The Wall Street crisis in the Chinese media

Caijing, September 29, 2008

Editor’s note: Iacob Koch-Weser’s previous contributions to Danwei include a comparison of the Chinese and English-language versions of National Geographic, a look at satiric text messages, and an introduction to the unsung heroes who write the glittering copy that promotes local development efforts.

In the following piece, Iacob discusses how three well-regarded Chinese publications, Caijing, Southern Weekly, and The Economic Observer, reported on the US credit crisis in late September, following the collapse of Lehman Brothers.

Seismic shifts are reshaping Wall Street this year, and the grim denouement of that process is unfolding as we speak. There is an overwhelming consensus — brought to the fore by the second Obama-McCain debate — that the sub-prime crisis marks an epochal change rather than a cyclical bust, and that its historical parallel lies more in 1929 than in 1987 or 2001.

For the media industry, that’s obviously a good thing. Countless articles have outlined a financial pathology of profit-mongering bankers, biased ratings agencies, exotic financial instruments, and outmoded regulatory systems. On the normative side, there has been plenty of contention to feed on as well: Can twelve-figure injections of taxpayer money restore confidence and liquidity? What does a return to statism portend for the future?

In China, the crisis has likewise been a hot topic. That is partly because the Chinese economy is starting to suffer. Capital and housing markets have been mercurial of late, and even in the real economy, profit and production forecasts are growing bleaker. Nevertheless, there is comparatively little to worry about for now, as GDP is still growing far above the global average, under the aegis of a trillion-plus current account surplus and a risk-averse state sector.

A more compelling reason why people in China want to read about the crisis, then, is because this is not just about finance. It is also about power and order. In an ideological sense, we are revisiting polemics between the profit-seeking and the regulated society. In that context, it is not surprising to see China’s (nominal) socialists gloat over the woes of their rival across the Pacific. During a CNN interview in September, Premier Wen Jiabao noted that the PRC’s state-led economy would not allow capital markets to put the real economy in such peril. When Wen visited Wall Street in September, ostensibly to help solve the crisis, it may also have been a symbolic gesture to show that the tides of power are shifting to the East.

Besides ideology, media coverage illustrates that this is a struggle between the “experts” and the man on the street. When society prospers, the circulation (and accumulation) of vast wealth is left unquestioningly to a caste of finance gurus. Yet when crisis hits, common sense regains currency, and labels like greed, arrogance, and herd behavior are used to simplify complex issues.

Following Lehman’s bankruptcy in mid-September, three publications in China issued in-depth features on the Wall Street crisis. When compared, they illustrate that some perspectives on the issue are quite unique to China. At the same time, they show that a stratified media industry always produces various versions of the truth. Southern Weekly (南方周末), a weekly paper from Guangzhou sold for an affordable 3 yuan, uses plain language to draw in the common reader. The Economic Observer (经济观察报), while also priced at 3 yuan, is a weekly paper that writes slightly more incisively for the business community. Caijing (财经), by contrast, is a 15-yuan magazine aimed at a highbrow audience. The meticulous account of the crisis that it offers, albeit Western-oriented and elitist, perhaps comes closest to objectivity.

An empire’s end is nigh

Listening to liberal voices in the US intelligentsia, one finds that financial turmoil on the eve of a presidential election has prompted strong verdicts. Nobel Prize winning economist Joseph Stiglitz notes that America’s financial leadership has been discredited, for it is resorting to a rescue package that contradicts the fiscal austerity it stipulated through the IMF to Southeast Asian countries during the Asia crisis in 1997. In a satirical piece, Bonfire of the Vanities author Tom Wolfe claims that Wall Street is all but done for, and that the Masters of the Universe are now sitting pretty in the hedge funds of Greenwich, Connecticut. Perhaps the most acerbic critic is Stanford University’s Timothy Garton Ash, who sees Wall Street’s hyper-leveraging as symptomatic of US imperialist hubris in culture, economics, and foreign policy during the Bush administration.

From The Economic Observer, September 29, 2008

In China, however, America bashing is taken to a new level. This is most evident in The Economic Observer, where the headline of its Wall Street feature reads: “The Changing Tune of an Empire.” In the background, we see a skyline beneath a US flag waving in the wind. The article below narrates the fall of century-old investment houses and states:

As Wall Street’s death knell tolls, some wonder whether or not capitalism has already reached an end…Maybe in 50 years we will look back and discover that these fragments of history formed startling images. The cold and taut faces, the long shadows beneath the evening sun amid the ruins of investment banks — it is truly the opening canto of the changing tune of an empire.

To elaborate on this theme, the article offers a retrospective of US power over the past century, which “can ultimately be divided into military, financial, and intellectual hegemony.” In finance, bankers “in suits and leather shoes with laptops in hand bestrode the world” as “symbols of wealth and power that were just about invincible.” Fortune 500 companies like Microsoft and Intel formed the pillars of an intellectual property empire. In geopolitics, the US empire began with the decimation of European power in World War I. It was further consolidated by the Bretton Woods accords after World War II, which placed the dollar at the center of the world financial system. This “steady rise” (崛起, a term often used to described China’s current trajectory) hit its apex in the early 1990’s. when the end of the Cold War and a rout of Saddam’s forces confirmed the US as “ruler of the world.”

Yet by 2008, the article claims, the US has lost its status as “liberator”. Just as the “changing tune of the United Kingdom” came when Churchill aided the Poles in World War II, the US began its decline when it entered the second Iraq War. In consonance with this, a debt-ridden economy with a depreciated US dollar will now be relegated to secondary status on the world stage. The US might become like the UK: “No one doubts it’s strong, yet it no longer has the power to realize the past glory of empire.”

In Southern Weekly, an editorial focuses on how China might benefit from this historical moment. Titled “Global Financial Storm Might Become a ‘Coming-of-Age Present’ for the Chinese Economy”, it argues that as of this crisis, the US will start to submit to the challenge posed by emerging economies endowed with abundant resources and cheap labor. In the near term, it can still afford to resolve its problems by issuing more dollars and allowing other dollar-dependent countries to bear the burden of inflation. Yet as emerging economies move from low- to high-end production, they will become an “ineluctable force” that “eats away” at US production chains. The article concludes on a note of optimism for China’s future:

The rise of great nations, whilst not necessitating bloody “palace coups”, is often a “zero-sum game.” If we concede that Japan’s decade-long recession and Southeast Asia’s financial crisis were the fledgling cries of the baby eagle in China, then the sub-prime crisis is the “coming-of-age present” bestowed upon China in the international commercial system and the global financial market. It is only that China’s road to becoming a great nation is still a long one.

In Caijing magazine, the focus is exclusively on a new financial order. Hong Kong Securities Regulatory Commission chief Shen Liantao is quoted as saying that the world will abandon the dollar as chief currency: “When market participants lose confidence in the US’s position as ‘village head’, there will naturally be a shift in direction, and the Euro has given investors another choice.”

Caijing’s guest writer Xie Guozhong, chairman of Meigui Shigu Consulting, goes further to advocate majority ownership of US banks by foreign investors. At same point “the US will have no choice,” because its massive debt cannot be liquidated simply by tightening the fiscal belt. That is where sovereign wealth funds — in countries like China with big current account surpluses — can save the day. Yet for the time-being, that won’t happen, because “the US’s evaluation of itself is still too unrealistic.” Xie ends his piece by declaring the demise of US-style capitalism:

The post-Cold War era brought unprecedented prosperity, but it was driven in part by a continual housing bubble…At the Davos Economic Forum, we once praised US capitalism. But now, that model is no longer credible. We are entering another world.

The crisis in a nutshell for the hoi polloi

In China as anywhere else, most people are neophytes of finance who have been quite dizzied by the complexity of the Wall Street crisis. Most know that there is a grave problem, and they believe that rich bankers caused it. Yet how did it all go so wrong?

Southern Weekly, September 18, 2008

As a mass-market paper, Southern Weekly is quite good at making matters easier to understand. Emphasizing big numbers, first of all, is quite effective. To introduce the Lehman issue, it states that it is “the largest bankruptcy ever witnessed in the history of our planet.” As for the total value of the “over-the-counter” credit default swap market, numbers are equally staggering: 6.2 trillion dollars, more than total world GDP!

Analogies are another common sense way to relate an issue. When reading the opening lines of the first article in Southern Weekly, it is hard not recall the falling towers on 9/11:

The heart of the economy is finance, and Wall Street is the world’s financial center. If we use the metaphor of a large building to describe Wall Street, then the finance giants are its pillars. In the short span of the past few days, quite a few of these pillars have fallen like dominos.

Hence Wall Street has entered a “severe winter” akin to the Great Depression. The Lehman bankruptcy is most emblematic of that. Yet Lehman is not quite done for, for it is like a “centipede that dies but never falls down” — an old Chinese proverb meaning that old institutions die hard, aptly used here to show that Lehman still has its little legs in branches worldwide. If Lehman is a moribund centipede, then the still extant banks convened by Paulson on September 8 were a “beggars’ gang” in dire need of federal cash.

The big question, of course, is what really caused the crisis. The Economic Observer seems to suggest that, given Wall Street’s track record, it was only a matter of time. Captions spreading vertically down the right side of one page synopsize the many crises Wall Street has faced over the past 100 years. A rope runs down the middle of the captions and ends in a noose tied around a roll of dollar bills. The greenback is mounting the scaffold. The world will soon be using another currency.

A more trenchant explanation given for the crisis relates to human vices. In an article titled “Wall Street Stories” in The Economic Observer, the reader is given the impression that the average investment banker was just following the herd into disaster. Interviewed by the paper’s New York correspondent, a young Lehman employee explains that when he began trading at the tender age of 23, he didn’t care whether he was making bad deals or not, because he would get a 1 million dollar premium for a big transaction. Amid the optimism of 2006, his boss thought Dow Jones would hit 15000 points by 2007. “Of course I believed what he said,” the young man admits. “After all, he was my boss.” In China’s hierarchical culture, many readers would probably understand this reasoning.

When it comes to the real decision-makers, we are told that arrogance and greed were prime motivators. The perfect piñata is Lehman boss Richard Fuld, who said some years ago that arrogance is not a mistake, but a key to success. According to The Economic Observer, even when people said Lehman was done for, “Fuld didn’t want to believe the rumors.” When his company went bust, “Fuld paid the price for his arrogance.” On a similar note, a Southern Weekly article claims that Lehman’s risk management in recent years succumbed to “greedy thoughts of pursuing profit and market share” through mortgage-backed securities.

Southern Weekly even censures the hallowed heads of the Federal Reserve. Greenspan was “arrogant” when he lowered interest rates all the way down to 1% between 2001 and 2003, effectively precipitating the housing bubble. Paulson, by comparison, is spared such denigration, yet is blamed for repeating the mistakes of the 1980’s, when an initial rescue package of 25 billion eventually went up to 183 billion. Nonetheless, the Fed chief is praised as a fighter: “If the poor minister doesn’t reach the Yellow River, his heart won’t die.” This slightly pejorative proverb from the Qing era (1644-1911) basically means that, even when you’re facing disaster and there might be no way out, you struggle to the bitter end.

China gets some pretty good coverage in all this. If it weren’t for those cheap and good-quality “Made in China” goods that boosted the dollar, Southern Weekly argues, then the US would not have been able to “prodigiously spend the wealth of other nations.” The US went into debt knowing that China would use its current account surplus to purchase US government bonds.

Looking beyond China, The Economic Observer shows that Asia now stands to profit from the crisis. It reports extensively on Japanese banks’ purchases of Lehman Asia Pacific and Morgan Stanley shares, suggesting that Japanese finance will now achieve a long-awaited revival. It also reports on the Hong Kong banks that are buying some of the talent laid off by New York investment houses.

Of course, once readers have gotten a basic lay of the land, some will still want to ruminate on the nitty gritty details of the crisis. Here, Southern Weekly uses an ingenious approach. The reader is introduced to buyer A, mortgage lender B, investment bank C, and investor D. In China, “B” is the bank that lends mortgages and has the capital to do so; in the US, on the other hand, mortgage lender B gets capital from investment bank C, and C goes to investor D to procure funds. If A pays the mortgage, B, C, D all get a piece of the interest rate pie; but if A doesn’t pay, then B, C, and D are in big trouble. Then you can throw in insurance company E (aka AIG), which insures C’s risk by paying D if C can’t…

Do such wonderful explanations ever appear in Western newspapers?

In search of the truth: Gatsby or Kafka?

In contrast to Southern Weekly and The Economic Observer, Caijing is exceedingly sober and thorough in its feature. This is in keeping with the style that has come to be expected by its well-informed and elite readership. Following the hard-hitting op-ed by Xie Guozhong, the magazine’s feature, titled “Wall Street’s Judgment Day,” lets four lengthy articles run over twenty pages. Already early on, we are introduced to the nuances of collateral debt obligations, credit default swaps, and structured investment vehicles, a far cry from the A, B, C, D, E analogy used in Southern Weekly. To develop its arguments, Caijing canvasses the opinions of an expert elite that includes US policy makers, Ivy League economists, and investment bankers. Citigroup CEO Chuck Prince, Morgan Stanley China office head Li Xiaojia, and Tsinghua University Economics Professor John Thornton are among those frequently cited.

What seeps through the pages of Caijing is that the Wall Street crisis is an ambiguous reality. It is less about the misbehavior of individual actors, and more about a system that outgrew any one agent’s control. In this entangled web, as Xie Guozhong puts it, “the benefit of one was the benefit all, and the losses of one were the losses of all.” It is no longer just about pinpointing whether investment banks, ratings agencies, or regulators were most to blame; the question is also whether these institutions even knew what they were doing.

In regard to investment banks, Caijing allows us to see how deep the morass had become. It suggests that the bubble that led to the crisis began when investment banks listed on the stock market in the late 1990s. Pressure to deliver good profit margins to public shareholders led to a departure from low-profit, low-risk models of doing business. Concomitantly, “over-the-counter” trading based on complex computer modeling started to detract from traditional Wall Street trading, eventually blurring the lines between private equity, hedge funds, and investment banks. As mortgages were used as a basis for risky transactions — based on the shaky premise that housing prices would appreciate indefinitely — no one really took responsibility for risk. It was simply shifted, so that each link in the chain could earn an intermediary fee.

What role did the ratings agencies and due diligence play in all this? Caijing does give voice to theories of greed and collusion between these bodies and the banks, yet it only does so very briefly by citing others. The magazine devotes far more space to the subtle workings of these bodies. Due diligence did actually uncover faults in the system, yet the reports were not necessarily heeded by the loans agencies. Ratings agencies, for their part, may have been the victims of what Thornton calls “asymmetric information”: their ability to rate securities accurately was undermined by a lack of time and resources to sufficiently evaluate information. Meanwhile, banks could not get timely information on other companies involved in the securities they were packaging, and so relied excessively on ratings agencies.

To describe the failure of this opaque system of exotic financial instruments, Caijing provides some clever analogies. The financial packages were like the “emperor’s new clothes”: once sources of liquidity dry up, there is no way to cover up the extreme expenditures in the housing market. Or in the words of Morgan Stanley’s China Office head Li Xiaojia: “The bubble was a lovely banquet, and when the banquet suddenly ends, all wonderful designs only serve to exacerbate the problem.”

As Xie Guozhong notes, the hidden danger of this labyrinth of debt securitization is that it exposes few culprits:

Perhaps, executives will one day be fined for their actions. The lucky survivors, though, will still go on disbelieving that their success was just an illusion. They will continue to protect their kingdom. When there’s a bubble, all you need is temerity, not intelligence. Success itself makes Wall Street big shots feel they are intelligent. That is why their final act has been so tragically bitter: they themselves cannot grasp the financial instruments of their own creation.

If there is an antagonist in this drama, it is the government. How could it allow investment banks’ capital adequacy rates, for instance, to go down to 1-2% when the legal minimum was 8%? Caijing also gives voice to Chuck Prince’s complaints about the US’s fragmented regulatory system, in which commercial banks, investment banks, and insurance companies are regulated by separate agencies in spite of their joint business dealings. Worse still, when the crisis became imminent early this year, the Fed mounted a very patchy rescue operation. By allowing Lehman to go bankrupt, it was, in Xie Guozhong’s words, “killing the chicken for the monkey to see.” It wanted to set an example by not rescuing a company that couldn’t save itself. Yet when the “monkey” — AIG — was in trouble, the Fed did spring into action, thus setting double standards.

While throwing some heavy punches, Caijing is still able to show that the US is not a monolithic entity that universally espouses free market capitalism. We hear from plenty of critics inside the US. In regard to the rescue package, for example, Princeton economist Paul Krugman makes the socialist proposal that taxpayers should become shareholders in the banks they are bailing out. Even members of the Senate Banking Committee voice worries that Paulson’s rescue package endangers the Constitution by giving the Fed too many unchecked powers.

Looking ahead, Caijing points to a “philosophical dilemma” that will affect not just the US, but the entire world economy: how do you strike a balance between regulation and a free market? Won’t it always be a “cat and mouse” game where the very purpose of financial tools is to outwit regulators? As Thornton notes, the recent marriage of commercial and investment banks cannot last, because the growth of the economy will always be driven by risk.

In conclusion, then, our search for the truth about the Wall Street crisis leaves us with two main choices. For aesthetic purposes, we can draw them from great literature. In F. Scott Fitzgerald’s The Great Gatsby, we encounter a profound critique of the rampant capitalism that characterized the “roaring twenties,” a period in US history not unlike the early 21st century. Intoxicated by quick money, the protagonists descend into a fin-de-siècle mindset that corrupts and deludes. They form a convenient parallel to the portraits of bankers we read about in Southern Weekly and the The Economic Observer.

On the other hand, we might see the crisis through the lens of Franz Kafka’s The Castle. Here, the protagonist futilely struggles to enter a semi-illusionary castle. No one really knows who runs the castle, how many rooms it has, or what goes on inside; yet no one dares question its power. The castle, in my opinion, is the most fitting metaphor for the subprime bubble as it is depicted in Caijing magazine.