After I thought I had a near-final draft of the manuscript, a mutual friend suggested that I ask Henny Sender to take a look at it for me. I had met Henny a number of years before and knew her to be very thoughtful and knowledgeable about China's financial markets. I was incredibly fortunate that Henny not only looked at the draft for me, but drilled into the manuscript, pushing me to clarify each passage with a sort of nurturing iron discipline I had not encountered since visits to the school matron's surgery at boarding school. Without a doubt, this resulted in a far more polished work than I could ever have accomplished on my own.
Several others provided very helpful comments and advice on the manuscript, but would prefer to remain anonymous. I am deeply grateful to each of them.
Ronald Chan, Uther Charlton-Stevens, Mark Makepeace, Sophie Chen Keller and Shan Weijian gave me extensive advice on the publishing process and were extraordinarily generous with their contacts. I ultimately chose to work with Wiley because of the incredible enthusiasm that Gladys (Syd) Ganaden showed in the project right from the start. Syd, together with Purvi Patel, Sylvie Docherty, Philo Antonie Mahendran and the entire Wiley team were friendly, professional and a delight to work with throughout the process. I am also very grateful to Amita Haylock and Cheng Hau Yeo of Mayer Brown for their professional support and practical advice.
Finally, I must thank Stephanie Tsui for her daily support over many years. Without her efficiency in organising my life, this book would never have been completed.
That all said, any errors, omissions or other failings in this final work (of which I am sure there are many) are my responsibility. I must also stress that the views expressed herein are mine alone, and do not claim to represent those of any of the individuals who have provided advice or support. Nor do they represent the views of any of my former employers or other organisations with which I am associated.
– James A. Fok
Hong Kong
4 October 2021
Chapter 1 Introduction
今天，我主要讲一个问题，就是解放思想，开动脑筋，实事求是，团结一致向前看。
– 邓小平，1978 年中共中央工作会议
Today, I mainly want to discuss one question, namely, how to emancipate our minds, use our heads, seek truth from the facts and unite as one in looking to the future.
– Deng Xiaoping, Central Party Work Conference 1978
On Christmas Day 1991, the hammer and sickle flag was lowered over the Kremlin for the last time. It was a dry, still Wednesday morning and the temperature hovered around one degree above freezing, mild by Moscow standards for that time of year. With that, the Cold War had ended.
History would go on to record it as a triumph of capitalism over communism, and of liberal democracy over dictatorship. The euphoria of the period was famously captured in Francis Fukuyama's 1989 essay and subsequent book, declaring ‘The End of History’, with America's brand of capitalist democracy standing as ‘The Last Man’.1 Indeed, the US had become the sole superpower and the world basked in the glow of the Pax Americana. Even as the US was at the apex of its power, however, the seeds of future crises had been sown.
‘Free market’ ideology had been a major factor in America's victory in the Cold War and, by the fall of the Soviet Union (USSR), US financial markets, with the dollar at their core, had long since attained global leadership. The whole world had become dependent on an American-dominated financial system.
The victory of free market capitalism over communism was so convincing that political parties of the left had to become more centrist – if not outright right-wing – in order to win power. The epochal phrase ‘It's the economy, stupid’ was coined by campaign strategist James Carville during Bill Clinton's successful 1992 presidential campaign and summed up the prevailing mood in the US. Across the Atlantic, in 1995 Tony Blair's Labour Party in Great Britain abandoned Clause IV of the party's constitution, which had previously committed Labour to ‘common ownership of the means of production’. This was seen as a decisive step on the path towards Blair's election victory in 1997.
A significant outgrowth of this free market ideology were the monetarist economic policies advocated by Milton Friedman and economists of the Chicago school. Their popularisation was, in many ways, a reaction against the dominance of redistributive Keynesian economics that had prevailed since the end of World War II (WW2) but which had failed to meet economic challenges faced in the 1970s. The influence of monetarist economics was to have a profound impact on government and central bank policies around the world. The increased role for central banks in managing the money supply within economies de-emphasised fiscal policy and governments’ role in economic management.
Of course, the impact of the collapse of the Soviet Union was not just felt in economic and financial policy. As the sole superpower, the US was much freer to pursue and implement its strategic objectives across many spheres. When Saddam Hussein invaded Kuwait in August 1990, President George H.W. Bush took painstaking care to build broad international support through the United Nations (UN) Security Council and assembled a coalition of 35 nations before launching Operation Desert Storm to repel Iraqi forces from Kuwait. When his son, President George W. Bush, invaded Iraq in 2003, he did so notwithstanding explicit objections from UN Security Council members Russia and France, and amidst widespread international condemnation.
American military supremacy owes much to the role of the dollar in international trade and finance. US Treasuries make up roughly 60 percent of global central bank reserves,2 enabling the US government to finance its fiscal deficits cheaply and without any currency mis-match risk between its revenues and liabilities. Gradually, US policymakers came to realise that, through effective control of the global financial system, the dollar itself could be wielded as a weapon against strategic rivals.
The use of financial pressure and ‘geo-economic’ power in international diplomacy is nothing new. When Britain and France supported Israel's 1956 invasion of Egypt in a bid to topple Egyptian president Gamal Abdul Nasser and regain Western control of the Suez Canal, President Eisenhower used the threat of dumping British Gilts3 to force the withdrawal of the British and French troops. However, in the post-Cold War period, the exploitation of the dollar to achieve US diplomatic and strategic objectives was extended significantly.
Meanwhile, unlike the leaderships of the former Warsaw Pact countries, the Chinese Communist Party (CCP) continued in power beyond the end of the Cold War. Nevertheless, the CCP had also seen a wave of protests that had threatened its rule in the form of the 1989 student movement. Deng Xiaoping's decision to crack down on that movement in Tiananmen Square on 4 June 1989 has been described as ‘one of the most consequential decisions in recent world history’.4 Whatever the morality of that decision, it was influenced both by China's own history of internal chaos when the central government had been weak, and by the experience of Gorbachev's Perestroika movement, which had led to significant political upheavals while failing to generate meaningful economic growth.
China had been pursuing gradual market and political reforms since Deng had come to power in 1978 and announced his ‘reform and opening up’ (改革开放) policies. In the wake of Tiananmen, however, the Chinese government significantly accelerated market reforms, or what China's leadership has called ‘socialism with Chinese characteristics’ (中国特色社会主义), while political reforms were for the most part shelved.
As China embarked upon on its own unique path of reform and