Clever Geek Handbook
10 December 2025

The Moral Landscape

Recommendation

Neuroscientist and best-selling author Sam Harris is controversial, argumentative, against religion, in favor of science, deeply moral and intensely rationalist. While he never uses one word if many more will do, Harris’s positions on science, morality, religion and brain function prove innovative, well researched, thought provoking, and, if you are of a religious bent, probably infuriating. Harris dissects the evolutionary and biological processes underlying reason, moral choices and faith. He poses scientific counterarguments for religious tenets and dreams of a world where science proves the worth of any moral choice. You may not agree with everything he has to say, but he expresses the point of view of rationalism with thorough conviction. Caught up in explaining philosophical complexities, he seems not to worry whether readers will totally understand all that he says. Even so, BooksInShort suggests this interesting, impassioned, philosophical explanation of the rationalist worldview to those who wonder how and why – and even if – people make certain choices, and what their choices mean.

Take-Aways

  • The rationalist worldview contends that knowledge and belief can and should be mutually nourishing. This philosophy also says that:
  • Science – not religion – can objectively determine a morally superior way of life.
  • Belief systems may ignore, but cannot change, scientific laws.
  • Anything moral promotes “human well-being.” Ethics, principles and a better way of living derive from facts about the presence or absence of well-being.
  • Human well-being changes with world events and “states of the human brain.”
  • Nothing is more important than altering humanity’s “ethical commitments.”
  • Society needs to close the gaps between “knowledge and values,” between science and religion, and between facts and morality.
  • Moral questions have correct and incorrect answers.
  • To solve moral questions that have several possible answers, select the option with the greatest validity and potential for positive benefit.
  • Free will does not exist.

Summary

Morality as Quantifiable Fact

Can scientific methods demonstrate a morally superior way of life? Rationalism answers “yes,” and states that questions about morals are always questions about values. Such queries address “the well-being of conscious creatures.” If “human well-being” can be quantified – and it can – then one way of life offers more well-being than another. Values that advocate people’s well-being are morally superior to values that degrade it, though some moral questions (such as, is it always bad to tell a lie?) may have ambiguous or multiple answers. To address moral questions with several possible answers, select the option with the greatest validity and potential for positive benefit. Answers that lower human well-being are less valid, and rational people should reject them in favor of those that raise well-being.

“Questions about values – about meaning, morality and life’s larger purpose – are really questions about the well-being of conscious creatures. Values, therefore, translate into facts that can be scientifically understood.”

You believe in certain facts based on “rational inquiry,” but you also form beliefs about what is moral, what possesses ineffable worth, what your intentions are and why you exist. Such questions lead to lots of practical and moral confusion. Rationalism offers a simpler way. It says you can reduce moral questions to two premises. First, people face better and worse ways to live. And second, the differences between better and worse lives emerge from “states of the human brain and states of the world.”

The Power of Irrationality

Human well-being derives from interior and exterior events: that which goes on in the brain and that which goes on in the world. States of mind do not alter the state of the world. Your bad mood, for instance, will not change the cycles of the tides. But the world can alter people’s states of mind. In some cultures or religions, for example, people believe that boy babies are more precious than girl babies. What makes this belief “true” to those believers is that their cultural norms support it, and that influences their thoughts and emotions. Some argue that enduring beliefs must perform some adaptive evolutionary function, or they would not endure. This is not so. The fact that a belief or social norm lasts – even for centuries – is no proof that it promotes well-being or is even worthwhile. Physically punishing children to make them behave prolongs a host of negative psychological effects, yet it has been part of human existence for centuries.

“The goal of this book is to begin a conversation about how moral truth can be understood in the context of science.”

Belief systems may ignore, but cannot change, the universe’s physical nature or scientific laws, such as the speed of light. Algebra and physics have no nationality or religion; no religious belief can change the sum of two plus two. By the same token, morality itself does not belong to any particular religion or country. Rationalism thinks that morality is quantifiable according to a standard that holds true regardless of cultural or religious norms. It says that those who turn to religion for such standards must believe that rational discourse and reasoned decision making cannot address life’s most significant questions.

“How could we ever say, as a matter of scientific fact, that one way of life is better, or more moral, than another? Whose definition of ‘better’ or ‘moral’ would we use?”

Even though rationalism finds them unreasonable, the convictions of religion seem to be paralyzing the thoughtful, nourishing the confusion of “secular” democracy. For instance, consider the apprehension European nations have about Muslim fundamentalists among their populations, or America’s politicizing of some conservative Christians’ holdings about certain scientific issues. Such infiltration of religion into much of secular life has led to a specious divide. On one side is science, which many feel should limit itself to inquiries about the physical world. On the other side is religion, which is supposed to comprehend – or at least make as comprehensible as possible – the world of “meaning, values, morality and the good life.”

“Morality could be a lot like chess: There are surely principles that generally apply, but they might admit of important exceptions.”

But morality does not adhere to a religious code. What is moral is that which improves the quality of human life. Knowledge improves well-being. Unscientific beliefs, no matter how entrenched, do not. Society needs to close this gulf between “knowledge and values,” between science and religion, between facts and morality – but that is easier said than done. Dogmatic institutions often do not welcome open discussion and, conversely, many scientists protest that they are not in the values business but in the business of quantifiable knowledge. That is a moral abdication.

Does “Moral Truth” Exist?

Oddly, the public’s increased knowledge of all aspects of the world and its cultures has led only to moral confusion. Amid this confusion, well-educated secular people seem to retreat into moral relativism and cling to the idea that moral truth cannot exist. Those who do not think a moral truth exists often condone hideous behaviors in other cultures on the grounds that such behavior is a “cultural norm” no one outside that society can judge. But a norm is just an entrenched majority opinion. If “truth has nothing...to do with consensus; one person can be right, and everyone else can be wrong,” then science and rational thought can – and ought to – guide people to what they “should do and should want,” for everyone’s greater good.

“Moral relativism...tends to be self-contradictory.”

If everyone in the world led as wretched a life as possible, clearly, that would be “bad.” If everyone could live as well as possible – as fed, sheltered, healthy, loved, protected and able to pursue his or her goals as could be – that would be “good.” A universe in which humans suffer is indisputably worse than one where they “experience well-being.” Those who accept the existence of these two ends of the continuum and who think that life on one end is superior to life on the other must accept that moral questions have correct and incorrect answers. If science or rational fact-finding demonstrate that certain behaviors increase well-being and other behaviors do not, then some behaviors on the part of people or institutions are wrong, and society should recognize them as wrong. A cognizant moral being should:

  1. Try to understand why, under the banner of morality, people commit certain acts that undermine well-being.
  2. Examine what comprises moral truth, and ponder what actions humans should follow.
  3. Change the behavior of those who act immorally. The most critical task is finding ways to alter people’s erroneous or injurious “ethical commitments.”

The Dobu

Anthropologist Ruth Benedict’s study of the Dobu islanders in New Guinea presents an almost perfectly backward moral world, a world of cultural norms where nothing anyone does fosters the well-being of others.

“A bias is not...a source of error, it is a reliable pattern of error.”

The Dobu never cooperate. Their main activity is casting spells on other Dobu. The goal of these spells is to kill people or make them ill in order to steal their crops. The Dobu believe some people are born with the power to cast those spells, and they conduct a thriving economy in the sale of hexes. They recognize some other people as uniquely able to infect victims with certain diseases or to cure those diseases, and they buy the services of these people as well.

“Our brains were not developed with a view to our ultimate fulfillment.”

The Dobu do not practice altruism in any form; in fact, “all existence appears...as a cutthroat struggle.” They attribute every event to a specific spell and the person who cast it. They guess who cast a spell by seeing which person benefits most from the victim’s ill fortune.

The Dobu believe that any member of their community who has a good yam-farming season stole that successful crop – by spell – from those who had bad harvests. The Dobu are rigorously paranoid and see secrecy as a cultural virtue. People deeply distrust their closest relatives and friends because they believe that spells work best on the people who are most intimate with the spell caster. Dobu blame the parents when a child is ill; a dead husband means a murderous wife.

“The mere endurance of a belief system or custom does not suggest that it is adaptive, much less wise.”

Apparently, the islanders live in thrall to a strict moral order, but everything in it suppresses well-being. They illustrate that all issues of well-being rest first on the ability to experience actual well-being. The consistent misery and disconnection of Dobu life make their societal choices clearly immoral, no matter how they are woven into the fabric of daily life. That’s the problem with dismissing harmful behavior as a cultural norm: Moral and immoral acts have consequences.

What Is a Moral System?

A system that creates greater well-being for more people is more moral than a system that does not. Moral solutions should not depend solely on perspective, whether you are a Dobu or an anthropologist. Your preferences, no matter how strong they might be, do not constitute a moral view.

“Changes in wealth, health, age, marital status, etc., tend not to matter as much as we think they will.”

Rationalist thought comes to the conclusion that religion is rarely helpful in sorting out such moral issues. Most religions define the most moral life as the one which most closely adheres to that religion’s concept of the law of a supreme being or beings. Most religions say that reward comes to the believer in an afterlife, and they thereby downplay the importance of well-being “in this world.” True believers can find almost anything moral or immoral – “female genital excision, blood feuds, infanticide, the torture of animals, scarification, foot binding, cannibalism” – without considering whether their beliefs reduce anyone else’s well-being.

Categories of Behavior

Neuroscientific research sorts all human behavior into four kinds of action:

  1. “Self-serving” behavior that affects no one else.
  2. Self-serving behavior that adversely affects someone else.
  3. Behavior that benefits others and offers you a likelihood of reciprocity.
  4. Behavior benefiting others from which you do not expect to gain.
“There may be nothing more important than human cooperation.”

Humans and all other social mammals practice the first three kinds of actions, but only humans perform the fourth. This list underscores the “positive and negative motivation” of moral or immoral behavior. You know what actions might increase your well-being and which might increase the good that others experience. At times you want to perform the former; at times, even against your own will or inclination, you perform the latter.

Psychopathic Behavior

Psychopaths provide a useful negative example in a moral discussion. Lacking fear and empathy, they feel neither guilt nor remorse. They find pleasure in the pain and terror of others. Because psychopaths show reduced brain activity in response to “emotional stimuli” compared to those who aren’t psychopaths, they live without the mooring of “social and moral norms.” Psychopaths usually do not see themselves as flawed.

Free Will?

People change their behavior and states of being as their brains take in multiple channels of information and respond to environmental changes. The inputting channels include data from the outside world, from the individual’s interior state and from the surrounding “spheres of meaning,” which could be the habits of culture, spoken language, rituals and even a person’s unconscious reading of how sane someone else might be.

“It seems immoral not to recognize just how much luck is involved with morality itself.”

You consciously perceive only a small percentage of what your brain absorbs every instant. You feel changes in your thinking, your actions, your frame of mind, your emotions and other aspects of yourself. But often you have no idea what “neural events” or brain activities drive a change in your interior state. Ironically, other people, by taking a quick look at your face or by hearing you speak one sentence, have greater insight into your “internal states and motivations” than you do. Your actions stem from physical processes that remain opaque to your consciousness. That strongly supports the idea that free will does not exist. For instance, brain activity in areas dealing with movement takes place 350 milliseconds before someone decides to move. Researchers using MRI technology found that they could foretell that a person would make certain decisions 10 seconds before the subject was aware of making any choice. This evidence strongly suggests that human will is not the “conscious source” of human actions.

“We can account for the ways culture defines us within the context of neuroscience and psychology.”

Even as you perceive your existence, you do not predict what action you might take until “a thought or intention arises.” Your thinking and what you see as willful actions are based in mental processes that are invisible to you. People’s belief that they have free will only shows how little they know about the neurological events that motivate them.

About the Author

Neuroscientist Sam Harris wrote The End of Faith, Lying, Free Will and Letters to a Christian Nation.

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The Moral Landscape

Book The Moral Landscape

How Science Can Determine Human Values

Transworld,
 


10 December 2025

The Plundered Planet

Recommendation

In the never-ending war between “romantics” and “ostriches,” economist Paul Collier stands squarely in the middle. Deeply grounded in the economic and environmental issues of the world’s poorest nations, Collier’s book provides background and cogent strategy for rational, pragmatic environmental practices (thus pacifying the romantics) and for bringing economic growth to the developing world via the sane, honest exploitation of natural resources (thus pleasing the ostriches). Collier describes the history and economic theory of resource “plunder,” and discusses how to turn it into resource management. He’s willing to fly in the face of popular opinion, and his hard-earned knowledge makes his arguments difficult to resist. In a perfect world, Collier would write less like an economist. But his ideas are so necessary and his solutions so urgent that readers who put up with his less-than-perfect flow of prose will gain important new insights. BooksInShort strongly recommends this groundbreaking work to environmentalists, economists, policy makers, governments of any nation grappling with extracting their natural resources and all those concerned with these issues. And that should be everybody.

Take-Aways

  • “Nature is an asset” that humankind should use to its advantage.
  • Poor nations possess natural resources; wealthy nations have industrialization.
  • Less-developed countries need to exploit their natural assets wisely because they are unlikely to industrialize their way out of poverty.
  • “Nature plus technology minus regulation equals plunder” of natural resources.
  • The easier an asset is to find, the more quickly and thoroughly people will exploit it.
  • An abundance of natural resources demands good governance that ensures equitable distribution of benefits.
  • Norway and Malaysia offer the best examples of how to prosper from careful management of natural resources and the capital they provide.
  • Renewable assets such as plants, trees and fish can be as vulnerable to plunder as depletable resources such as oil, copper and other minerals.
  • If a nation uses its resources in the present, it must replace their value with investments for future generations.
  • Carbon emissions represent a “natural liability” that threatens future generations.

Summary

The Tightrope

Underdeveloped, poor nations – home to “the bottom billion” of Earth’s population – possess a resource with the potential to save them: their natural assets. Handled properly, those assets and their resulting income can raise a nation’s fortunes. But when these countries handle their natural assets poorly, “plunder” is the result. All states walk the tightrope between “prosperity and plunder.” On one end of that tightrope are the “romantics,” who want to save the world, and on the other end are the “ostriches,” who want to milk the Earth for all possible profit. Neither group has a workable solution. Only the most pragmatic approach can save humanity and the planet. A sound strategy must address the needs of the bottom billion and the demands of the bottom line.

The Bottom Billion

It’s too late for small-scale agriculture to feed Africa. Most of the continent’s poor nations already lag behind in food production, and global warming will mean less rain and diminishing arable land. Bottom-billion economies must depend on resource extraction, which provides a constant temptation for government corruption. In a corrupt state, the revenue from plundered assets never reaches the mass of citizens. A thieving elite takes it all. A crooked government fueled by resource extraction profits is unlikely to enforce any regulations that provide for the sensible, orderly depletion of natural resources. Thus a nation’s shady leaders exploit its mines and wells for limited short-term gain, while foreigners with resource extraction expertise loot the country’s only valuable assets. Plunder and exploitation, either by colonial powers or postcolonial corporations, feature in the history of all the bottom-billion nations.

“Restoring environmental order and eradicating global poverty have become the two defining challenges of our era.”

Rich nations can afford to be environmentally conscious, goes one argument. No longer dependent on resource extraction, developed countries attempt to make less-developed nations enforce environmental rules that they themselves never followed. This leads to distrust between rich and poor countries. The disconnect between environmentalists and economists mirrors this distrust; they “have been cat and dog,” but they no longer can afford to be at odds. They must recognize their mutual goals and dependence. Environmentalists should gain some economic pragmatism, and economists could use a lesson in ethics.

Ownership of Assets

If you make something, it belongs to you. If you simply find something in nature, whether it belongs to you depends on where you find it. The control of a natural asset – diamonds, oil, copper, forests – matters a great deal to the nation where the asset is located. The easier it is to discover, the more quickly people will plunder it. For instance, buffalo once roamed the Western United States by the millions; by the end of the 19th century, buffalo were all but extinct due to overhunting. In another example: The Dominican Republic possesses rich forests, yet on the other side of the same island, Haiti features mile after mile of denuded hillsides.

“Plunder has dominated the history of the exploitation of natural assets in the poorest societies.”

The US operates on a mostly “finders-keepers” policy – if you find gold on your land, then the gold is yours. But this makes for an inefficient market. Large-scale extracting companies buy as much land as possible, leave it untouched and wait to see who turns up a strike nearby. These big exploiters then take all they can by whatever method, however destructive, while swallowing up smaller competitors. This endlessly repeated cycle helps illustrate that humanity should use nature’s resources, but only with regard toward what must remain for future generations.

“Cursed by Nature”

Rich natural assets have proved no great boon to some of the world’s poorer nations. The scramble for Sierra Leone’s diamonds helped reduce that country to anarchy. Nigeria’s oil created rampant, deadly corruption. Yet some countries have channeled the power of their natural wealth: Botswana’s diamonds fueled “the fastest growing economy in the world.” In most countries, the government controls the sale of natural resources to outsiders who do the harvesting. Any country with a weak or potentially corrupt government – and that includes most nations in the developing world – suffers a “resource curse.” Extracting the resources seldom brings widespread prosperity or stability.

“We are not curators of the natural world, preserving nature as an end to itself...we are custodians of the value of natural assets.”

These nations face other issues besides corruption and its accompanying violence and inequality. For example, some problems result from poor planning. When the copper market plummeted, Zambia encouraged investment by lowering taxes on mined copper. Five years after the deal closed, copper prices rose astronomically. The government, bound to the low tax rate, earned little from the market resurgence. Conversely, Norway and Malaysia altered their respective economic fates with honest, astute management of oil income. Though natural resources offer the most bountiful income source for African countries, their governments’ sales methods undervalued their resources terribly.

“The failure to harness natural capital is the single most important missed opportunity in economic development.”

A commodity boom often means more exports, which cause exchange rate appreciations and thus reduced growth. But nothing stifles growth like corruption, wherein the ruling government takes all the income, and the citizenry get none. Honest governments function transparently: Citizens in these countries have a pretty good idea of how and where their officials spend money. Residents also have some sense of ownership of their countries’ natural assets. Corrupt governments conceal resource-related revenues, the better to steal the money and allow extractors to plunder the land.

Managing Natural Assets

The coal Great Britain starting mining more than 100 years ago is all but depleted now. Poor nations are only beginning to extract their resources. The developed world has had two centuries to move from resource extraction to industrialization. The bottom billion can’t afford such slow growth. With every inch of the developed world well mapped for resources, a disproportionate share of future discoveries will occur in the nations of the bottom billion, whose governments are either corrupt or corruptible.

“The resource curse might be connected to something that is specific to the public management of revenues, to governance.”

Resource-derived income raises the important issue of how that value is “captured by society”: Funds should flow to the rights-seller – usually the government – for the benefit of its citizens. But in the bottom billion, what should happen seldom does. Cameroon, for example, derived enormous revenues from the sale of its oil rights; almost all that money went into the private accounts of its president. Companies investing in corrupt nations always face the risk that governments might nationalize their assets, a fear firms use to justify bribes to host governments.

Now or Later?

Once resource sales create income, the next significant question is whether the money should “benefit the present or the future.” Spending on immediate consumption improves present living conditions; investing the income assists the future. Some natural assets serve the future better by their immediate extraction, followed by investment of the income they produce. Others serve the future by remaining where they are until cheaper extraction or transportation methods arrive or until market conditions improve. Yet many underdeveloped nations face such political instability that they cannot count on resources in the ground gaining value or becoming any easier to extract.

“Natural assets have no natural owners.”

Sierra Leone, now in the midst of an oil boom, serves as a prime negative example. Despite enormous oil revenues, its capital, Freetown, is experiencing little new urban development. Years of war and anarchy have resulted in a chaotic tangle of competing claims of ownership of valuable urban land. No one will build anything until the courts resolve these claims, and, given the judicial system in Sierra Leone, that will take a long time. Natural resources may – or may not – be able to rescue bottom-billion countries from their lack of such basic building blocks.

“A resource-rich low-income country cannot count on natural assets it has left in the ground becoming more valuable.”

Sustainability and preservation are vastly different. Depleting a natural asset is not necessarily good or bad. Countries should exploit some resources immediately; other resources offer greater gain through piecemeal extraction. The use of the money earned is the factor that makes the difference. Depleting a resource and losing the money to corrupt individuals means squandering that resource. Governments must understand – and few in the bottom billion seem to – that resource depletion is not sustainable, and neither is the income derived. Nations who base their current economies on resource extraction must use current income to create a functional future.

“Politically, foregoing consumption in favor of the future is not easy.”

If a resource is depleted in the present, then the country must replace it with something of value for future generations, such as well-invested funds, modern infrastructure or a sound educational system. Spending all of today’s income immediately is simply plunder by a different name. At the same time, solid current investments can pay multiple unforeseen future dividends. For example, a new road will ease the extraction of resources, but also it might enable new markets for rural farmers, a larger import market for bicycles or trucks, a need for more skilled labor to work in new manufacturing, and so on.

Renewable Nature

Dig it up and it’s gone. Certain natural assets – mostly minerals – derive their value from their extraction and depletion. But nature offers renewable assets: plants, trees, fish and animals. These provide “a double blessing.” Humans did not have to manufacture them, “yet we can harvest them for eternity.” These assets, too, are vulnerable to plunder. People today still have fish to eat because previous generations did not destroy breeding populations. In contrast, Haiti has no trees because former generations plundered them.

“Natural assets are special, but not so special that they cannot be used.”

As world population – and demand – increases, the value of even naturally occurring renewable resources increases. If more people want salmon, but the same number of salmon exist, then each salmon is worth more. Without some regulation of who owns the salmon in the sea – or any other natural asset anywhere – plunder grows more likely. Pillaging natural resources carries the threat of extinction, the worst possible outcome for a potentially infinite resource.

“Harnessing natural assets for sustained development depends upon a chain of decisions, and the outcome is only as good as the weakest link in that chain.”

Fish that swim in international waters, where no nation’s regulations hold sway, face a constant threat of depletion. International monitoring may offer the best prevention against exhausting fish stocks to the point that renders certain species unable to reproduce. If all the natural assets of the sea were to become the province of the United Nations, the world’s oceans “would, in effect, be turned into a giant fish farm.” The UN could, through its own research, establish harvest limits that would ensure that this crucial resource remained renewable. If the UN controlled the worldwide fish market, it could establish a system of localized auctions to ensure fair pricing and distribution, and avoid profiteering.

Cows and Carbon

Carbon expelled by the world’s cattle herds produces a greater global warming threat than nuclear reactors. Reactors do not emit carbon, but gaseous cows do. Carbon creates a debt, “a natural liability,” billed to future generations. Emitted carbon has no owner, and thus no particular party is responsible for the damage it causes. Carbon regulation seeks to make current carbon producers pay future generations for harm caused today.

“Natural assets are for us to use, but ‘us’ includes the rights of future generations.”

France leads the world in carbon efficiency, a feat the nation accomplished with a deliberate, knowing switch to nuclear energy, with all its concomitant risk. This kind of hard-nosed pragmatism serves as a model for other countries facing difficult decisions about their fuel usage and environmental future. Most citizens do not understand that their automobile use creates a debt that they charge to future generations. Carbon does not dissipate in the atmosphere; it lingers for human lifetimes. Its continued existence incarnates another pernicious kind of plunder.

About the Author

Paul Collier, author of The Bottom Billion, is Professor of Economics and Director of the Center for the Study of African Economies at Oxford University.

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The Plundered Planet

Book The Plundered Planet

Why We Must – and How We Can – Manage Nature for Global Prosperity

Oxford UP,
 


10 December 2025

Red Capitalism

Recommendation

This insider’s report on China’s version of capitalism tells a revealing story about an economy that is poised to become the world’s largest. Asia banking experts Carl E. Walter and Fraser J.T. Howie expose the interconnections of a financial system dominated by the Communist Party; the conflicts among ruling families, corporate executives and technocrats – each vying for political and personal gain; and the challenges opaque, state-run companies present to Western investors. The authors delve into the byzantine, often clandestine machinations behind the modern and sophisticated screen China presents to the rest of the world. The book provides a detailed account of major players, agencies and policies, as well as an advanced-level financial analysis of the banking and capital market sectors. The book’s most interesting points sometimes bog down in historical details, but patient readers reap rewards. BooksInShort recommends this extraordinary behind-the-scenes look to those who want to know what’s really driving China’s dazzling growth. Surprisingly, this is a story most people do not know.

Take-Aways

  • China’s economic development dazzles outsiders, but in the 1970s, the country was on the verge of bankruptcy.
  • When then-premier Deng Xiaoping went to the United Nations in 1974, his delegation could only find $38,000 in state funds to pay for the trip.
  • Communist Party cadres, not market forces, rule China’s financial markets.
  • China relies on its major banks to fund state-owned firms and government interests.
  • Despite their size, China’s banks are neither innovative nor internationally competitive.
  • China’s “Bird Cage” approach once restricted foreign investment to certain regions.
  • China’s bond market trades thinly, with only a few hundred transactions daily.
  • Chinese banks own 70% of all Chinese bonds, which they hold to maturity, like loans.
  • The party runs Chinese stock exchanges, which are the largest in Asia, through its ownership control of all listed companies.
  • China’s future pension obligations will cost from 10% to 40% of its annual GDP.

Summary

“The Great China Development Myth”

The 2008 Olympics put China in the world spotlight. In preparation for the competition, the nation built highways, stadiums, apartments and hotels. Overnight, workers placed 40 million flowerpots along main streets to welcome visitors. China’s spectacular reintroduction to the West was even more remarkable considering that the nation was effectively bankrupt just 30 years earlier. In 1978, Beijing resembled a devastated city, while Shanghai, once considered the most cosmopolitan city in the East, was run-down, its residents sleeping in the streets for lack of air conditioning. The nation was so broke that when Premier Deng Xiaoping went to the United Nations in 1974, his delegation could find only $38,000 in state funds to pay for the trip.

“Understanding how China...has built its own version of capitalism is fundamental to understanding the role China will play in the global economy in the next few years.”

While many in the West have lent credence to the Great China Development Myth, China’s rapid economic transformation from the 1970s to the present has not been linear nor without mistakes. The changes began when long-time leader Mao Zedong died in 1976 and Deng acceded to power in 1978. China’s journey coincided with a wave of financial deregulation that swept the world. Seeking to follow the US capitalist model, China’s new leaders, Jiang Zemin and Zhu Rongji, deregulated its markets in the 1990s and founded stock exchanges in Shanghai and Shenzhen. In 1992, Deng publicly acknowledged that capitalism could play a role in China’s economy.

“If Deng had not said that capitalist tools would work in socialist hands, who knows where China would be today?”

After the Asian financial crisis of 1997, China restructured and recapitalized its bankrupt state banks. With this financial makeover, the banks listed some of their shares on global exchanges, allowing them to raise new money and attract international partners. Another breakthrough occurred in 2001 when – after 15 years of discussions – the World Trade Organization admitted China as a member. Attaining membership paved the way for a massive influx of foreign investment, as corporations from around the world lined up to build businesses in China.

“China’s state-owned economy is a family business, and the loyalties of these families are conflicted, stretched tight between the need to preserve political power and the urge to do business.”

Up to that point, China had kept foreign investment regionalized and restricted to designated eastern seaboard special economic zones (SEZs). This “Bird Cage” approach forced foreign corporations into joint ventures with often unqualified Chinese partners. In an effort to attract jobs and investment, China relaxed its controls and allowed more local governments to set up their own SEZs. By 2008, almost three-quarters of all foreign investment had shifted to “wholly owned enterprises” expanding into new locations.

Still a “Family Business”

Since the late 1970s, economic reforms have allowed China’s state-owned enterprises (SOEs) to expand and thrive. Chinese leaders used US investment bank expertise to help the country’s SOEs go public. By 2009, China boasted 44 companies on the Fortune Global 500, all of them newly restructured SOEs. While their shares trade publicly, their majority owner remains the state. Thus the companies’ management and future development are tied to the political system. These “superficially internationalized corporations” represent “the inside economy” that is nominally independent but actually under state control. However, foreign direct investment, exemplified by the factories and plants of multinationals, operates in an entirely different sphere. This private, nonstate sector has helped advance a growing Chinese entrepreneurial class.

“China’s banks look strong but are fragile; in this, they are emblematic of the country itself.”

Despite reform, the economy still operates within a complicated web of personal and political relationships. China’s dominant Communist Party sits at the top of a seemingly monolithic but essentially fragmented political system; regional and local level governments wield great power, while the connected families of politicians and special interests – including SOE executives and ministerial bureaucrats – contribute to Chinese “crony capitalism.” These leading Communist Party cadres guide China’s economy according to a patronage system. While political shifts may occur among the ruling groups, they all adhere to a common goal of political stability, which allows them to pursue their own economic interests.

The Importance of Banking

China’s financial system depends on its state banks; the four largest – Bank of China, China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China – monopolize 43% of the nation’s financial assets. These banks have massive loan portfolios, funded by the prodigious savings of Chinese citizens. The banking sector is firmly centralized in party hands. China admits foreign banks, but they account for less than 2% of banking assets.

“Party leaders believe they are better positioned than any market to value and price risk.”

Bank lending fuels the inside economy. The major banks hold 70% of all bonds outstanding, including those that the Ministry of Finance (MOF) issues. The banks are largely undisciplined lenders, with untrained party loyalists in their employ. Banks lend at the direction of the state, without regard to credit risk or return potential. Though the banks are compelled to lend, their borrowers – also state-controlled companies and other government interests – are under no constraint to repay their loans. As a result, Chinese banks have repeatedly faced bankruptcy, and the state has continually come to their rescue.

Restoring Confidence

After the 1997 Asian financial crisis, China’s financial authorities resuscitated its moribund banks through substantial capital injections and transfers of nonperforming loans to a series of asset management companies (AMCs). Following America’s Resolution Trust Company model – which rescued failed US savings and loan institutions in the 1980s – AMCs assumed the delinquent portfolios and took on losses from corporations, securities and leasing firms, finance and insurance companies, and commodities brokers. By 2000, Goldman Sachs and Bank of America had invested in seemingly pristine banks and provided Western management expertise.

“Rolling outstanding debt when it matures – that is, reissuing new debt to repay the old – is a principal characteristic of China’s financial system.”

The restructuring worked, and major Chinese banks have since raised large amounts of capital in international markets. But troubling items classified as “receivables” remain on bank balance sheets, some dating back to the early 1990s. These are IOUs issued by the Ministry of Finance. Despite their name, these debts are outstanding, and it is unlikely the debtors will ever extinguish them, given the government’s grip on the banks. These assets confound any Western accounting analysis, because it is unclear who approved the debt and how to collect it. In addition, the nonperforming loans ostensibly transferred to the AMCs in reality remain liabilities of the major banks, through a circuitous funneling of bonds and funds among what are all essentially government organs.

“One cannot simply assume that words such as ‘stocks’ or ‘bonds’ or ‘capital’ or ‘yield curves’ or ‘markets’ have the same meaning in China’s economic and political context.”

Under the current structure, the People’s Bank of China (PBOC) – acting as a central bank – is the guarantor of China’s AMCs and responsible for resolving all bank failures. Yet banks are still lax in their loan valuations, credit issuance and risk controls. Additionally, the PBOC has been lending at a furious pace to stimulate the economy in the wake of the 2008 global recession that hammered China’s manufacturing and export sector. Undoubtedly, 2009’s $1.4 trillion spending spree will lead to another wave of future nonperforming assets. At the behest of the state, the PBOC “write[s] the check for the party’s profligate management of the country’s finances.”

“The Fragile Fortress”

Actual financial reform in China remains elusive; bureaucrats at the PBOC and MOF jostle for dominance in a conflicting and confusing administrative setup. The banking scheme is intentionally opaque, which is why few outsiders know that the Chinese financial system has been on the verge of collapse several times in 30 years. Chinese banks remain instruments of the party’s politically driven lending policies. As a result, bad debt gets recycled to new government entities, so financial institutions never have to realize losses. And banks depend on the party for their profitability: The government stipulates the interest rate spreads between deposit and lending rates. With these assured profits, the banks invest in cheap government securities. A lack of competition maintains the spreads, and banks rely on a dedicated customer base for deposits.

“China’s capital markets, including Hong Kong, are now home to the largest IPOs and are the envy of investment bankers and issuers the world over.”

Since the party controls them, China’s banks have not proven that they can create value without government direction and protection. This is why no Chinese banks made offers for the distressed US financial institutions like Washington Mutual, Citigroup and Merrill Lynch that were for sale in 2008. It also explains why other nations have not adopted China’s banking model and why its very large banks are not internationally competitive.

China’s Bond Market

Despite China’s huge economy, its bond market is still developing. Because the party controls interest rates, bank loan rates determine bond prices and risk assessments, not market demand. Only a few hundred bonds trade daily – with prices largely determined by how quickly an investor must sell. In such an illiquid system, market participants have no objective way to measure and price risk. Almost all bond primary dealers are banks, which hold the bonds they buy in their own portfolios until maturity, just like loans. As a result, the Chinese bond market is a mechanism for making loans, not a competitive way of raising new capital.

“The Chinese are masters of the surface and excel at burying the telling detail in the passage of time.”

In a 2009 report, the MOF reported that the majority of China’s thousands of local municipalities run fiscal deficits; the main duty of mayors and provincial governors is to finance local job-creating projects. China’s larger, more sophisticated coastal provinces can raise funds by attracting foreign investment. Interior provinces don’t have this option, so they often rely on land auctions and cash flows from infrastructure projects. Cities and regions also have created a municipal bond market by issuing bonds and commercial paper through limited liability companies. In 2009, provincial and local governments had created 8,221 of these “fund-raising platforms” totaling $95 billion in new debt; by year-end, the total cumulative municipal debt was $1.14 trillion, equivalent to 23% of the nation’s yearly gross domestic product.

Stocks: Form over Substance

Party authorities encourage citizens to invest in shares for two main reasons: First, entities that issue stock don’t have to repay their investors, an event that government officials have termed as “inconvenient” in referring to bonds. Second, the party recognizes the value of symbols, and it considers a Chinese company’s public listing on a stock exchange as projecting a more modern image for the nation. As a result, the state encourages stock ownership as a means of building individual wealth and conveying China’s sophistication.

“An inherently conservative political class, whose natural instinct is to control, will not easily invite those it cannot easily control to participate actively in its domestic debt markets.”

China's stock exchanges are Asia’s largest in daily trading volume, new IPOs and brokerage fees. The party runs the stock exchanges through their ownership of all listed companies. When the Shanghai exchange started in 1990, a year after the Tiananmen Square protests, the party looked to the opening to quell social unrest. Since then, wild IPO speculations, driven by lottery subscriptions, boost stock market activity. In the listing process, issuers intentionally set their share prices low, so that they will surge on opening day. This eliminates underwriting risk for bankers, but it attracts investors looking for a quick score. It also means people don’t analyze and understand a company’s performance or prospects. Government policy changes affect the stock market more than the performance of individual, listed companies. Unless and until privatization occurs, a remote possibility, China’s stock markets will not operate like their Western counterparts.

“If...China seeks to replace the US at the center of the global economy...one would expect it to export not just capital, but also intellectual property.”

China’s economy is impressively large, but it is subject to serious problems that could arise from changes in household savings rates, interest rates and rising pension costs. Unequal income distribution among China’s vast population keeps authorities primed to address any incipient social unrest. The country faces a demographic shift as its population ages: As more individuals divert their savings to health care, domestic consumption will decrease and bank deposits will fall. The state also must fund pensions for its graying population. The World Bank estimates China’s future retirement obligations represent between 10% and 40% of its GDP, a massive liability that is even more foreboding due to China’s poorly structured capital markets.

About the Authors

Carl E. Walter worked in China’s financial sector for 20 years; he held a senior position in China’s first joint venture investment bank. Fraser J.T. Howie is managing director of a brokerage firm in Singapore.

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Red Capitalism

Book Red Capitalism

The Fragile Financial Foundation of China's Extraordinary Rise

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