Victor Shih has produced a deep and rich analysis that links the complexity of Chinese elite politics to the monetary policies that have defined China's economic reforms. Written in the tradition of the field of scholarship analysing Chinese elite politics – a field which includes names like Roderick MacFarquhar, Andrew Nathan, Harry Harding and Ken Lieberthal – Factions and Finance in China is an excellent addition to this literature, representing deep and careful research about Chinese politics and economics. It will be essential reading for students of Chinese politics as well as those interested in the complex relationship between political and economic reform in the world's largest nation.

Through a combination of quantitative and qualitative work, Shih takes us deep inside the factional politics that have shaped China's reform process over the last 30 years. The empirical starting point of Shih's study is the massive amount of nonperforming loans on China's books, which threaten to cripple the banking sector. He introduces us to this problem through a richly described field account of the workings of the banking system from a local official's point of view. However, though we begin with the banking sector, the real focus of Shih's analysis – the underlying reality that has brought about this potential and looming financial crisis – is the structure of China's political system and the ways in which factional politics have shaped the current system (and potential crisis) in fundamental ways. Shih's argument begins with the tension between fiscal decentralization and central control, with the generalists advocating the former and the technocratic elite advocating the latter. Decentralization has been viewed by many scholars as being one of the key features of China's reform process. It has allowed for flexibility in the implementation of policy; it has allowed for local initiative and local competition among provinces and local-level officials; it has allowed for market-like incentive structures despite the continuation of state ownership. Shih sees a much darker side of decentralization, however: local officials want to maximize investment in their localities and they rely on their political ties within the generalist faction to do so. They see local investment as the key source of growth and have little incentive to adhere to borrowing limits, a problem that could ultimately lead to hyperinflation. On the other hand, the technocrats, the faction led by Zhu Rongji in the 1990s, have consistently pushed for greater central control, and have thus constrained inflation. These factions coexist because, while the technocratic elite have greater control over central resources and institutions, the generalists have a broader base and ultimate control over the vast majority of the Party infrastructure. With the ebbs and flow of the economy, different economic conditions determine which factions hold the upper hand in monetary policy at a given point in time.

Through this basic theoretical framework, Shih knits together a history of China's economic reforms from 1978 to 2006. It is a remarkably deep and detailed history that brings together econometric models of macro-level (province) loan-to-deposit ratios and inflation with in-depth interviews and archival research that includes an impressive battery of internal documents. I am not normally a fan of macro-level analyses such as these, because so many hidden factors can be tied up in a given variable that it is difficult to know what you are actually measuring. However, Shih's work is an exception: as with the rest of the book, even the econometric models have an unusual archival feature to them, as Shih has mapped the networks of the provincial officials with Standing Committee members over time. These econometric models provide nice affirmation of Shih's argument, but the real beauty of the book lies in the thoroughness of the data gathering, the multiple methods employed, and the deft weaving together of complex theoretical views of politics in China with basic economic aspects of the reform process. It is a remarkably careful and thorough analysis of elite politics and their link to monetary policy and will set a standard for future studies in this area.

Finally, it should be noted here that, while Shih's study is remarkable in its empirical link between factional politics and monetary policy, his real interest is in the nature of elite politics in China and he does a nice job of extending his analysis to speculation about the future of China's authoritarian regime. The book is thus not only an impressive history of the relationship between China's political system and monetary policy but it is also a roadmap for predicting the future.