Selling Foreign Investment Short

Yasheng Huang is a thoughtful, articulate observer of China's political economy, who has gained international respect. Many high-level conferences benefit from his insights, and this reviewer is indebted on a variety of issues. Selling China is essentially two books. One is a very impressive, very carefully documented review of the negative consequences for the Chinese economy of laws and policies that advantage state enterprises at the expense of private enterprises – particularly of a financial system that allocates financial resources overwhelmingly to relatively inefficient state enterprises, and proportionately disadvantages private enterprises. As Huang details, the current Chinese system allocates advantages and disadvantages to firms according to a political pecking order rather than by credit quality. China's markets are highly fragmented and locally protected. China's banks allocate capital disproportionately to state enterprises. Its stock and bond markets are largely restricted by policy, although not by law, to state enterprises. Implicit government guarantees of loans to the biggest state enterprises (SOEs), together with weak private-sector accounting standards, make it irrational for the banks to lend to private firms rather than to big SOEs.