the many powerful and influential state financial institutions around the world.
Bibliographical notes
Sarah HO is a qualified solicitor in Hong Kong. She has an MSc in development studies from SOAS University of London.
Thomas MAROIS is a senior lecturer in development studies at SOAS University of London. He is author of States, Banks and Crisis: Emerging Finance Capitalism in Mexico and Turkey (2012, Edward Elgar).
