Market Visions: The Interplay of Ideas and Institutions in Chinese Financial Restructuring
| Author | Edward S. Steinfeld |
| Published date | 01 December 2004 |
| Date | 01 December 2004 |
| DOI | http://doi.org/10.1111/j.1467-9248.2004.00501.x |
| Subject Matter | Original Article |
Market Visions: The Interplay of
Ideas and Institutions in Chinese
Financial Restructuring
Edward S. Steinfeld
Massachusetts Institute of Technology
In studies of transitional systems, negative economic outcomes are often associated with ‘partial’
or ‘stalled’ reform – a reform that signifies an institutional departure from standard market opera-
tion. Such departures are often traced to socio-political contestation or political preferences. Focus-
ing on China’s intertwined financial and enterprise reforms, this paper challenges that approach
on two fronts. First, it argues that institutional change and resultant economic outcomes are driven
less by contestation than by societally held assumptions regarding the nature of economic causa-
tion in market contexts. The analytical lenses that actors employ to understand their environment
shape expectations about how markets function, influence the manner by which economic prob-
lems are diagnosed, and profoundly affect the ultimate institutional evolution of the system.
Second, such lenses are necessitated by substantial uncertainties at the theoretical level regarding
market function – uncertainties that make characterizations of economic behavior as ‘irrational’
highly problematic.
In December 2003, the Chinese government announced a US$45 billion recapi-
talization of two of the nation’s four main banks. This followed a US$32.6 billion
bailout of the four main banks in 1998 and a US$157 billion carve-out of non-
performing loans (NPLs) in 1999. Yet, for all this effort, levels of NPLs remain
staggeringly high and distressingly opaque. In 1997, the government officially esti-
mated NPLs at 24 percent of total outstanding loans.1By the time of the 2003
recapitalization, NPLs at the four major state banks were still officially estimated
at 16.9 percent of total outstanding loans, and that was after a third of all NPLs
had been removed from the banks’ balance sheets in the 1999 carve-out (Baglole,
2004). Independent analysts today paint an even grimmer picture, routinely
estimating NPLs at 40 percent, or higher, of total outstanding loans (Hu, F., 2004;
Ma and Fung, 2002). Unfortunately, the most recent data offer little cause for
optimism. New loan extensions in 2003 surged 20 percent over the previous year,
thus diluting NPL ratios by adding dubious new loan assets to bank balance sheets,
a portion of which assets themselves are likely to become non-performing in
the future (Hu, 2004; Holland and Lague, 2004). China today faces a major
problem of capital misallocation, one that has deepened in recent years despite
considerable governmental attention and a series of highly publicized ameliorative
measures.
Why has this situation persisted? Why do China’s financial reforms seem gripped
by institutional paralysis, and how can such paralysis be explained in the context
of other more successful reforms – price liberalization, the rise of a vibrant private
POLITICAL STUDIES: 2004 VOL 52, 643–663
© Political Studies Association, 2004.
Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
644 EDWARD S. STEINFELD
sector, and a substantial downsizing of state-owned industry? What accounts for
the dichotomous nature of China’s institutional transformation overall?
In answering the above, I will challenge explanations that treat ‘stalled’ institu-
tional reform as a departure from economic rationality – a departure from an essen-
tially unitary model of market function that, as such, must be explained by an
alternative non-economic logic, be it political, social or ideological.2The argument
is that ‘partial’, ‘stalled’ institutional transformation stems from the manner in
which decision-makers and other economic actors conceptualize and understand
markets. More specifically, outcomes are driven in large part by assumptions that
actors make about cause and effect under market conditions. Such assumptions
influence expectations about what should obtain empirically in the real world, and
the extent to which what actually does obtain is understood as constituting a
problem requiring redress.
These widely shared, often tacit common understandings serve as frameworks for
ordering highly complex, highly uncertain environments, the very sort of envi-
ronments characteristic of modern economic affairs. They are, in effect, societally
shared lenses for constructing reality in the face of tremendous uncertainty (Hall,
1989). As will be illustrated in the Chinese case, these shared ways of under-
standing the world – by grouping together discordant, and even contradictory,
assumptions – at times lack internal consistency (Swidler, 2001). Nonetheless, they
lead to routinized behavioral responses (Swidler, 2001) – responses that persist
even as their ineffectuality becomes increasingly apparent to outsiders employing
different frameworks, different ‘principles of causality’ (Dobbin, 1994). Although
these frameworks may not be determinative – indeed, they often allow for con-
siderable debate within societies – they provide a common language for discussing
problems and a circumscribed palette of options from which various solutions can
be drawn and debated (Swidler, 2001). They are, in effect, societal constructions
of reality and, as such, provide a common discourse within which different opin-
ions, ideas and options can be discussed.
The argument presented here constitutes a distillation of interview data collected
over the past decade in China. During an extended seven-month research visit in
1994, a six-month visit in 1999, a three-month visit in 2000 and numerous shorter
stays between 1993 and 2003, I conducted over 250 formal interviews and far more
numerous informal conversations with central policy architects, central and local
administrative officials, bankers, asset managers, and enterprise managers and staff.
Though the initial aim of these interviews was to understand the diverse interests
surrounding financial reform – and hence, respondents were chosen to cover the
broadest array of interests possible – I was struck, over time, by the similar ways
in which these highly diverse respondents framed the problems of reform and their
potential solutions. Interviews intended to illustrate the policy impact of compet-
ing interests inadvertently uncovered something entirely different – shared soci-
etal understandings that profoundly guide behavior.3
China’s Contemporary Political Economy
Twenty-five years into the reform era, China’s political economy today embodies
an amalgam of dichotomous outcomes – which seem to indicate, in some cases,
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