Carl Walter and exposing the brittle facade of Chinese public as well as corporate finance

• Published date: 01 June 2023
• Author: Don Chew
• Date: 01 June 2023
• DOI: http://doi.org/10.1111/jacf.12566

DOI: 10.1111/jacf.12566

ORIGINAL ARTICLE

Carl Walter and exposing the brittle facade of Chinese public as well as

corporate f‌inance

Don Chew

Correspondence

Don Chew

Journal of Applied Corporate Finance

Email: don.chewnyc@gmail.com

This article will appear as Chapter 10 of the author’sf orthcoming book, The Making of ModernCorporate Finance, Columbia University Press, 2023.

INTRODUCTION

After the collapse of the Maoist revolution at the end of the

1970s, a 30-year-old named Carl Walter was among the f‌irst

American graduate students to be allowed to study in China

since 1949. Along with f‌luency in Mandarin, he was able

to acquire enough material during his f‌irst stay in Beijing—

which earned him a certif‌icate in “advanced study” from Peking

University—to complete his Ph.D. dissertation back at Stan-

ford in 1981. The subject was the workings of China’s central

bank.

But rather than become an academic, Carl became an invest-

ment banker. And after several years in Taipei and then Tokyo,he

moved in 1992 to Beijing, where he lived and worked for the next

20 years. During that time, he played a leading role in China’sf‌irst

IPO, Brilliance China Automotive, which had a “blow-out listing”

on the New York Stock Exchange in October 1992. Then, after

establishing Credit Suisse First Boston’s China off‌ice in Beijing, he

helped “lead-manage” the f‌irst listing of a state-owned enterprise,

Shandong Huaneng Power, on the New York Stock Exchange in

August 1994.

The next moves in Carl’s career brought him as close to

becoming an “insider” in Chinese f‌inance as any Westerner

is likely to get. After joining Morgan Stanley in 1999, he

became a member of the Management Committee of China

International Capital Corporation (CICC), China’s f‌irst and

most successful joint venture investment bank. In that role,

he not only supported debt and stock offerings by Chinese

companies but served as an informal adviser on a number

of reforms of Chinese capital markets and corporate f‌inancial

practices.

But as will become clear in the pages that follow, these attempts

at adopting Western-style markets and corporate practices have

fallen well short of what their planners and promoters—

Carl not least among them—had envisioned and hoped

for.

THE RISE OF RED CAPITALISM (OR THE

TRAPPINGS, WITHOUT THE SUBSTANCE, OF

MODERN CORPORATE FINANCE)

My introduction to Chinese corporate f‌inance took place in the

summer of 2014 when I f‌irst met Carl at a conference held on

the campus of Hong Kong Polytechnic University in Kowloon.

He was the keynote speaker, and both the occasion and the matter

for his opening talk were provided by his 2010 book Red Capi-

talism, co-written by fellow banker Fraser Howie and bearing the

provocative subtitle, The Fragile Financial Foundation of China’s

Extraordinary Rise.1

The main argument of the book—which was recognized by

both The Economist and Bloomberg as “ABest Book of the Year”—

is that despite the best intentions of would-be reformers, China

has ended up adopting the forms, but not the substance, of

Western capital markets. With considerable help from US invest-

ment banks like Goldman Sachs and Morgan Stanley, China has

succeeded in replicating the entire panoply of institutions that

support public capital markets, from stock exchanges to regula-

tors and auditors to listed companies large enough to justify the

costs of raising public equity capital.

But as Carl makes clear in the book, the prof‌itability and

underlying fundamental values of most of China’s publicly

traded companies—two-thirds of their state-owned enterprises (or

SOEs)—are largely an illusion created and sustained by two things

you rarely see in today’sWestern markets: (1) government-granted

monopolies and protection against foreign competitors; and (2)

a seemingly endless supply of cheap capital provided entirely by

China’s state-owned banks, whose main mandate, as established

and enforced by the Chinese Communist Party, is to promote

domestic growth, full employment, and the f‌inancial stability of

the SOEs.

1This book, and the keynote speech, drew heavily on Carl’s f‌irst book, Privatizing China:

Inside China’s StockMarkets. John Wiley, 2005.

J. Appl. Corp. Finance. 2023;35:49–56. © 2023 Cantillon & Mann.49wileyonlinelibrary.com/journal/jacf