Financier Weijian Shan made a boatload of money for himself and his Western partners when their Newbridge Capital became the first foreign firm to buy a state-owned Chinese national bank at least since the Communist victory in 1949 and sell it six years later. Shan’s Money Machine: A Trailblazing American Venture in China promises to explain the deal and its significance, but for readers looking to understand how China operates, the book disappoints.

That’s probably a good move by Shan personally. In the era of President Xi Jinping, outspoken multimillionaires tend to have problems—even ones, like Shan, based out of Hong Kong rather than the mainland. Sometimes, the reader learns more about China from what Shan doesn’t say than what he does.

Shan has a lot he could teach. In a well-received earlier book, Out of Gobi: My Story of China and America, he recounts his time in Inner Mongolia during the Cultural Revolution. As a “sent-down” teenager born in October 1953, he dug potatoes—enthusiastically, at first—became a barefoot doctor, and was so deprived that he ate stray dogs and cats. But he quickly realized that his construction unit was lousy at farming and was hated by the local peasants. Through grit, he eventually managed to get an education and earn a Ph.D. in the United States.

In that book, he took some mild shots at Mao Zedong’s Great Leap Forward (a “man-made famine”) and Deng Xiaoping’s Tiananmen Square repression. (“I was completely shocked” the troops opened fire.) But for the most part, Shan, who left academia for private equity, has been broadly supportive of the government. In his frequent essays in the South China Morning Post he has backed China’s claims to the South China Sea and supported Beijing’s crackdown on Hong Kong’s democracy movement and what he described as a “war on terror” in Xinjiang.

Last spring, though, he inadvertently ran into trouble when the Financial Times reported on private comments he made to brokers while he was pitching shares of PAG, a private-equity firm he co-founded. China’s economy was “in the worst shape in the past 30 years,” he said, laying the blame on the country’s rulers while they were carrying out China’s draconian zero-COVID lockdowns.

“I think to a very large extent the crisis is man-made,” Shan told the brokers. “We have a leadership who thinks they know what is best for the economy and what is best for the livelihood of the people. Unfortunately, I think their knowledge and their rationality are both limited.”

Since then, Shan has gone uncharacteristically quiet, publishing only a single article in the South China Morning Post and quoted  a handful of times in the English-language  press on economic issues, and Money Machine is cautious in the extreme. Shan endlessly discusses which potential deals might pass regulatory muster but says nearly nothing about broader Chinese economic or political issues. In the repressive Xi era, that caution is probably warranted—witness the recent disappearance of tech financier Bao Fan or the targeting and silencing of once-outspoken Alibaba billionaire co-founder Jack Ma—but the reader is shortchanged.

Money Machine opens in 2002, just after China joined the World Trade Organization (WTO). The city of Shenzhen, across from Hong Kong, wanted to advertise itself as China’s reform leader. An executive at Shenzhen Development Bank (SDB), a mid-sized Chinese bank with branches across the country, approached Shan with the tip that the city wanted to sell its approximately 20 percent stake in the bank, a sale that the WTO deal would make possible. Shan was a partner at Newbridge, a private-equity investment partnership founded in 1994 by Richard C. Blum and David Bonderman to invest in Asia. Eventually, Newbridge became an investment arm of Bonderman’s TPG Inc., and Shan left to found his own private-equity firm.

With SDB’s shares widely held, purchasing Shenzhen’s stake would give Newbridge Capital a controlling interest—the first time a foreign firm would own a Chinese national bank post-Mao.

The proposed sale was part of Chinese Premier Zhu Rongji’s plan to reform state-owned banks by bringing in foreign expertise to pare down the banks’ worthless debts, which by some estimates accounted for 15 percent to 30 percent of Chinese bank loans.

At the time, the Chinese government set both the rates that banks charged customers and the lower rates banks paid depositors. Beijing made sure that the banks had a healthy profit margin, even though depositors got screwed. “Financial repression,” economists politely called the system, which funneled the public’s savings into state assets, helping fuel the country’s development boom, albeit at a sharp cost to ordinary households. To Shan it was “a license to print money.”

Read More

Is America’s China Policy Too Hawkish?

Jessica Chen Weiss on why she thinks competition with China is consuming U.S. foreign policy—and what the United States needs to do about it.

Q&A |

Ravi Agrawal

China Is Pushing Disengagement With the United States Hard

Beijing paints Washington as an implacable and inevitable opponent.

Argument |

Covell Meyskens

China’s Ukraine Peace Plan Is Actually About Taiwan

Beijing’s phony proposal lays bare its conditions for winning an East Asian war.

Analysis |

Craig Singleton

But making money in Chinese banking wasn’t quite that simple. If a bank had too many worthless loans, it couldn’t make a profit, no matter the size of the spread. The banks had little expertise in telling viable loans from bad ones, and many deals were based on politics and nepotism. The challenge for Newbridge was to a) collect the poor loans or dispose of them and b) be more selective in making new loans. Shan thought Newbridge could manage that and could count on China’s rapid growth to vastly increase bank revenue. He negotiated a deal to purchase Shenzhen’s shares for $150 million.

Then, surprisingly, the deal started to fall apart. Although Shenzhen’s mayor backed the deal, the vice mayor suddenly got cold feet. More importantly, so did Shenzhen’s Communist Party secretary, the city’s most important politician. She wanted to sell SDB to a Taiwanese firm, even though Newbridge and Shenzhen had already signed a purchase agreement. Why the reversal? Shan is silent on this in the book. Readers are left to make their own deductions. Some obvious answers leap to mind. Corruption? Greater comfort level with Taiwanese buyers than Shan’s American partners?

A little digging, which Shan doesn’t do, provides some intriguing clues. The party secretary, Huang Liman, was a onetime protege of Jiang Zemin, who was then finishing up his term as Chinese Communist Party chief and still held enormous power. That would have given Huang the leverage to try to undo a deal, whatever her motivation was. During the midst of her power play, Yu Youjun, the mayor who supported Newbridge, was suddenly transferred to become vice governor of Hunan province.

As for the vice mayor, Chen Yingchun, who worked to break the Newbridge contract, he was later implicated in a graft probe, according to the South China Morning Post, though he kept his job. In 2016, Chen died when he fell from a building.

Shan does give an account of how he tried to keep the deal together, even if he’s silent on what might have been going on backstage. He looked to embarrass Shenzhen and call into question its commitment to reform.

To do so, he courted the foreign press, talking to reporters about the historic importance of the deal. He had the U.S. ambassador deliver a letter to Chinese Premier Wen Jiabao complaining about how Newbridge was being treated. “We believe that the Chinese government appreciates the stature of a major international firm like ours and welcomes our participation in the reform of a banking system,” Shan wrote.

Even that may not have been enough to push through the deal. In China, the central government often defers to local fiefdoms, particularly those run by politicians like Huang with ties to national leaders.

Shan could also count on the backing of the reform-minded banking regulator Liu Mingkang. Liu informed Shenzhen officials that it would be “very difficult” to approve the sale to a Taiwanese firm because Beijing and Taipei at the time didn’t have official regulatory relations. That nixed the Taiwanese banking suitors. Shan also filed for international arbitration, which flummoxed Shenzhen authorities who hadn’t dealt with a foreign legal system. After two and a half years of haggling, Newbridge gained control of SDB at the end of 2004.

At this point the reader might expect Shan to explain in detail how foreign managers turned SDB around, which even its employees considered a stinker of a bank. But he provides more of an outline than a handbook.

Early on, Shan gave a pep talk to SDB employees used to the lumbering ways of state-owned firms. China has too often been ruled by unjust emperors who couldn’t be replaced, he said, searching for a metaphor that would strike home. State-owned firms also have untouchable chiefs. “The market economy is better because it has a mechanism to get rid of bad apples,” he explained—namely by firing incompetent or corrupt ones.

Shan outlines the steps his firm took to reform SDB. Newbridge created a division to handle bad debts and tried to segregate those loans from the rest of the firm. It hired people for competence, not nepotism, and tied executive compensation to performance. To try to reduce sweetheart loans, credit officers approved loans, not the CEO or branch managers. Most importantly, Shan says, he brought in Frank Newman, an American banking veteran who had turned around Bankers Trust and other troubled U.S. banks, to run SDB. Newman figured out how to make loans more attractive to the bank’s mid-sized corporate customers.

Another plus: Newman had been deputy treasury secretary during the Clinton administration, which impressed status-conscious Chinese bureaucrats. He called himself a “bank repairman” and went to work.

The fix-it part of the book is fascinating but gets short shrift—just 30-odd pages in a 300-page book.

Although Newbridge had promised to own the bank for at least five years, Shan started looking for ways to sell it well before that time frame. A lot of potential deals fell apart for one reason or another. Some potential deals would have run afoul of regulators’ attempts to dilute the shares owned by state-owned entities. Other times, regulators were wary of Shan’s different corporate-financing schemes.

Shan spends nearly as much time describing the ins and outs of convertible bonds as he does on how Newman and team transformed SDB. The book’s dramatic tension revolves around whether selling SDB would make Shan and his partners much richer or much, much richer. Really, who cares?

For deeper looks at how the Chinese economy actually operates, try Red Capitalism, co-written by a former executive at JP Morgan who discusses China’s reckless lending; Red Roulette, which describes how the author tried to get ahead by cozying up to the wife of China’s premier; or The Myth of Chinese Capitalism, which shows how China’s manufacturing juggernaut depends on exploiting peasants.

Eventually, in 2010, Shan managed to sell the bank to Ping An Insurance Group, a big Chinese insurer, for a net of $2.27 billion, more than 14 times what Newbridge had paid. Ping An used SDB to expand its banking business nationally and has become the largest shareholder in Britain’s venerable Hong Kong bank, HSBC Holdings Plc.

Ping An’s co-founder, Ma Mingzhe, whom Shan calls Peter Ma in the book, is a prominent Chinese wheeler-dealer himself. In 1999, the New York Times reported, he won approval from China’s central bank to ease requirements that would have forced a Ping An breakup. Among those Ma lobbied was Wen Jiabao, then vice premier. Wen’s family grew wealthy in large part by buying Ping An shares eight months after the insurer’s waiver was approved.

In one of the most interesting passages of the book, Shan boasts of manipulating the Chinese press to present the Ping An deal in the best light. He describes what he calls “soft articles” where “often the reporters or publishers took the articles fed to them without much change or editing.” His biggest complaint: He had to review or rewrite four or five articles a day “to make certain both facts and messages were correct before I gave final approval for their release.” He doesn’t say whether he paid to have the articles placed and, if so, how much. Pay-for-play is a common practice in Chinese journalism, where reporters often expect to collect red envelopes of cash even at routine press conferences.

At the end of the book, Shan asserts that Newbridge’s impact on Chinese banking reform was “profound and obvious in retrospect.”

Not really.

As he notes, only one other foreign financial institution, Citibank, purchased a Chinese national bank, and that was as part of a consortium with Chinese financial institutions. After 10 years, Citi sold its shares. So Shan’s SDB purchase hardly started a trend. China’s major banks have sold only small portions of their shares to the public and remain overwhelmingly state-owned.

Zhu Rongji got what he wanted: better-managed state-owned banks. Non-performing loans were greatly reduced, and Chinese banks expanded globally. Foreign capital and expertise made China Inc. stronger.

Whether the financial system will continue to prosper is an open question since Xi took power and increased party control over the economy. China’s largest banks were already known for favoring state-owned firms, rather than entrepreneurial ones that could pioneer new industries. Xi is expected to appoint cronies to run the central bank and revive a party committee to oversee the financial sector.

But was a financially more robust China actually in the interests of Newbridge’s home country, the United States? Shan doesn’t raise the question. U.S. policymakers and business executives once took it as an article of faith that a stronger and more prosperous China was in America’s interest. Now, even those who favor engagement with China are reassessing.

“Our interests are more complex,” said former Treasury Secretary Larry Summers in an interview in The Wire China. “China is both our competitor and our customer. It’s good when your customer gets richer. It’s bad when your competitor gets more effective.”

More than 20 years after China joined the WTO, here’s what the U.S. Trade Representative says about the Chinese banking system: “Although China has opened its banking sector to foreign competition in the form of wholly foreign-owned banks, China has maintained restrictions on market access in other ways that have kept foreign banks from establishing, expanding and obtaining significant market share in China.”

Among those favored by Beijing are Morgan Stanley and JPMorgan. Both recently got the go-ahead to operate wholly owned mutual fund businesses in China. Beijing counts on Wall Street to do its lobbying in Washington. For many American financiers, China is still a money machine.