Financing China Trade and Investment (review)

474 China Review International: Vol. 5, No. 2, Fall 1998 Kui-Wai Li. Financing China Trade and Investment. Westport, Connecticut : Praeger, 1997. xx, 280 pp. Hardcover $69.50, isbn 0-275-95115-4. In 1994, Paul Krugman published a diought-provoking article in Foreign Affairs critical of the Asian development model.1 According to Krugman, the Newly Industrialized Economies ofAsia and Japan have failed to increase the efficient use of inputs—especially labor and physical capital. In reality, the Asian economies more resemble "Potemkin villages" that cannot sustain the high growth rates enjoyed during the past decades; they thus do not provide an appropriate model for other developing countries. Although only a small portion of the article was devoted to China, Krugman believed that China had only modesdy improved its efficient use of inputs, and thus forecast a reduced growth rate in the coming decade . This pessimistic view appears to be shared by many in the China field. According to this volume's introduction, written by the World Bank's Edgardo Barandiaran, it is widely believed that total factor productivity has contributed very litde (30 percent or less) to China's dramatic growth in overall economic output during the past seventeen years. This volume of eleven essays makes a timely contribution to this ongoing debate over China's input-driven growth by focusing on the efficient use ofone particular input: financial capital. Kui-Wai Li explains in the introduction that die few economic studies on contemporary China concentrate on the "quantity" of capital available for China's development. To compensate, Li has gathered the views of sixteen economists and bankers to evaluate China's efficient use of four sources of investment capital: the finance and banking system, direct foreign investment (DFI) and foreign trade, the foreign exchange market and official flows, and the equity markets. Like many such collections, certain contributions succeed brilliantiy at achieving the editor's goal of analyzing the efficient use of China's finance capital. Fairly accessible to both the academician and practitioner alike, certain contributions rely more on econometric analysis (Wong, Leung, and Wong's chapter) while others are more qualitative—even to the point ofmere description (Chai and Li). Yet even these descriptive pieces are often convenient reference sources for practitioners, while providing a platform for scholars to conduct more indepth research. Xu Tang and Kui-Wai Li provide a useful reference for analyzing China's© 1998 by University contemporary finance and banking system. The authors recount the evolution of ofHawai'i PressChina's banking system and describe the evolving relationship between China's central bank—the People's Bank of China—and the State-owned Commercial Banks, Policy Banks, Commercial Banks, Foreign Institutions, and Nonbank fi- Reviews 475 nancial institutions (trust and investment, finance, and insurance companies). While providing a fascinating look at the development ofthe various macroeconomic tools to control China's economic growth, it is unfortunate that the audiors do not fully address the relationship between China's banks and die Stateowned enterprises. This relationship not only has kept afloat inefficient industries but has imperiled die solvency ofChina's banking system. It is the major problem facing China's banking system today. Four articles are devoted to China's foreign direct investment and foreign trade. Mee-kau Nyaw provides a brief survey ofdirect foreign investment, including an interesting analysis of DFI's role in China's overall development strategy. Because the study ends in 1993, Nyaw is unable to explain fully die dramatic increase of DFI in the 1990s; the lack ofprimary sources and reference to Margaret Pearson's work are also drawbacks.2 Nyaw does devote a short section on the economic efficiency ofthe various types of foreign-invested enterprises based on a survey of thirty-four Equity Joint Ventures in the Shenzhen Special Economic Zone conducted in 1986. Yet more work must be done on the problems offoreign enterprises in China; such a small data sample and oblique references to other surveys provide inconclusive evidence of efficiency problems. Raymond Kwok takes a more rigorous approach to the question ofefficiency by empirically demonstrating the significant correlation between foreign trade and high economic growth rates between 1983 and 1993. Using simple...