Finance and Society in 21st Century China : Chinese Culture Versus Western Markets [1 ed.] 9781317135227, 9781409401292

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Finance and Society in 21st Century China

Transformation and Innovation Series Series Editors: Ronnie Lessem, University of Buckingham, UK Alexander Schieffer, University of St. Gallen, Switzerland This series on enterprise transformation and social innovation comprises a range of books informing practitioners, consultants, organization developers, development agents and academics how businesses and other organizations, as well as the discipline of economics itself, can and will have to be transformed. The series prepares the ground for viable twentyfirst entury enterprises and a sustainable macroeconomic system. A new kind of R&D, involving social, as well as technological innovation, needs to be supported by integrated and participative action research in the social sciences. Focusing on new, emerging kinds of public, social and sustainable entrepreneurship originating from all corners of the world and from different cultures, books in this series will help those operating at the interface between enterprise and society to mediate between the two and will help schools teaching management and economics to re-engage with their founding principles.

Current titles in this series Transformation Management Towards the Integral Enterprise Ronnie Lessem and Alexander Schieffer ISBN 978-0-566-08896-4 Integral Research and Innovation Transforming Enterprise and Society Ronnie Lessem and Alexander Schieffer ISBN 978-0-566-08918-3 Integral Economics Releasing the Economic Genius of Your Society Ronnie Lessem and Alexander Schieffer ISBN 978-0-566-09247-3 Finance at the Threshold Rethinking the Real and Financial Economies Christopher Houghton Budd ISBN 978-0-566-09211-4 Culture and Economics in the Global Community: A Framework for Socioeconomic Development Kensei Hiwaki ISBN 978-1-4094-0412-5

Finance and Society in 21st Century China Chinese Culture versus Western Markets

Junie T. Tong

Centre for Teaching in Management, Birmingham, UK

First published 2011 by Gower Publishing Published 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright © Junie T. Tong 2011 Junie T. Tong has asserted her moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Gower Applied Business Research Our programme provides leaders, practitioners, scholars and researchers with thought provoking, cutting edge books that combine conceptual insights, interdisciplinary rigour and practical relevance in key areas of business and management. British Library Cataloguing in Publication Data Tong, Junie T. Finance and society in 21st century China : Chinese culture versus Western markets. -- (Transformation and innovation) 1. Banks and banking--China. 2. Finance--Social aspects-China. 3. China--Economic conditions--2000I. Title II. Series 332.1'0951'0905-dc22 Library of Congress Cataloging-in-Publication Data Tong, Junie T. Finance and society in 21st century China : Chinese culture versus Western markets / Junie T. Tong. p. cm. -- (Transformation and innovation) Includes bibliographical references and index. ISBN 978-1-4094-0129-2 (hbk.) 1. Finance--Social aspects--China. 2. China--Economic conditions--21st century. 3. China--Social conditions--21st century. 4. China--Civilization--21st century. I. Title. HG187.C6T66 2011 332.0951--dc22 2011012930 ISBN 9781409401292 (hbk)

Contents

List of Figures and Tables Prologue: Time for Financial Transformation

ix xi

Chapter 1

From Investment Banking to Finance-in-Society Introduction 1.1 1.2 Life as Story 1.3 Life as Transformation 1.4 Conclusion

1 1 2 6 12

Chapter 2

Finance and Society 2.1 Introduction 2.2 Background of Banking and Finance – The Global Context 2.3 Background of Chinese Banking and Finance – The Local Context The Derivation of Knowledge 2.4 2.5 Conclusion

15 15 17

Chapter 3

Finance and Humanity 3.1 Introduction Background and Development – The Global Context 3.2 3.3 Background and Development – The Chinese Context 3.4 Time to be Critically Conscious Conclusion 3.5

29 29 29 30 35 37

Chapter 4

Banking and Finance in a Global Context 4.1 Introduction 4.2 Capitalism versus Socialism 4.3 Conclusion

39 39 40 52

Chapter 5

The Developmental Path of Finance 5.1 Introduction 5.2 The Historical Development of Banking and Finance 5.3 Centuries of Financial Crises and Crashes 5.4 Conclusion

57 57 57 59 68

19 21 24

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Finance and Society in 21st Century China

Chapter 6

The Interdisciplinary Nature of Finance 6.1 Introduction 6.2 The Different Concepts of Critical Theory 6.3 Critical Theory in Relation to Banking and Finance 6.4 Critical Consciousness 6.5 Conclusion

75 75 79 83 84 84

Chapter 7

Chinese Philosophy in Banking and Finance 7.1 Introduction 7.2 The Concepts of Chinese Philosophy 7.3 The Key Chinese Tenets in the Context of Finance 7.4 Conclusion

87 87 88 89 96

Chapter 8

The Story of Modern China 8.1 Introduction 8.2 The Historical, Social and Economic Transformation of China 8.3 The Unsettling Era of Reformation Socio-Political and Socio-Economic Struggles and Reforms 8.4 8.5 Conclusion

99 99 100 105 109 113

Narrative, Philosophy and Application: Banking and Finance in China Introduction 9.1 9.2 The Original Chinese Financial Industry 9.3 The Original Local Chinese Bankers 9.4 The Modern Chinese Financial Crises 9.5 Conclusion

117 117 118 121 125 128

Chapter 9

Chapter 10

Chapter 11

China Construction Bank Corporation: From Critical Consciousness to Balance and Harmony 10.1 Introduction How to Derive the Knowledge 10.2 10.3 Historical Development 10.4 Life as Transformation – The Transformation of the Chinese State-Owned Commercial Banks 10.5 From Dogmatic Training to Conscious Learning 10.6 Conclusion The Grameen Bank: Life as a Story and as a Journey 11.1 Introduction 11.2 How to Derive Knowledge 11.3 Historical Development 11.4 Life as Transformation 11.5 The Rural Bank for the Poor 11.6 Conclusion

131 131 132 133 135 137 144 147 147 149 151 153 156 162

Contents

Chapter 12

Chapter 13

Catalyst Foundation: Participatory Action and Empowerment 12.1 Introduction 12.2 Deriving the Knowledge 12.3 Historical Development – North-East China 12.4 Life as Transformation 12.5 Effecting Participatory Collective Action 12.6 Catalyst Foundation – A Chinese-Contextualized Finance-in-Society Model 12.7 Conclusion

vii

165 165 168 170 172 174 178 187

The Finance-in-Society Model 193 13.1 Introduction 193 Background and Development 193 13.2 13.3 The Theory and Practice of the Finance-in-Society Model 195 13.4 Measurement and Evaluation 203 13.5 The Finance-in-Society Model in the Chinese Context 205 13.6 The Future Development of the Finance-in-Society Model 205 208 13.7 Conclusion

Index215

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List of Figures and Tables Figures Figure 3.1

The masculine–yang-characterized banking and finance

32

Figure 7.1

The interdisciplinary Five Elements philosophical knowledge base

92

Figure 9.1

An interdisciplinary interpretation of the socio-economic and socio-political environment of China from the late 19th to mid-20th century

Figure 13.1 Figure 13.2 Figure 13.3 Figure 13.4 Figure 13.5 Figure 13.6

The interconnection of theory and practice within the Finance-in-Society Model The western methodological theory base of the Finance-inSociety Model The Chinese philosophical theory base of the Finance-inSociety Model The theory of the Finance-in-Society Model Characteristics of conventional banking and finance versus the Finance-in-Society Model Orientation and practice of conventional finance versus the Finance-in-Society Model

124

195 196 197 197 206 206

Table Table 4.1

Credit unions versus international financial institutions 

52

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Prologue: Time for Financial Transformation

Happiness will not be found in mere possessions, more spending, greater material prosperity or greater job satisfaction. Happiness and purposeful living go together. Ken Costa

While the world was inclined to look to China to possibly lift the global economy out of the recession caused by the sub-prime mortgage market collapse, beneath its impressive US$2.65 trillion plus foreign exchange reserves recorded in September 2010 and the 8.7 per cent gross domestic product (GDP) growth for 2009 and an estimated 10 per cent growth for 2010, China is, in fact, challenged by increasing social and economic threats and uncertainties. Overtaking Japan and becoming the second largest of the world’s economies means China’s socio-economic stability and sustainability have an unprecedented influence on global order and peace. Despite the fact that, at 8.7 per cent, GDP growth in 2009 was stronger than many other countries could have achieved, it was the slowest for the Chinese economy since 2001. It is suspected that about 80 per cent of the 8.7 per cent growth was attributed to a Renminbi (RMB) 4 trillion stimulus package and, if this really is the case, it only reflects the fact that the massive Chinese domestic economy does not yet have the capacity to be resilient in the face of global financial and economic crises without government stimulus. Those who believed that China had already outgrown its reliance on its western counterparts might have been disappointed by the reality that the country was still very much dependent on exports and foreign investments. The collapse in exports and the slowdown of foreign investment have, in turn, caused job losses throughout China. Underlying the 8.7 per cent economic growth was the total amount of new bank loans extended in 2009, equivalent to RMB 9.6 trillion versus RMB 4.2 trillion in 2008. Alongside this huge amount of lending, massive infrastructure projects were undertaken and there was an upsurge of property prices in major cities throughout the country. Also in 2009, the Shanghai Stock Exchange had the third largest trading turnover anywhere. Even so, the rate of urban registered unemployment was 4.3 per cent, compared to 4.2 per cent a year before. The unemployment situation elsewhere in the labour force, including the urban unregistered workforce, migrant workforce and surplus rural workforce remain unknown. Nevertheless, from the fact that farmers were refusing to buy governmentsubsidized electrical appliances, fearing they would not be able to afford the utility costs to operate them, it is reasonable to guess that the rural unemployment situation is not improving.

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Finance and Society in 21st Century China

While the sub-prime-led recession has undoubtedly exposed underlying Chinese social and economic problems, it has also raised concerns about the country’s sustainability. Taking lessons from the sub-prime financial crisis, Bernard Lietaer points out that the financial system provides the foundation for the sustainability of other socio-economic subsystems. To a large extent, therefore, the stability of the Chinese financial system is the core consideration determining the future of both the country and its trading partners. The present Chinese financial structure, however, is very much operated and evaluated according to a mathematically driven and politically dominated orientation. Any connection between the financial structures and the roots of Chinese culture or any integration of finance and culture seems to be missing. It is sadly the case that socioeconomic foundations not properly embedded in wider culture tend to be fragile and unsustainable. During the seven years I have spent in China since my first visit to Beijing back in 1983, I have witnessed an alarmingly growing disconnection between the Chinese people and their original traditions and cultures. It is very sad and worrying to see a younger generation who are largely obsessed with materialism and compulsive greed. Their loss of identity and values has led to emptiness and purposelessness. Life is, indeed, occupied by the pursuit of money and selfish pleasure. As an entrepreneur and ex-investment banker, I fully see and understand the risk of short-termism, particularly when it has become a dominant trait of Chinese society at large. Short-termism is one of the most damaging causes of financial instability. On the one hand, this book addresses concerns about the socio-economic reality of today’s China and, on the other, it also reflects awareness of a disconnection between currently witnessed phenomena and traditional Chinese thinking involving a belief in there being an important cosmic rhythm. It is possible that this disconnection between cultural traditions and present reality could lead to disintegration and unsustainable development. The implicit traditional Chinese belief is in a correspondence whereby everything is interconnected, in tune with a cosmic rhythm shared by all. Accordingly, it is thought that if any one of the cosmological elements is missing or in disorder, the overall rhythm will be interrupted and chaos will result. Given the fundamental role of finance within the entire socio-economic paradigm, the interdependent philosophy of the Five Elements provides an irreplaceable metaphor, from the perspective of Chinese spirituality, for the study and operation of financial systems. From the Chinese perspective, while the Yin-Yang school emphasizes the importance of balance, the theory of the Five Elements provides an intersubjective universal principle for the harmonious development of the socio-economic system. Since finance has hitherto been used largely as a tool for profit accumulation, the growth and development of other socio-economic subsystems has suffered as a result. This book aims to provide a view and understanding of the critical issues of banking and finance from both global and local Chinese perspectives. On the one hand, it is intended to raise awareness of the severe social and economic disruption that finance has caused from a global perspective. It also aims to increase consciousness of the particular threats and challenges resulting from the current disengagement of finance in China from its cultural roots. Since the Opium Wars, the Chinese have for generations been trying to find solutions for successfully transforming the country. We currently inhabit one of the most dynamic and most challenging periods of social and economic transformation in modern Chinese

P r o l o g u e : T i m e f o r F i n a n c i a l Tr a n s f o r m a t i o n

xiii

history. The Chinese economy is increasingly important to global development and there is a plan for Shanghai to become a leading international financial centre. Roger Lindsay, Senior Vice President, Asia Pacific, for Timken, takes the view that it would be good for Shanghai to be such an international financial centre. He also makes the point, however, that challenges associated with transparent financial reporting, freedom of foreign exchanges, financial compliance and ethical behaviour present hurdles which remain to be overcome. It is important for Shanghai to become a centre that supports financial stability and broader socio-economic sustainability. This book aims to encourage reconnection of the Chinese financial system with its original cultural roots. It offers Chinese society a new kind of financial knowledge and illustrates the theory and practice of a Finance-in-Society Model that can be established, developed and operated. Such a Chinese-contextualized model could effect a transformation during the 21st century, leading to a sustainable financial system based on trust.

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chapter

1 From Investment Banking to Finance-in-Society

There is more than symbolism in this difference: one cannot come to learn about, and love, a nation unless one gets out to the countryside. One should not see unemployment as just a statistic, an economic ‘body count’, the unintended casualties in the fight against inflation or to ensure that Western banks get repaid. The unemployed are people, with families, whose lives are affected – sometimes devastated – by the economic policies that outsiders recommend, and, in the case of IMF, effectively impose. Stiglitz, 2002

1.1 Introduction My goal in writing this book is to hopefully effect social and economic transformation. Given that social and economic transformation and critical theory are rooted in history, they both emphasize the acquisition of deep understanding as the foundation of cognitive knowledge. Cognitive knowledge is, in fact, acquired from the thoughts, experiences and senses of each individual who is embedded in his or her particular history, society, economy, psychology and philosophy. For Habermas, cognitive knowledge also involves the moment of self-reflection and self-understanding. Therefore, a consistently and constantly self-reflective life story is an essential part of the process of attaining cognitive knowledge. Through self-emancipation and self-reflection, deep understanding can be fostered. I am going to start by narrating the story of my life which furnishes the underlying causes of my departure from a career in investment banking and international finance for one in socio-economic finance. First of all, I must express my sincere gratitude to Professor Ronnie Lessem at the University of Buckingham. He has played a major role in guiding me through the present journey in my life. I remember when I first met Ronnie in the summer of 2002 when I returned to London. Our discussion was about my doctoral research plan when he emphasized the importance of rooting the research in my own life story and experience. In Ordinary Wisdom: Biographical Aging and the Journey of Life, Randall and Kenyon state, ‘Central to the transformation of life into lifestory, and of raw events into experiencable episodes, we would propose, is narrative intelligence, a capacity on which psychology has been remarkably mute.’1 It is, therefore, critical for me to tell my life story in order to reflect on and rediscover my past as a key part of understanding myself as well as banking and finance. As Randall and Kenyon put it, ‘We access our own wisdom only by telling “the story of my life” – that is, by getting it out and then stepping back from it to investigate and interpret it; in short, to read it.’2 The roots of my family set the scene of my life story.

2

Finance and Society in 21st Century China

1.2 Life as Story 1.2.1 From Hong Kong to England Hong Kong, the city where I spent my early childhood, celebrated the twelfth anniversary of the city’s handover to its motherland in July 2009. On 1 July 1997, Hong Kong was returned to the ownership of the People’s Republic of China (PRC) by the British Government. The Treaty of Nanking, following the defeat of China in the Opium War, ceded Hong Kong to British governance until the Joint Declaration signed by both the British and Chinese Governments in 1984. The Treaty reaffirmed the PRC’s right to regain its sovereignty over Hong Kong under ‘one country, two systems’ with effect from 1 July 1997. In ‘One-horse race: A special report on Hong Kong’, Long states the following: The whole point of Hong Kong, both for the people living there and the foreigners doing business with it, was that it was not quite China. It was a place of refugees, ‘a Chinese colony that happen[ed] to be run by Britain’, according to its historian, Frank Welsh. By 1997 it had become a prosperous, service-oriented economy and a sophisticated cosmopolitan society. China was a poor agricultural nation in the throes of the world’s fastest industrial revolution.3

From being a part of China, to becoming a British colony and eventually being handed back to China, Hong Kong has a history of straddling two empires and two worlds. Although it acts as the link between the East and the West, Hong Kong has itself been at the centre of conflict and compromise. Hong Kong was only a village in the early 1800s, inhabited mostly by farmers, fishermen and pirates. It began to prosper in the 1850s and 1860s. As a result of the Treaty of Nanking, signed in August 1842, Hong Kong became a British colony for 167 years. In view of the historical background of Hong Kong, it is obvious that its people’s very distant and detached feelings for both the PRC’s government in Beijing and the British administration in London prevented the development of strong patriotic emotions. Economic prosperity has, therefore, become the priority of the Hong Kong people for generations. In other words, it is appropriate to say that the political ideology of the Hong Kong people is primarily grounded in its pragmatic roots of economic prosperity, though it can be reactionary when its freedom is challenged. The protest on 1 July 2003, involving hundreds of thousands of its citizens set against the anti-subversion legislation Beijing tried to impose on Hong Kong, demonstrates this point. Otherwise, the Hong Kong people are, in the main, contented as long as the economy of the city continues to develop and prosper. Nonetheless, Hong Kong has a long history of having to cope with illegal immigrants from China and in particular with the massive influx from the mainland when China was caught in years of severe social and economic devastation from the late 1950s to the 1970s. The Cultural Revolution of China, which began in 1966, had actually provoked a workers’ uprising of anti-capitalism in Hong Kong, since a large number of the grassroots population of the city came from the mainland. Nevertheless, Hong Kong has been a cosmopolitan city and has successfully served as an important international financial and business centre in Asia after Tokyo. Christopher Patten, now Lord Patten, the last British governor of Hong Kong, writes the following in his book titled East and West: China, Power, and the Future of Asia:

From Investment Banking to Finance-in-Society

3

Hong Kong is vital to the fastest-growing parts of the Chinese economy that underpin the rise in prosperity and in living standards that sustain the legitimacy of the Chinese leadership. For the overseas Chinese as well as for so many foreign businesses, Hong Kong is the reassuring and safe commercial base for doing business in China. A contract signed in Hong Kong enjoys the security of a common-law system and independent courts. The city also provides the bridge to Taiwan, economic relations between Taiwan and China being largely conducted through Hong Kong. Taiwan will watch closely what happens farther down the coast: Can ‘one country, two systems’ work in the former colony, and if it cannot do so there, the Taiwanese will ask, how could it possibly work for them?4

Although Hong Kong has not been in the socio-political limelight since its handover, its thriving economic recovery from the Asian Crisis, the bursting of the Internet bubble and the bird flu epidemic is of great credit to the Chinese Communist Party (CCP). In spite of its economic prosperity, the city, like most of the western world, has suffered higher unemployment and rapidly widening wealth disparity. In ‘One-horse race: A special report on Hong Kong’, Long further states: Unemployment before the handover, at about 2 per cent of workforce, was almost negligible. It climbed to 6.2 per cent in 1999 and 7.9 per cent in 2003. Since then it has fallen very year, but at 4.8 per cent in 2006 was still much higher than pre-handover levels. Over the same period median earnings – about HK$10,000 a month – have not changed at all.5

While unemployment has become a challenge, the rapidly widening wealth disparity of the city is also critical. The Gini coefficient of Hong Kong, as explicitly reported by CNN.com in ‘Hong Kong boom belies wealth disparity’, has ‘increased from 0.476 in 1991 to 0.525 in 2001 – the most recent figure – on a scale where 0 represents perfect equality and 1, complete inequality’.6 It is further reported in ‘Hong Kong boom belies wealth disparity’ that ‘China’s economic emergence is fostering a growing population of ultra-rich in Hong Kong, with property and stock prices well above 1997 highs, and the city is now home to an estimated 270,000 local-dollar millionaires – some feeding off a seemingly endless train of billion-dollar public-share floats.’ Hong Kong, a city deeply embedded in pragmatism as well as utilitarianism, seems to have endless opportunities for making high returns from business, trading and speculating properties and stocks, and is growing more disconnected from its Chinese holistic origins despite the handover to its motherland. Although Hong Kong has been hit very badly by different financial crashes in the last three decades, before this latest financial crash caused by the collapse of the sub-prime mortgage system, the city was always busily engaging in strengthening and expanding its stock market which included inviting many sizeable Chinese state-owned enterprises to list on the Hong Kong Stock Exchange. In ‘One-horse race: A special report on Hong Kong’, Long makes the point that: As financial services have steadily grown in relative economic importance, so has exposure to any fickleness in Beijing’s policies. This is particularly true of the stock market. Last year the amount of capital raised in initial public offerings (IPOS) in Hong Kong was second only to that in London. Some 73 per cent of the Hong Kong total, or HK$369 billion, was raised by mainland enterprises. By the end of 2006, 367 mainland companies had listed shares in Hong

4

Finance and Society in 21st Century China Kong. They account for 55 per cent of the capital raised in Hong Kong in that period and now make up nearly one-third of listed companies, half the stock market’s capital and 60 per cent of its turnover.7

No matter whether under British or Chinese administration, the craze for speculating in the real estate and stocks of Hong Kong has shown no sign of diminishing. It is, nevertheless, appropriate to say that the Hong Kong people have grown to be very adaptable to the domination of their souls and minds by financial trading and speculation. Rudolf Steiner states in The Philosophy of Freedom that ‘Man can certainly do as he wills, but he cannot want as he wills, because his wanting is determined by motives.’8 He goes on: Freedom of will would then mean being able to want without ground, without motive. But what does wanting mean if not to have grounds for doing, or trying to do, this rather than that? To want something without ground or motive would be to want something without wanting it. The concept of wanting cannot be divorced from the concept of motive. Without a determining motive the will is an empty faculty; only through the motive does it become active and real. It is, therefore, quite true that the human will is not ‘free’ inasmuch as its direction is always determined by the strongest motive.

It is obvious that while speculation is driven by greed, the motive of wanting and demanding more is the ground for such speculation. In other words, due to the motive of wanting and demanding more, speculation becomes active. Unless the motive which drives speculation is under control, free will is impossible to attain. Without the successful attainment of free will, domination will always prevent true liberty. Hong Kong, which is embedded in western pragmatism, has become more disconnected from the ancient Chinese holistic orientation even after the handover to its motherland, whereas the catastrophic Cultural Revolution and the economic reform have, at the same time, disengaged the mainland Chinese from holism. In recent years, an increasing number of Chinese citizens have, in fact, established accounts in Hong Kong for stocks trading and speculation.

1.2.2 The roots of my family Although my father and mother come from very different family backgrounds, both of their families are very much rooted in the pragmatic and commercialized Hong Kong. My father’s grandfather was the first generation of my family to settle in Hong Kong. Nobody in my family really knows exactly when my great-grandfather started to reside in Hong Kong but I suspect it is likely to be after the second Opium War during the 1860s and 1870s because my grandfather was born in Hong Kong in the late 1800s. As an old Hong Kong family, owing to our very early settlement in the city, we were privileged to have an upper-middle class standard of living. My grandfather as well as my father and his siblings were able to receive the best education in Hong Kong and were brought up in the comfortable environment of the then British colony. If the family system was the social system of pre-industrial China, my family would be more appropriately classified as one which belongs to the modern society. In Selected Philosophical Writings of Fung Yu-lan, Fung states:

From Investment Banking to Finance-in-Society

5

Traditional Chinese society originated long before the Christian era, and continued to exist, without fundamental change, until the latter part of the last century. It began to break down with what is usually called the invasion of the East by the West but which was really an invasion of medieval by modern society. The basic factor in modern society is its industrialized economy.9

It may well be that, as a result of the long history of living under a British administration and receiving a British education, the members of my father’s family have never had the urge to seek out their indigenous Chinese identity. My uncles and their families departed for Australia and Canada in the six months after the signing of the Sino-British Joint Declaration in 1984, my parents and my brothers emigrated to Canada in early 1985 but I remained in Hong Kong as a British citizen. Whereas I have spent the last seven years in China to try to rediscover my indigenous identity, my brothers and cousins have been settled in both Australia and Canada for over two decades. Their children are, in fact, very disconnected and distant from their Chinese identity. My mother’s family is far more intriguing from the Chinese historical perspective compared to that of my father. My mother was born in 1937 in Shanghai, the city of prosperity and turmoil, in the same year as the Sino-Japanese War broke out. Although related to the prestigious Song (also spelt Soong or Sung) family, my mother had quite an unfortunate childhood. Shanghai, the eastern entrepôt of China in 1930s was, on the one hand, prosperous but, on the other, a dangerous place to be. After the Opium Wars, Shanghai had become a city of opportunities, dreams, fortune – and violence as well. Shanghai was the centre where most trade between the East and the West took place and it was both a multicultural and an international city with endless nights. The city itself was divided into different concessions occupied by the different western powers and my mother was born in the then British Concession where the Wing On Department Store managed by her uncle was located. I was told that my mother’s uncle had a very close relationship with T.V. Song, the Minister of Finance and Foreign Affairs of the then Kuomintang Government (國民黨政府). Nevertheless, my mother’s family has both Chinese and British roots. The British roots of my mother can be traced back to the life story of her grandfather, who was a very well-accomplished lawyer in Hong Kong. My uncle mentioned that his grandfather was actually the first Chinese lawyer of the then British colony. Since my mother’s grandfather had died before she was born, it was impossible for me to learn his full life story other than through the bits and pieces of information gathered from my uncle. According to my uncle, my great-grandfather was not only a lawyer but was also an accomplished businessman. As well as the few streets he owned in Happy Valley, a high-class area of Hong Kong, he was also the first person to drive a Rolls-Royce around town. While my great-grandfather was the one who initiated the British link and nationality of the family, my mother’s aunts began to live in England before the Second World War. Also, though my great-grandfather’s successful career made him a part of the upper class of Hong Kong society, he was not able to escape from the impact of the worldwide economic depression which began in 1929. The economic depression provoked a series of serious workers’ strikes and my great-grandfather suffered a huge financial loss. Unfortunately, he could not put this material loss behind him and he died from a heart attack in the early 1930s.

6

Finance and Society in 21st Century China

After the death of my great-grandfather in Hong Kong, my grandfather, although he had become detached from his original Chinese roots, decided to move his family to join his elder brother in Shanghai. My mother’s uncle, who was married to the daughter of the then Chinese ambassador to Canada of the Kuomintang Government, was the general manager of the Wing On Department Store in Shanghai at that time. However, the decision made by my grandfather to return to his motherland led to the unfortunate childhood of my mother. It was soon after my grandfather’s arrival in Shanghai that the Japanese began to show increasing aggression against China. Nobody knows exactly the underlying reason for the imprisonment of my grandfather, whom the Japanese claimed was a British spy. As a result of our family background, although my grandfather was eventually released by the Japanese, he still made the decision to leave China when the Sino-Japanese War intensified. My mother was only two when she was brought to Hong Kong by her parents and her connection with her motherland was, therefore, very brief. Unfortunately, my grandfather died from illness not long after he returned to Hong Kong and my grandmother died soon after the death of her husband. Very sadly, my mother and her siblings became orphans within a very short period of time. In China, in view of the intensifying conflicts with the Japanese, my mother’s uncle had decided to join his wife’s family in Canada. Following the defeat of the Kuomintang and the takeover of power by the CCP, my mother’s family ties with China had been cut off for over half of a century. It is rather appropriate for me to say that our family roots are a mixture of Chinese indigenousness and exogenous British colonial upbringing.

1.3 Life as Transformation 1.3.1 My earliest life formation My father and my mother, needless to say, were the first significant masculine and feminine figures of my life. Their respective relationships, interactions, behaviours and values have influenced my personal development. Although they have become less influential in my mid-life, my earliest life formation was undoubtedly firmly rooted in their expectations and values. This early life formation has since become the fundamental structure of my life. My father is the eldest son of five children. Born in Hong Kong in 1929, my father, like his father before him, received his undergraduate education from Hong Kong University and was professionally trained as a civil engineer. After graduation, he easily secured a civil engineer job in the then British-administered Hong Kong Government. He remained in this role for most of his career, except for the last ten years, when he acted as a government-appointed District Counsellor. A career in the government did not consume much of his time and together with his high salary, he could afford to have many hobbies which included boating, fishing, photography, flying and growing orchids. He usually got home from work before 7:00 pm and and indulged in his hobbies straight after dinner. My father is almost 82 now and he has changed. Of late, he is much more understanding and loving in comparison to the person I used to know in my early years. I used to dislike speaking to my father since he had neither the patience nor interest in getting to know my concerns and worries. He was quick tempered, impatient and authoritarian. He did not want to be bothered and wanted to be left alone with his

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hobbies. The more authoritarian he was, the more rebellious I became. My father could sometimes be physical and I grew to be quite afraid of him. This internalized oppression showed itself through my growing rebelliousness. Adorno’s view is that repressed early resentment of parental harshness seems to coexist with the parents’ idealization. In my father’s ideal, I should be obedient, submissive and should have followed his path and become interested in mathematics and natural sciences. However, I have always had a passion for humanities. My father was always the subject and I had remained as the object. For Freire, a subject–object relation is embedded in a controlled and manipulative orientation. My father’s authoritarian and oppressive behaviour resulted in an indifferent and distant relationship between us. The following summarization of Horkheimer is of relevance to my relationship with my mother. Horkheimer writes that ‘The abstract glorification of the family is paralleled by an almost complete lack of concrete emotional ties, either positive or negative, to the parents.’10 My mother, who lost both of her parents at the age of two, has been living in insecurity. Although she was adopted by her aunt at the age of 14, she has never been able to overcome and free herself from this state of insecurity. Her insecurity has, in fact, manifested itself through endless expectations of me, her only daughter. For 15 consecutive years, I was swamped with endless contests and competitions. My mother, who appears to be soft and submissive, is actually very strong-willed and stubborn. Although her adoptive parents provided her with a good education and financial support, she did not grow up with the kind of love she had hoped for – the kind of intimacy and trust shared between parents and children. Due to this lack of parental intimacy, my mother refrained from loving her children unconditionally. As a result, although she thinks that she does love me a lot, her love always comes with a price to pay. As the oldest of three children, I have always been the one who grew up with their high expectations. The endless expectations of my mother controlled and manipulated my life until I reached my mid-life transition. Besides school and endless singing and piano lessons as well as competitions, the remainder of my childhood was spent in church. Since Christianity is our family’s religion, I was baptized when I was two weeks old. We adopted Christianity as our family’s religion many generations ago, and, although we have an indigenous Chinese identity, it is not wrong to say that our family remains rooted more in European than Chinese culture. As Rudolf Steiner pointed out, ‘It is essential to point out that spiritual science provides a means of testing the spiritual sources of every religion – including Christianity, the basis of our European culture on the one hand, and Buddhism on the other.’11 It is in a sense useful to be a Christian in respect of telling one’s life story, since the Christian way of thinking is historical and all life stories are embedded in their respective histories. In Transforming the Soul, Steiner explicitly states the following: There is a radical difference in the way people think in the culture out of which Buddhism arose and in the culture into which Christianity entered. This difference can be described quite simply. All genuine eastern culture has not yet been fructified by the West is non-historical, whereas all western culture is historical. And that is ultimately the difference between the Christian and the Buddhist outlooks. The Christian way of thinking is historical; it recognizes not only that repeated earth lives occur but that they form a historical sequence, so that what is first experienced on a more imperfect level can develop in the course of incarnations to ever higher and more perfect levels.12

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Given this underlying Christian thinking, my mother viewed Sunday bible classes and church prayers as more important to personal development than school. The early formative years of my life were, as a result, occupied by schooling, church, bible classes, singing and piano playing. My Chinese identity was well concealed under the cover of my western cultural upbringing.

1.3.2 Early adult transition (17–22) In Managing in Four Words, Lessem and Palsule state that the first task of the period is ‘to move out of the pre-adult world, to question the nature of the world and your place in it, to modify or terminate relationships with important persons’.13 By the time I reached the period of my transition to adulthood, I had already been resident in England for quite some time. It was, as Lessem and Palsule put it, ‘the first world of the Novice: Western Exploration’.14 I left Hong Kong and entered the first exploratory stage of my life with curiosity and a sense of freedom. Although I am of British nationality, England at that time was totally new and distant for me. Nonetheless, the task ahead of me involved a process of initiation and since I lived miles away from my parents, I had to terminate my dependence on my mother. I had to start new initiatives to prepare myself for adult life. I began to have my own identity from the moment I opened my first bank account. I had to learn about making my own decisions and how to make plans. When the time came for me to look for a job to support myself, with no success in securing a job in advertising or public relations, I began my career working for a renowned English merchant bank without much commitment, since the financial industry was neither my original intention nor my wish. I could not have expected that my first job in corporate finance would mark the beginning of my lifelong career in finance, from investment banking and international finance to today’s social and communal finance. While I was getting ready to embark on my career development, I had the opportunity to visit China for the first time. China at that time was very remote from me in terms of its physical and spiritual perspectives. Up until then, China had only appeared in books as a country and culture so remote from my life. Beijing in 1983 could be a real shock for anyone who has been spoilt by the lifestyle of the developed world. I can clearly remember the sky of the city being totally grey and that applied to the society and its people too. The city was extremely polluted and the Chinese people only wore grey and black. The roads in Beijing were packed with old bicycles and filthy-looking people. They looked unhappy, exhausted and poor in the fifth year of the country’s economic reform. They kept looking at me with curiosity and I really felt like a stranger. Poverty was never far away and my first impression of the country did not remind me of my indigenous Chinese identity.

1.3.3 The first stage of my adult life (22–28) While I was still overwhelmed by the physical freedom and independence, I had entered into the second stage of exploration without much consciousness of it. Lessem and Palsule describe this first adult life structure (22–28) in the following way:

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First, you need to explore the possibilities for adult living, to keep your options open, to avoid strong commitments and maximize your alternatives. This task is reflected in a sense of adventure and wonderment. The second task is to create a stable life structure, to become more responsible and ‘make something of my life’.15

Although the financial industry was not my initial orientation, it was a good platform from which I could gain a lot of exposure to travel and work in different countries. A career in investment banking had also provided me with considerable financial returns which allowed me to live a life of luxury. However, the better the material living standard I possessed, the more insecure I became. I was totally absorbed in western pragmatic values and the first 20 years of my career can be described as pragmatic and materialistic. The insecurity within me became a driving force for me to work very hard and my career became my priority. Poverty and disparity were never of concern to me and I was totally wrapped up in a financial sphere oblivious to these social factors. The first alarm bells rang in 1987 when the worldwide stock markets crashed. I was the fund manager of a New Zealand-owned Hong Kong-listed company where I managed a stock investment portfolio worth US$15 million. The portfolio I managed lost almost half of its value after the crash and I was under tremendous pressure to decide whether I should hold on to or to sell off the remaining stocks of the portfolio. I was lucky that I had reduced a significant proportion of the shareholding held before the crash, but, nevertheless, the New Zealand parent company suffered a huge financial loss. It was decided that the cash-rich Hong Kong subsidiary would be privatized in order to save the mother company from a cash crisis. After the successful privatization, the Hong Kong subsidiary became dormant and the New Zealand holding company was set to close down the now inactive operation in Hong Kong. At the same time I was approached by Baring Brothers bank which turned out to be a nightmare of bad experiences. The overall culture of Barings was competition and more competition. Colleagues there were extremely insecure and always in conflict with each other. The very competitive and insecure environment triggered their greed and unfriendliness. I began to question the morality of these people and became very uncomfortable with their craving for speculation and money. I left after three months. It was a no surprise to me when Barings collapsed in 1995 as a result of the staggering losses from the unauthorized trading activities of one of its employees, Nicholas Leeson. I was invited to join Swiss Bank Corporation International (SBCI) after Barings and, in comparison with Baring Brothers, SBCI was a corporation which had much better governance and far more integrity. Although colleagues were comparatively friendlier than those in Barings, investment banking is still an insecure environment in which real friendship is rarely fostered. The 1987 worldwide financial market crash happened just before I joined SBCI. I began to ask myself what kind of role our present financial systems played in respect of humanity. Was the financial industry really structured to facilitate trade in order to improve the economy and society at large? Did it provide a cushion against economic downturn or did it instead trigger further insecurity and volatility in an already turbulent situation? What were the roles of the bankers? Were they responsible for stabilizing the financial systems or were they only concerned with their own well-being? While I was still in the midst of trying to find answers to my questions, the devastating Tiananmen Massacre took place in June 1989.

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The 4 June Massacre made me begin to realize that the capitalist way of economic development might not necessarily bring satisfaction or happiness to the majority of humankind. An unbalanced economic growth under an oppressive political environment will only lead to a disastrous level of social instability. Our present banking and financial systems are definitely not serving the poor but are feeding a vicious socio-economic and socio-political cycle. This cycle, which has a negative and insecure psychological impact, leads to over-sensitive, volatile, short-term and irrational behaviours which, in turn, upset the stability and sustainability of humanity. Lietaer and Brunnhuber state in Our Future Economy: Money and Sustainability – The Missing Link that ‘Only with a minimally stable monetary system, free from major financial and banking crises, can we expect societies to be able to mobilize enough resources for a sustainable future.’16 I began to review my life along the lines described in Managing in Four Worlds: ‘At about 28 the provisional quality of the twenties begins to end and life becomes more serious, more for real.’17 Although I was promoted to become Associate Director of SBCI, the volatility and insecurity of investment banking kept bothering me. I became more serious about my future and I wondered whether being an investment banker was my ultimate goal. What would I want to achieve other than financial returns? Would I be able to offer more to businesses than money-making advice? These questions kept on perplexing me for another two years before I decided to start up my own business. The decision made to start my financial consultancy was triggered by the lack of professional knowledge of the financial press. The general public tends to react to financial news without much consciousness. However, most of the financial news neither reflects the true picture nor fosters a deeper understanding of the phenomena at work. The sameness of financial news provided by the mass media tends to promulgate speculation and subdue consciousness. As David Held describes in his book entitled Introduction to Critical Theory, ‘As Adorno wrote, “the modern mass media tend particularly to fortify reaction formations [reaction formations utilize the energy of a repressed wish to constitute a habit and/or set of attitudes in reaction against it] and defenses concomitant with actual social dependence”.’18 My business goal was to produce and provide professional financial news which aimed at telling the public and the businesses the truth which would hopefully result in less financial turmoil.

1.3.4 The transition to age 30 (28–30) Lessem and Palsule believe that the transition point is at the age of 30 when an opportunity is provided to review one’s life structure. Such a review will enable the creation of a more satisfactory life derived from working on the flaws in the previous period. This life transition can be smooth for some people but tough and stressful for others. At this transitional stage of my life, I began to advise public and private companies on the importance of a balanced and harmonious management of future development. However, the advice I gave was based only on the experience I had and too much emphasis was put on the industrial and product competitiveness. Unfortunately, I refrained from the necessary reflection and, driven by my pragmatic roots, my priority was to develop my business rapidly after its set-up. I was again too absorbed in being successful and obtaining pragmatic returns. As a result of my investment banking background, my view was that only companies which were qualified to go public could claim to be successful. My entire business focus was to list my company

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successfully. My company had operations in New York, Paris, London, Hong Kong and Shanghai within nine years of operation. With close to 100 employees worldwide and a strong clientele of renowned multinationals, things worked out as planned. Although the business was in a highly competitive market, its estimated earnings were achieved. However, I became more insecure as the business grew. I was always worried about the competitiveness of the company and the growing insecurity and anxiety had dragged me further into the trap of focusing only on listing the company’s shares rather than actual business performance. As I had wished, the company was listed on one of the secondary boards in London in October 2000. I reckoned that if the company had to continue growing, a dual listing on the NASDAQ market would be essential. Therefore, straight after the successful London listing, I immediately started the US listing procedures. A large volume of due diligence work was carried out in the following nine months and the listing approval was granted by the US Securities and Exchange Commission in July 2001. Although the different stock markets were already indicating the risk of the Internet burst, I was totally absorbed in the US listing and thought that I would correctly predict when the bubble would burst.

1.3.5 The transition out of my 30s Of course, I was hardly a genius and while the board members were excited about the upcoming US listing, the devastating 9/11 catastrophe happened. The already risky stock markets panicked and crashed. My dream could no longer come true, and all my years of effort and hard work counted for nothing. After the slump of the worldwide stock markets, company frauds were revealed and long-established firms including Arthur Anderson and Enron went bankrupt. Stock prices collapsed further as a result of the non- or under-performing e-companies. The stock market crash had spilled over into real economics with a number of my American clients defaulting on payments. The banks, as usual, shrank their credit facilities during financial crises and economic downturns which made the already critical situation worse. All these incidents forced me to seriously consider which direction I should choose for my future! As Lessem and Palsule state in Managing in Four Worlds: As the age 30 transition ends, you move towards major new choices or recommit yourself to existing ones. If they are well made from the viewpoint of your dream, values, talent and possibilities, they provide the centre for a relatively satisfactory life structure. If the preparatory work has been poorly done and the new structure is flawed, life in ‘settling down’ will become increasingly painful.19

It became very obvious that my life so far had been rather poorly structured. Both my pragmatic roots and my approach had turned out to be highly unsatisfactory and unfulfilling. At the age of 39, I started to re-evaluate the actual meaning of my life and, besides promising financial returns, had I actually made any positive contribution to society? I then questioned the definition of success and failure. What did my life mean to me and to others? The catastrophe of 9/11 made it clear to me that our present world is unstable, fragmented, insecure and full of conflicts. Humankind has been moving further away from both an eastern holistic orientation and the Christian way of wholeness. As Steiner said, ‘What does the Christian way of thinking lead to? It regards a single part of

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an organism not as a single part but as filled and governed by something that is real and whole.’20 My individualistic behaviour had deprived me of realizing my eastern holistic value or the Christian spirit of totality. I decided that it was time for me to start pursuing another kind of life structure and orientation.

1.4 Conclusion In Managing in Four Worlds, Lessem and Palsule state: At around 40, when you reach the top rung of your early adult ladder, you have to reappraise the meaning of the ladder itself. It is not just a matter of evaluating how well you have done within the current definitions of success and failure. You have to question the basic meanings of success and failure in more complex terms, giving more emphasis to the quality of experience, to the intrinsic value of your work and products, and their meaning to yourself and others.21

I began to realize that without the recognition, realization and acceptance of my indigenous background, I would be just like a rootless tree that, regardless of its abundance of fruits and branches, could hardly sustain itself. I had realized from reviewing my childhood and early adulthood that I had always lived under a masculineled environment. Although my childhood was spent under the authoritarianism of my father, I was, without much awareness, attracted to the male-characterized investment banking and finance. It is very obvious that a repression of feminine dimension was the archetype of the earlier stages of my life. As written in Yellow Emperor’s Canon of Internal Medicine, ‘The Emperor said: “Since ancient time, it is considered that the existence of men has depended upon the communications of the variation of Yin and Yang energies, thus, human life is Yin and Yang.”’22 In the light of ancient Chinese philosophy, since all things are based on the balance of the Yin and Yang energies, a man is seen as a small universe since a human body must have such a balance as the universe has. Therefore, placing myself within my original Chinese cultural tradition in the hope of completing my life structure became an emergent goal at the beginning of my mid-life. Coming from the youthful pioneering and competitive western world of pragmatism to the adult-like, consolidating and conserving northern world of rationalism, I hoped to seek my identity from a mid-life renewal through the catalyst of an eastern world which paves the way to a more mature transforming and co-creating stage of life. I left for the PRC in early 2002 to uncover the long-forgotten indigenous roots of my family in China, the eastern dragon, which has gone through tremendous socio-political and socio-economic changes and turmoil in the last 160 years. From a closed-door dynasty to a semi-colony ruled by different western powers and from a very temporary history of democracy and capitalism to the orthodoxy of a communist planned economy, China is now developing a peculiar form of market economy in the current period of time. The tremendous and rapidly changing experiences of this society over such a short period of time in a long history are likely to induce a loss of identity. Such a loss of identity is going to trigger growing insecurity and anxiety. The role of banking and finance, against this specific socio-political and socio-economic background, bears on the stability and sustainability of the country’s whole social and economic foundations and possibly in

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turn on the wider global economy. I am sincerely grateful for the mentoring of Professor Lessem, which has helped me during this period of great struggle to define my newly emerging self. It has also enabled me to dedicate myself to developing, in a Chinese context, but with Christian ethical values, an interdisciplinary and holistic Financein-Society Model (FISM). The beginnings of this can be seen in the story of Catalyst Foundation, which is related in Chapter 12. My hope is that such a model can help China to achieve financial stability and be a positive influence on the wider world.

Endnotes 1

Randall, W.L. and Kenyon, G.M. 2001. Ordinary Wisdom: Biographical Aging and the Journey of Life. Westport, CT: Praeger.

2

Randall, W.L. and Kenyon, G.M. 2001. Ordinary Wisdom: Biographical Aging and the Journey of Life. Westport, CT: Praeger.

3

Long, S. 2007. One-horse race: A special report on Hong Kong. The Economist, 30 June–6 July.

4

Patten, C. 1998. East and West: China, Power, and the Future of Asia. New York, NY: Times Books.

5

Long, S. 2007. One-horse race: A special report on Hong Kong. The Economist, 30 June–6 July.

6

CNN.com 2007. Hong Kong boom belies wealth divide. [Online]. Available at: http://www.cnn. com/2007/WORLD/asiapcf/06/28/hongkong.tinshuiwai.reut/index.html [accessed: 3 July 2007].

7

Long, S. 2007. One-horse race: A special report on Hong Kong. The Economist, 30 June–6 July.

8

Steiner, R. 1964. The Philosophy of Freedom, 7th edition, translated by M. Wilson. East Sussex, UK: Rudolf Steiner Press.

9

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

10

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

11

Steiner, R. 2005. Transforming the Soul, vol. 1, edited by P. Wehrle, translated by C. Davy and C. von Arnim. East Sussex, UK: Rudolf Steiner Press.

12

Steiner, R. 2005. Transforming the Soul, vol. 1, edited by P. Wehrle, translated by C. Davy and C. von Arnim. East Sussex, UK: Rudolf Steiner Press.

13

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

14

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

15

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

14 16

Finance and Society in 21st Century China Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

17

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

18

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

19

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

20

Steiner, R. 2005. Transforming the Soul, vol. 1, edited by P. Wehrle, translated by C. Davy and C. von Arnim. East Sussex, UK: Rudolf Steiner Press.

21

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

22

Wang, B. 1997. Yellow Emperor’s Canon of Internal Medicine, translated by L.S. Wu and Q. Wu. Beijing, China: China Science and Technology Press.

chapter

2 Finance and Society

Study it extensively. Inquire about it thoroughly. Think about it carefully. Discriminate on it clearly. Practice it earnestly. Mean and Harmony #20

2.1 Introduction On 9 November 2008, the Chinese Government introduced a Renminbi (RMB) 4 trillion stimulus package to offset the impact of the global recession resulting from the sub-prime mortgage crisis. Whilst the first quarter gross domestic product (GDP) tumbled to 6.1 per cent, which was the slowest in the past ten years following the massive pump-priming and record lending made by the Chinese banks, the country’s second quarter GDP growth was expanded by 7.9 per cent. The stimulus package had certainly helped the economy to attain an annual GDP growth of 8.7 per cent. Although the stimulus package has so far demonstrated positive results, the recession in the USA, Europe and Japan remains critical to the future economic development of China. Given that 48 per cent of Chinese goods are exported to these countries, a slow recovery of their economies is going to prolong the pressure on growth and employment in China. Furthermore, underneath the impressive 8.7 per cent growth was a total amount of RMB 9.6 trillion in new loans extended in the year of 2009 in comparison with RMB 4.2 trillion a year before. However, how much of this RMB 9.6 trillion has directly benefited wider society and the people remains questionable. Could it and should it have been distributed on a more equal basis? It is reported in ‘A great migration into the unknown’: China’s leaders are struggling to cope with the biggest upsurge of unemployment the country has faced in years. Migrants from the countryside, the main source of labour for export-oriented industries and construction sites, have been the hardest hit so far. Millions have been thrown out of work. Urban white-collar workers, for years pampered by double-digit growth, speak of shrinking bonuses and frozen wages. Some are losing jobs, too. Students, whom the government always fear upsetting, face the most difficult employment prospects since the upheaval in Tiananmen Square 20 years ago. As the Communist Party prepares to celebrate 60 years in power on October 1st, it worries that citizens will be in a fractious mood.1

It is, therefore, necessary for the Government to always work on attaining a full-year GDP growth target of 8 per cent, a level which is rare in the developed economies, but which is the minimum needed to maintain full employment in a nation of 1.3 billion people. Although having said so, the Legislative Affairs Office of the State Council PRC predicted that over 24 million Chinese people would have joined the labour force in

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2009. Nevertheless, even with a GDP growth of 8 per cent, only 12 million new jobs would be generated. As a result, there is a widening gap between employment demand and supply in comparison with 2008. To a certain extent, the above reflects the present socio-economic fragility of China, wherein the reality of severe shortage of natural resources, alarming environmental damage, serious corruption which filters through the public and private sectors, poor corporate governance and widening wealth disparity are undoubtedly posing critical challenges to the stability of the country. The resulting social, economic, environmental and political disharmony of today’s China raises a critical awareness of the disengagement from the traditional Chinese philosophical spirit. As Hiwaki and Tong state in ‘Credibility Trap: Japan today and China tomorrow’: China today is facing the growing instability, uncertainty and insecurity, with the narrowing range of choice for socio-economic development. More concretely, China is suffering from a manifold societal uncertainty and disorder with the mounting number of drifting people without employment; the drastically skewed welfare benefits; the explosive disparity–animosity spiral among the diverse social constituents; public resentments and personal grudges against the rampant corruption of the government and the Communist Party; and the conflicting demarcations of areas, ethnics and occupations. All these already have seriously damaged mutual trust among the social constituents and devastated the society’s centripetal force.2

Security, to a large extent, is obtained from a recognized and respected identity, but mutual trust cannot be fostered without security. However, a disintegration or disconnection from one’s cultural roots inhibits the establishment of identity. As a result, without a clearly defined and generally accepted identity, a society tends to be fragile, with its foundations easily shaken by values imported from elsewhere. To rely less on exports and foreign investments or government’s economic stimulus in order to achieve better sustainable economic development through domestic market support, a reconnection and integration with one’s cultural roots is of utmost importance since the cultural background of a society is where its identity, so important for sustainable development, lies. In view of the underlying problems of China, the socio-economic sustainability of the country remains questionable. It is clearly demonstrated in the sub-prime mortgage crisis that the financial system, indeed, is situated at the heart of the foundation of stability of all other socio-economic subsystems. Taking into consideration the increasing economic significance of China, the stability of its financial system is likely to make an intense impact on the future growth and sustainability of the country and the world at large. Therefore, the present financial and cultural disintegration of the country needs to be addressed and reconnected before a more sustainable development can be achieved. While this book is a journey of exploring the reality of China at present, it also raises the concern of the disconnection of the country’s existing socio-economic circumstances from original Chinese cosmological and philosophical thinking. An intriguing concept of Bernard Lietaer, written in his forthcoming book entitled The Soul of Money,3 maintains that we have become familiar with the monopoly of a Yang currency and ‘many people consider it to be part of human nature’. Nevertheless, Lietaer further views that:

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… an unprecedented shift can be observed in our societies towards a new honouring of the feminine archetype. It may be better to describe this as a re-awakening of a ‘Yin paradigm’, because while it includes ‘women’s issues’ – such as women emancipation and gender equality – it also goes way beyond it.

After all the above-mentioned scepticisms and doubts, I think it is only fair that some background should be provided to give an overall picture and to derive better understanding of the critical issues of banking and finance from both global and local Chinese perspectives. More importantly, the long ignored but undoubtedly important process of integrating finance with culture is essential in order to provide better financial stability. On the one hand, it is hoped to raise awareness of the severe social and economic disruptions which finance has caused from a global perspective. On the other, it aims to raise the consciousness of the threats and challenges resulting from the disconnection and disengagement from the Chinese cultural roots with regard to the application of finance in China at the present.

2.2 Background of Banking and Finance – The Global Context In their forthcoming book entitled Our Future Economy: Money and Sustainability – The Missing Link,4 Lietaer and Brunnhuber state, ‘Humans are to monetary systems as fish are to water. Most are born in it, live in it, and die in it without ever becoming fully aware of the medium that surrounds them.’ However, for close to four centuries, from the speculation which first emerged during the Kipper- und Wipperzeit period (1619–1622) through the trading of metallic coins when ‘financial crisis is demonstrated to be possible with only metallic money and without bank credit’5 to the recent sub-prime mortgage crisis, the recurrent financial crashes and manias have been severely affecting the sustainability of humankind. Moreover, the International Monetary Fund (IMF) world map regarding banking problems worldwide in 1980–96, ‘clearly illustrates that most countries in the world, inhabited by well over 90 per cent of humanity, have experienced significant banking problems or worse during this recent period’.6 Furthermore, the Second Report to the Club of Rome, 1974, suggests that ‘the crises of today are man-made and differ from many previous crises in that they can be overcome’.7 Lietaer and Brunnhuber describe in our Our Future Economy: Money and Sustainability – The Missing Link: The three main columns of our sustainability edifice are: ecological sustainability, economic stability, and the governance system. This governance system includes both the formal structures (official governmental and political structures which deal with the issues of how hierarchical power is exerted in society) and the less formal social capital (the citizen’s solidarity fabric of a civic society in which peer to peer relationships are nurtured). Whenever the monetary system gets in serious trouble, all three of these columns are typically threatened. These three are supporting columns to the overarching aim of human development where consciousness, relationships and cultural or artistic expressions are fostered. When one or more of the columns fail, human and societal development gets in turn at risk.8

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If taking into consideration the Chinese cosmological theory, when the interdisciplinary structure of the Five Elements is disrupted, or when its regular pattern ‘is out of order, it should be considered to be abnormal. When the seasonal energy becomes abnormal, the weather will change and calamities will happen’.9 Given the fundamental importance of finance, whenever the financial system fails, it will disrupt the regular pattern of the entire socio-economic system and chaos and crises will then result. Taking into account the Chinese thought of adopting ‘an “integrative” point of view, one that considers all things in terms of their relationships – be they social, economic, or biological’,10 the harmony integration of economy, society, culture and politics is, therefore, the key element of attaining stability of the country. Furthermore, if Lietaer and Brunnhuber are correct in saying that the monetary/ financial system is the foundation of the sustainable development of all other socioeconomic subsystems – in other words, the monetary/financial system is the totality of all other socio-economic subsystems – then the fostering of critical conscious awareness of the negative effects impacted on humankind caused by the instability of the financial systems becomes most fundamental. In the light of Chinese philosophy, while the totality includes both the thinking and the thinker, ‘One must first think about totality in order to realize that it is unthinkable.’11 Therefore, ‘One needs thought in order to realize that it is unthinkable, just as sometimes one needs a sound in order to be conscious of silence.’12 In view of establishing better financial stability, thinking holistically is fundamental to the development of an all-embracing financial model which aims to empower humanity to sustain itself. Although having said so, the financial reality has been exclusive rather than inclusive. The change in the core activity of banks from acting as intermediaries to speculators, the globalization of capital and liberation of financial markets have, to a large extent, contributed to the widening of wealth disparity and societal instability. The extrapolation of the present free trade practice encompasses not only goods and services but capital as well. Lietaer and Brunnhuber state that: Ricardo whose theories are invoked to justify free trade explicitly states that the benefits of free trade would manifest if and only if capital is not freely moving, John Maynard Keynes, considered one of the most important 20th century economists, goes even a step further than his eminent predecessors, by discouraging mobility of both capital and goods.13

This book, therefore, calls for the urgency of raising critical consciousness of the damage caused by financial instability, which, in many cases, is caused by financial speculation and to a certain extent, by the mobility of capital. It is clearly demonstrated that from the trading of metallic coins during the Kipperund Wipperzeit period (1619–1622) to the recent collateralized debt obligations (CDOs), the speculative act of banks has overshadowed and dominated their traditional role as intermediaries. Although the speculative tools have been different at a given time, the most important message is that the social and economic stability of humankind has been largely controlled as well as manipulated by the hard, competitive, masculine–yang-dominated financial markets. The masculine–yang force is characterized as pragmatic, harsh, forceful and expansive. Such characteristics of finance have triggered and caused the recurrent financial crises and crashes which significantly inhibit the development and sustainability of humankind. Furthermore, since the financial system lies at the heart of the foundation

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of the socio-economic system, the present textbooks and literature which largely focus on studying the mathematical and quantitative-based analyses and instrumental tools of finance, are unlikely to resolve the most pressing challenge of how finance can possibly reduce the widening wealth disparity and be able to bring about sustainability. In view of the foundational paradigm of banking/finance, an interdisciplinary understanding of a particular economy, its society, politics, history, cultural tradition, philosophy and psychology are essential for achieving social and economic stability. In the light of the Chinese philosophical perspective, the Yang force must be balanced by the Yin force in order to attain harmony. As described by Fung Yu-lan in his book entitled A History of Chinese Philosophy, ‘All natural phenomena result from the ceaseless interplay of these two forces.’14 Therefore, in the hope of successfully catalysing social and economic transformation in China, it is necessary to foster an equally powerful FISM which offers an alternative feminine–yin dimension of providing a caring, giving, understanding and sustaining financial system to balance against the long monopolization of the masculine–yang-dominated world of finance.

2.3 Background of Chinese Banking and Finance – The Local Context At the time of writing, the Chinese Government has announced its goal to build Shanghai as a global financial centre by 2020. The forthcoming decade may be both an interesting and challenging period in modern Chinese financial history. However, in order to help China avoid further devastation and despair, such as that inflicted on humankind at large by Wall Street, it is very likely that a reconnection of the present practice of the Chinese financial system to its original cultural roots offers a better alternative and hopefully a solution. Nevertheless, in view of the comments made by the renowned Chinese political scientist, Li Shenzhi (李慎之), that despite of the very long history of China, the historical memory of the last 100 years of the nation is indeed full of memory cracks,15 the reconnection of financial reality with the recollection of Chinese historical and cultural tradition, therefore, becomes particularly important in order to achieve better economic balance and financial stability. Taking into account the presently available studies, literature and the banking and finance data of the country which either cover the historical development or the pragmatic performances of industry, a historically contextualized interdisciplinary knowledge has not been found. However, in view of the foundational role of finance in respect of the socio-economic stability, the obvious separation of the study of banking and finance from humanity becomes a core concern. The reconnection of the traditional Chinese philosophical values, therefore, is going to espouse a conscious awareness of the present financial systems of the country and hopefully through such derived critical consciousness, the sustainability of the underlying socio-economic systems of China is more likely to be achieved. On 11 December 2006, China gained full access to the World Trade Organization after a five-year trial period. This full access has endorsed the beginning of the country’s opening up of its financial markets to foreign financial institutions. Before 11 December 2006, many of the Chinese commercial banks, including the four major Governmentowned commercial banks, the ‘Big Four’, had undergone a series of restructuring actions

20

Finance and Society in 21st Century China

including, but not limited to, capital injection, foreign ownership and the flotation of shares. The restructuring of the Chinese banks is seen to be both vital and critical since almost all of these banks had suffered from very high levels of non-performing loans (NPL) and were unable to meet the capital adequacy ratio of 8 per cent of risk-weighted assets as decreed by the global standard of the Basel Agreement. The word bank (yinhang) (银行), the term banking (yinhang ye) (银行业) and the banking business were first introduced into China in 1845 when the British-owned Oriental Banking Corporation set up its branch in Guangzhou. It was 52 years later that the first Chinese-owned bank, owned by the Qing Government, was established. The transitional development of banking and finance in China from 1845 to the present day can be concluded briefly as the following:

• the banking and financial industries were dominated and manipulated by foreign banking institutions from 1845;

• the Chinese banks then became fully controlled by the Communist Chinese Government from 1949;

• a combined Chinese-foreign ownership of the Chinese commercial banks began to take place in 1996; and

• the emergent trend of going public of the Chinese commercial banks from 2006. Similar to modern Chinese history, the financial industry of China has gone through a rapid change of identity; this has resulted in a disconnection from its Chinese cultural roots. The resulting disconnection from traditional values has further led to a state of psychological complexity or anxiety which caused irresponsible behaviour including corruption, bribery, fraud and favouritism. In addition to this, unqualified personnel and the constant conflict between power and integrity have also become critical challenges to the stability of the Chinese financial systems. Lietaer and Brunnhuber suggest in their forthcoming book entitled Our Future Economy: Money and Sustainability – The Missing Link that in relation to sustainability: ‘In the long run, it should be obvious that there will be an increasing demand for products and services that impose less of a burden on our ecosystem’ and ‘Sustainability is a complex political concept. It includes economic, social, cultural and ecological aspects.’16 However, since fraud, corruption, favouritism and inefficiency on the one hand prohibit sustainability and on the other hand, are, to a certain extent, characteristics of the present Chinese banking and financial institutions, this book is, therefore, designed to revisit and reveal the indigenous Chinese culture by studying the traditional Chinese financial houses which include Qianzhuang (钱庄), Zhangju (帐局) and Piaohao (票号). While the credit system of traditional Chinese society was founded on a philosophical basis of integrity, honesty and good faith, the present financial behaviour undoubtedly reflects a serious conflict with the original Chinese values. It is, in fact, obvious that within the traditional financial culture of China, credibility and trustworthiness always overplayed financial techniques, whilst building and maintaining good relationship or guanxi (关系) has always been an essential ingredient of networking and survival in Chinese society. Nevertheless, how to define and maintain good guanxi while not crossing the ethical line and falling into the trap of bribery and favouritism has also been a challenge: ‘For the Chinese, the exchange of gifts presents an opportunity to cultivate and advance guanxi through social interaction’.17 However, I am

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an eyewitness to the change from giving gifts at the beginning of the economic reform to today’s giving money in respect of guanxi maintenance in China. This book, hopefully, through the understanding and knowledge derived from the study of these traditional Chinese financial houses, will uncover and recover the cultural and philosophical backdrop of Chinese banking and finance. The connection between tradition and its role is an essential factor in establishing the model of FISM which incorporates both Chinese philosophy and western financial rationale.

2.4 The Derivation of Knowledge While the reality of close to four centuries of recurrent financial crises and turmoil gives rise to the question of the methods and effectiveness of the study of banking and finance, neither the capitalist economic systems nor the socialist economic systems have successfully offered any solution to attain better social and economic equilibrium. The concern of the reality gap between economic theories and financial reality is also raised. Given that the vastly adopted quantitatively and mathematically driven financial orientation has proved to be inadequate in achieving financial stability, a historically contextualized and interdisciplinary-based understanding of finance offers hope of counterbalancing the dominance of figures and numbers. Given the interconnected and integrated nature of finance, the methodologies adopted in this research, which are critical theory, feminism and participatory action research, provide a qualitative and interdisciplinary paradigm of studying banking and finance. More importantly, through the application of these methodologies, the reality gap between economic theories and financial reality is hopefully filled.

2.4.1 Critical Theory and Dialectic Both social and economic transformation and critical theory are rooted in history. They both foster an interdisciplinary and intersubjective understanding and knowledge. In addition, both are dynamic and emphasize deep understanding of a particular individual, society, history and culture. Since this research is a discipline of social and economic transformation, it is consistent and appropriate to adopt critical theory as the core methodology. Critical theory emphasizes an immanent critical approach to understand the ever-changing world with an interdisciplinary knowledge base. In Introduction to Critical Theory, David Held emphasizes Horkheimer’s view in the light of the importance and necessity of ‘a programme of interdisciplinary study in which philosophers, sociologists, economists, historians and psychologists must unite in a lasting working partnership … to do what all genuine researchers have always done; namely to pursue the great philosophical questions with the most refined methods.’18 Horkheimer, the leading critical theorist and leader of the Frankfurt School in School in the 1940s, also insists that critical theory has to involve exploring ‘the question of the interconnection between the economic life of society, the psychic development of the individual and transformations in the realm of culture’.19 He then emphasizes ‘the necessity for social theory to explicate the interconnections (mediations) that make possible the reproduction and transformation of society, economy, culture and consciousness’.20 Through the application of critical theory, self-emancipation and

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Finance and Society in 21st Century China

critical conscious awareness are manifested and such manifestation will empower us to free ourselves from domination and to gain true liberation ultimately. Critical theory empowers the possibility to criticize and challenge the nature of existing societies. Moreover, ‘Critical–emancipatory insight is required for the movement towards critical consciousness – conscientization – that transforms reality.’21 In Hegel’s Dialectic and its Criticism, Michael Rosen writes the following: Dialectic is, indeed, a ‘law unto itself’; but the pejorative implication which this carries is misplaced. Being a ‘law unto itself’ dialectic is autonomous, which is not the same thing as being arbitrary. Dialectic can escape this charge of arbitrariness not by calling on a single method, whose standards it treats as absolute, by returning to its roots in the sense of discussion, dialogue and debate, dialectic. Dialectic is legitimated, therefore, not with reference to absolute (or Absolute) principles, but by the ability which it has to deal with objections and to satisfy them on their own terms.22

Rosen continues: The strength of dialectic consists in critically entering into contrary positions in order to uncover the irrational, dogmatic elements [Momente] in them. But this it has only thanks to an aspiration towards reason which it recognizes as binding onitself and which it cannot lay claim to one-sidedly. The engagement aims to uncover irrationality and limitation in order to strengthen rationality.

Subject–subject dialectical approach is adopted in this research to discover, uncover and recover the interrelationship between banking/finance and society/humanity from a Chinese perspective. Morrow and Torres quote in their book entitled Reading Freire and Habermas23 that, ‘Intersubjectivity, or intercommunications, is the primordial characteristic of this cultural and historical world.’

2.4.2 Feminism and Discourse Analysis Feminism is applied alongside critical theory and action research in this research with the aim of providing an alternative view to balance against the present dominant masculine– yang banking and financial systems. Linda Shepherd, in her book titled Lifting the Veil, states the following: Yin and yang mutually help each other; together they constitute equilibrium and harmony. Though opposite, they are not in opposition or antagonistic. Though different, they supplement. There is a continuous movement between them, without beginning and without end: when yang reaches its limit, yin is manifested; when yin is completed, yang begins again. Instead of representing a hierarchy of superior and inferior qualities, they represent a duality that exists in harmonious relationship, as necessary parts of the whole.24

Furthermore, Linda Shepherd makes the point that criticism is valuable in science since it forces people to think carefully through their ideas with convincing and supportive evidence. It is totally justifiable, therefore, to apply feminism alongside critical theory. In The Soul of Money, Bernard Lietaer notes that:

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Our traditional bank-debt national money, like all of economic theory and most of Western thinking, has been designed from a monopoly of legitimacy for a Yang perspective. Until now, independently on whether one is a man or a woman, a ‘macho’ way of thinking has been needed to succeed in economic life. Reaching Sustainable Abundance is going to require giving equal weight to a feminine perspective on money systems and economics. It is not that the male perspective is ‘wrong’ in itself. On the contrary, it is an indispensable ingredient. But problems arise when its shadow wants to impose a monopoly on legitimately interpreting and directing human activity.25

In view of discourse analysis or critical thinking, a method applied in several critical emancipatory orientations is a deconstructive reading and interpretation of a problem or text. Discourse analysis can be applied to any text, problem or situation. Discourse analysis uncovers or unveils the hidden motivations or knowledge behind a text, dialogue or story. Instead of providing an absolute answer to a specific case or problem, it instead enables the knowledge of the underlying conditions of a problem. Discourse analysis, therefore, enables a conscious awareness of the hidden or underlying problems in order to reach more concrete solutions. Such consciousness includes self-awareness and awareness of others. In their book titled Discourse Analysis: Investing Processes of Social Construction, Phillips and Hardy state: Thus the task of discourse analysis is not to apply categories to participants’ talk, but rather to identify the ways in which participants themselves actively construct and employ categories in their talks. Further, all categorization is provisional; analysis requires constant reflexive attention to the process of categorization of both the participant and the analyst.26

2.4.3 Participatory Action Research Besides critical theory and feminism, participatory action research (PAR) is applied as the third methodology in the combined methodological approach adopted in this book in the light of deriving knowledge. Action research represents an evolving and a cyclical learning process which encompasses participatory action, critical observation, planning and research into understanding and knowledge. Action research complements critical theory and feminism well. From planning to action to critical observation and finally to reflection, the complex and dynamic activity of action research enables and allows shared understanding and knowledge in addition to those acquired from pure dialectic and discourse. Action research complements critical theory in that critical theory and practice through PAR have been integrated in this thesis. Theory accompanies the practice at every moment, analyzing the changing situation and formulating its concepts accordingly. The concrete conditions for realizing the truth may vary, but the truth remains the same and theory remains its ultimate guardian. Theory will preserve the truth even if revolutionary practice deviates from its proper path.27 Kurt Lewin, the main pioneer of action research, postulates that an action research experiment must not only express the theory concerned but it must be expressed in ‘such a way that the results of the experiment can be fed directly back to the theory’.28 Action research, therefore, contains action, research and participation. Its problem-focused, context-specific and future-oriented approach aims at improvement and involvement.

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Finance and Society in 21st Century China

2.5 Conclusion The aim of this book is to establish FISM, a model which is rooted in the Chinese context and based on building upon currently emergent examples such as the China Construction Bank Corporation and Catalyst Foundation. Bernard Lietaer and Stefan Brunnhuber state the following in their forthcoming book entitled Our Future Economy: Money and Sustainability – The Missing Link: The relationships between different dimensions of sustainability can be illustrated with the metaphor of a building. In this metaphor, the monetary/financial infrastructure represents the foundation of the sustainability structure, because major instabilities in that field tend to bring to a crisis in all other aspects of society.29

In view of the above statement, it makes sense that the stability of financial systems lies at the heart of sustainability of the overall socio-economic system. Therefore, there is an essential link over and above intersubjectivity between banking/finance and the human systems of society, economics, history, philosophy and psychology. This book is based on the discipline of social and economic transformation; transformation engages a deep connection between the culture of an individual and the community as well as the society involved. As a result, besides the interdisciplinary and interdependent approach which this research is taking, a topographical application of understanding as well as analyzing the Chinese banking and finance from a cultural and philosophical perspective is also necessary. This research, on the one hand, adopts critical theory, which emphasizes the necessity of interdisciplinary knowledge, to deliver an immanent critique of the reality gap between economic theories and financial practices. Critical analysis is also used to identify the traditional roles of financial industry and to illustrate the negativities resulting from the wrong pathway which it has been taking. Moreover, such negativities have been affecting the development and sustainability of humanity. Such underlying knowledge of both western and Chinese financial orientation establishes the backdrop of this research. On the other hand, this book is positioned to reveal the disconnection of human instinct from the philosophical sphere in respect of practising finance. While Lessem and Schieffer30 hold the view that ‘personal inclinations’ occupy the topsoil of a society, Fung31 describes this top level of the topography as ‘the innocent sphere’. If taking a closer look at the four centuries of recurrent financial crises, which were mostly caused by financial speculation, human attitudes and behaviours were, in fact, dominated by their instinct of greed without giving much consideration to society at large. This book then focuses on three cases – the case story of Grameen Bank (Grameen), as well as two fieldwork cases of the China Construction Bank Corporation (CCBC) and Catalyst Foundation. In order to keep the consistency of the overall methodological approach of this book, critical theory has been applied in all three cases as the core methodology, with feminism adopted as a supplementary methodology. Although the Grameen case is not rooted in China, with its success in alleviating poverty in Bangladesh it nevertheless offers a solid learning base for the development of FISM. Because the Grameen Bank is very much rooted in history, its local Bangladeshi contextualization offers important insights into establishing the Chinese-contextualized FISM.

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In the case of Grameen, a particular focus is placed on uncovering and discovering its historical roots in order to try and identify the role and importance of indigenousness in the domains of finance and society. Moreover, such knowledge is then developed and applied to a financial model incorporating Chinese philosophy with western financial rationale. The first fieldwork case relates to CCBC, formerly known as China Construction Bank, incorporated in China in 1954. It is one of the four leading Chinese state-owned commercial banks and it was the first case which demonstrated the radical transition undertaken by the Chinese commercial banks as a result of non-performance and marketization following the country’s economic reform. The transition intensifies in the light of China’s full entry into the World Trade Organization. From a politically dominated dimension to a quasi-market-dominated dimension, the Chinese Government hopes that through foreign participation, going public and marketization, the Chinese banks, including CCBC, will develop better governance and become competitive. A combined discourse and narrative method is used to tell, transcribe and analyze the story of CCBC as the backdrop of this case story. The dialectical approach was applied to 31 senior executives, including eight branch managers of the bank during a management course which took place in late August 2006. The management course was designed by the author, who acted as a dialectic participant, to raise critical consciousness of the Chinese bankers in view of the negative effect that the present banking and financial industry had brought to the development of humanity. Dialogues and discussions were then exchanged in exploring a financial model which would benefit Chinese society as well as aiding the growth and sustainability of the CCBC. The second fieldwork case focuses on Catalyst Foundation, a PAR project operating on a micro scale, within the FISM. Catalyst Foundation, the main case study of this book, is a Chinese-contextualized finance and business initiative founded by the author. Catalyst Foundation, helping women to help themselves, is rooted within the local Chinese culture and offers work opportunities to women who are under tremendous financial and psychological pressure resulting from the changing socio-economic environment of China. As a result of radical social and economic changes, these women are suffering from a loss of identity. A combination of methods – subject–subject dialectic, discourse analysis and narrative storytelling – is applied to uncover the life stories of the Catalyst women workers and to understand as well as to interpret the underlying conditions surrounding their problems in order to try and find concrete solutions. A dialectical approach is adopted as the core method to raise critical consciousness of these women and to help them to regain their dignity as well as to free them from oppression through self-emancipation. PAR is applied to generate new knowledge and to produce practical solutions to empower the disadvantaged women members of Catalyst Foundation, who are also the core members of their respective local communities, to free themselves from domination and in the hope of helping Chinese society to attain better stability as well as sustainability. The core approach of this book is intended to raise critical conscious awareness of the instability of the socio-economic systems of China resulting from its present banking and financial systems. China, although a communist country, has, as a result of the dominance of free trade and marketization philosophies, been following the paths of the West by adopting mathematical and quantitatively driven financial systems. The outcome and fruition of the FISM is to offer an alternative model of finance which aims at achieving better social and economic balance. This model has roots within local Chinese identity, fostered out of Chinese philosophy and applied with western financial rationale.

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Endnotes 1

The Economist. 2009. A great migration into the unknown. [Online]. Available at: http://www. economist.com/PrinterFriendly.cfm?story_id =13012736 [accessed: 8 March 2009].

2

Hiwaki, K. and Tong, J. 2006. Credibility Trap: Japan today and China tomorrow. Human Systems Management.

3 4

Lietaer, B. (unpublished). The Soul of Money. Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

5

Kindleberger, C.P. 2000. Manias, Panics, and Crashes. 4th edition. New York, NY: John Wiley and Sons.

6

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

7

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

8

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

9

Wang, B. 1997. Yellow Emperor’s Canon of Internal Medicine, translated by L.S. Wu and Q. Wu. Beijing, China: China Science and Technology Press.

10 11

Chen, M.J. 2001. Inside Chinese Business. Boston, MA: Harvard Business School Press. Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

12

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

13

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

14

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

15

Du, W.M. 1997. Humanity and Global Moral Principles [Online]. Available at: http://web.cenet.org. cn/web/quin/index.php3?file=detail.php3andnowdir=andid=57931anddetail=1 [accessed: 1 August 2005].

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27

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

17

Chen, M.J. 2001. Inside Chinese Business. Boston, MA: Harvard Business School Press.

18

Held, D. 1980. Introduction to Critical Theory. Cambridgeshire, UK: Polity Press.

19

Held, D. 1980. Introduction to Critical Theory. Cambridgeshire, UK: Polity Press.

20

Held, D. 1980. Introduction to Critical Theory. Cambridgeshire, UK: Polity Press.

21

Morrow, R.A. and Torres, C.A. 2002. Reading Freire and Habermas. New York, NY: Teachers College Press.

22 23

Rosen, M. 1982. Hegel’s Dialectic and Its Criticism. Cambridge, UK: Cambridge University Press. Morrow, R.A. and Torres, C.A. 2002. Reading Freire and Habermas. New York, NY: Teachers College Press.

24

Shepherd, L.J. 1993. Lifting the Veil. Boston, MA: Shambhala.

25

Lietaer, B. (unpublished). The Soul of Money.

26

Phillips, N. and Hardy, C. 2002. Discourse Analysis: Investing Processes of Social Construction. Thousand Oaks, CA: Sage.

27

Held, D. 1980. Introduction to Critical Theory. Cambridgeshire, UK: Polity Press.

28

Reason, P. and Bradbury, H. 2006. Handbook of Action Research, revised edition. London: Sage.

29

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

30

Lessem, R. and Schieffer, A. (2009). Culture and Transformation. Farnham, UK: Ashgate.

31

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

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chapter

3 Finance and Humanity

To exist, humanly, is to name the world, to change it. Once named, the world in its turn reappears to the namers as a problem and requires of them a new naming. Men are not built in silence, but in word, in work, in action-reflection. Freire, as cited in Morrow and Torres, Reading Freire and Habermas

3.1 Introduction Has it ever occurred to you that even though we are living in such a technologically advanced period of human history and that we, human beings, had the ability to land on the moon a few decades ago, why it is that we become so helpless when it comes to dealing with the challenges of preventing financial disruptions? It is also disappointing to see the single-facet approach of quantitative analysis which has been dominating the study and understanding of finance. The present global economic downturn, caused by the collapse of the sub-prime mortgage system, has further questioned our ability to achieve better financial stability. We have now come to a critical point and we need to review how we have been structuring and managing finance, as well as the methodologies and methods applied to studying it. As mentioned in Chapter 1, given the interdisciplinary nature of finance and, moreover, the urgency of raising critical consciousness of financial damages, critical theory, which is profoundly embedded in an interdisciplinary context, serves the interdependent structure of banking and finance very well with its pivotal role in the paradigm of all socio-economic subsystems.

3.2 Background and Development – The Global Context If Bernard Lietaer and Stefan Brunnhuber are correct in saying that human development relies on the stability of the monetary/financial system because it serves as the foundation of all other subsystems at work in the overall socio-economic structure – which includes economic stability, ecological sustainability and governance systems – or if, as postulated by Joseph Stiglitz, that there is something wrong with the global financial system since international financial crises or near-crises have become regular events, it is no longer a consideration of whether there will be another crisis, but where it will happen. The instability of banking and finance has demonstrated substantial negative impacts on the sustainability of all socio-economic systems across the world. The recent sub-prime mortgage-led financial and economic crisis once again confirms this claim. It then raises the importance of the need for a fundamental inquiry into banking and finance using the long underemphasized and neglected interdisciplinary and intersubjective approach. In other words, it is essential to apply an interdisciplinary methodology to develop

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understanding of the underlying relationship between banking/finance and society/ humanity. Relying on a purely mathematical or instrumental approach when studying the impact of banking and finance in its wider context would be either insufficient as an explanation of the potential interdisciplinary consequences or would be oblivious to the overall interdisciplinary effects on humankind. For close to four centuries, since speculation first emerged during the Kipper- und Wipperzeit period (1619–1622), the recurrent financial crises and manias have been severely affecting the development and sustainability of humanity. In Manias, Panics, and Crashes, Charles Kindleberger states: Financial crises are associated with the peaks of business cycles. We are not interested in the business cycle as such, the rhythm of economic expansion and contraction, but only in the financial crisis that is the culmination of a period of expansion and leads to downturn. If there be business cycles without financial crises, they lie outside our interest. Isolated financial crises that prove so manageable as to have no effects on the economic system will also be neglected to an extent.1

Since the stability of the business cycle and the occurrence of financial crisis are explicitly interconnected and interlinked, then the general belief in the boom and bust economic cycles or the uncritical acceptance of the bull and bear financial markets become profoundly questionable. Such uncritical or unconscious belief or acceptance has caused extensive damage to the development and sustainability of humankind. Therefore, it is very important to study banking and finance with critical consciousness. Critical theory, embracing an immanent critique, encourages an interdisciplinary understanding and knowledge development as well as emphasizing the need for conscious awareness of the whole.

3.3 Background and Development – The Chinese Context From the traditional Chinese perspective, the social level of a merchant or a businessman was ranked the lowest within the overall Chinese social strata. The conventional Chinese hierarchical society ranked bureaucrats the highest, followed by farmers, then workers, with merchants or businessmen at the bottom. As a result, even though China does have a long history of offering financial products and services, because the traditional Chinese financial houses such as Qianzhuang (钱庄), Zhangju (帐局) and Piaohao (票号) were privately owned, the study of finance has been insignificant throughout the long history of the country. As a result, the different traditional Chinese schools of thought are very much disconnected from banking and finance. Since there is no available established theory or philosophy from a Chinese perspective relating to banking and finance, the present financial principles, practices and techniques adopted in China have, to a large extent, been imported from the West. Although having said this, the traditional Chinese philosophy of Yin–Yang (阴阳) and the Five Elements (Wuxing) (五行) fits well with the interdisciplinary as well as intersubjective characteristics of the banking and financial systems. Lessem and Palsule in their book, titled Managing in Four Worlds (1997), describe the eastern-holistic world as a catalyzation phase of the ecosystems in that:

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… the system becomes highly sensitized at the catalytic stage. As we shall see later, positive feedback loops amplify small changes and push them through the entire system, keeping it from a ‘far-from-equilibrium’ stage. This is also the stage where life can take new directions and lead to the development of new species and behaviour.2

If implementing changes to effect positive social and economic transformation to better sustain humankind is the ultimate goal of the social sciences, and since banking and finance lies at the centre of all other interconnected socio-economic subsystems, then it is totally appropriate to raise critical consciousness towards the negative impacts which financial crises have brought to the human race. It, therefore, makes a lot of sense to explore and develop a financial model which is able to integrate traditional Chinese philosophical spirit with western financial rationale. The aim of this book is to establish a financial model, in a Chinese context, that brings about social balance, harmony and human sustainability.

3.3.1 The topography of the masculine – yang-characterized banking and finance While the following topography in Figure 3.1 illustrates the orientation and practice of conventional banking and finance, it also addresses the reality gap between financial practice and indigenous Chinese philosophy. It takes into account that an instinctive, goal-getting, self-centred and competitively driven behaviour has been a dominant characteristic of the masculine–yang-driven financial practice for centuries and, as a result, the industry has been disconnecting from the promotion and achievement of harmony and sustainability of humanity. On the one hand, the above topography of banking and finance is illustrated upon the cultural topography of the four levels of topsoil, subsoil, bedrock and core. The topsoil level of a society is where personal inclinations take place, while the subsoil level is where the dominant systems and models are positioned. The bedrock level of a society is where philosophies and ideologies lie, whereas humanities and cultural values are situated at the core level. On the other hand, it also presents the four general grades of spheres of living rooted in the Chinese philosophy. Fung’s view is that what differentiates a man from an animal is the self-consciousness which enables him to understand what he is doing. It is written in Selected Philosophical Writings of Fung Yu-Lan, ‘Different men may do the same things, but according to their different degrees of understanding and selfconsciousness, these things may have varying significance to them.’3 As a result, each individual has his or her own sphere of living: ‘Beginning with the lowest, they are: the innocent sphere, the utilitarian sphere, the moral sphere, and the transcendent sphere’.4 The following is an interpretation of banking and finance in the context of cultural topography in the light of an explanation of the constituents and flows in Figure 3.1.

The innocent sphere – the level of pragmatism Within the cultural topography of banking and finance, the innocent sphere is situated at the topsoil level. This is the level which is driven by personal inclinations and engaged with attitude and behaviour while pragmatism, competition, greed and accumulation-

32

Finance and Society in 21st Century China The Innocent Sphere – Personal Inclinations The Level of Pragmatism and Accumulation-through-Exploitation Market

Topsoil

Market

Performance

Competitiveness The Utilitarian Sphere – Awareness of Self-Benefit The Level of Rationalism and Depersonalized Systems Market Performance

Subsoil

Market Competitiveness

The Moral Sphere – An Individual as part of the Whole The Level of Holism

Bedrock

The Interdisciplinary Knowledge Base: Economics, Sociology, History, Philosophy and Psychology

The Transcendent Sphere – A Member of a Society and the Whole Universe C The Level of Humanism Harmony and Sustainability of Humankind

Core

Figure 3.1 The masculine–yang-characterized banking and finance through-exploitation are the dominant characteristics. Within the innocent sphere of living, without much consciousness, a man just simply does what his instinct or the custom of his society drives him to do. As illustrated by Bernard Lietaer in The Soul of Money,5 the Chinese Yang characteristics are described as competitive, harsh, goal-getting and accumulating while parts explain whole. Within the present masculine–yang-driven banking and financial paradigm, profit maximization, facilitation of speculations, creation and participation in speculative tools as well as lending to the rich emanate from western pragmatism. A very large international banking and financial institution, as it is described in Managing in Four Worlds, is ‘an organization that derives its identity from its separateness from the environment. The physical and economic structure seeks to survive and grow through an accumulationthrough-exploitation of resources’.6 They strive to continue accumulating physical, financial and human capital since these resources ensure their survival and existence. The free flow of capital across borders facilitates expansive and aggressive behaviour. The need to remain competitive underpins the dominance of the international financial

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institutions and how they maintain their competitiveness has become one of the leading considerations of the western school of management for many decades. Through the continuous accumulation of resources, these organizations are able to further their aggressive and forceful dominance of the economy, society and humanity, both locally and globally. China, following its economic reform, has been adopting this western masculine– yang concept of competitiveness. The Chinese banks have undergone a western-type of financial restructuring, which includes merger and acquisition as well as share floatation, believing such to be a commitment to becoming competitive. Moreover, the Chinese banks also introduced financial management services. The launch of respective Chinese investment funds are believed to enrich and add dynamism to the industry. Besides, privatization is also seen as an effective mechanism to promote competitiveness. Alongside the economic reform of China is the massive scale of the privatization scheme implemented by the Chinese Government. The massive scale of privatization since the 1990s has forced a large number of Chinese state-owned enterprises either to close down or become bankrupt. This privatization programme has led to extensive unemployment throughout the country, which has, to a large extent, led to the present huge wealth disparity. Nevertheless, the masculine– yang theory of competitiveness is obviously disconnected from the holistic value of both Mencius and Dao.

The utilitarian sphere – the level of rationalism This second sphere of living is situated at the subsoil level within the topography of banking and finance. Within this utilitarian sphere of living, an individual is aware of what he is doing and everything he does ‘has the significance of utility for himself’.7 From the perspective of a society, the subsoil level is where the respective legal, political and economic systems are structured. This level is a structural formation of a society governed by its dominant systems and models. This subsoil level of rationalism is built on a layer of depersonalized systems and is concept-based instead of context-based. Lessem and Palsule say that ‘The pursuit of rationality is to transcend the network of all the possible casual relationships and abstract out details that will be of specific use. The rational mode seeks external coherence, the uniformity and standardization that is so necessary in future implementation.’8 However, the rational approach is unchanging in form, although it propels rapid change. More importantly, the dynamic interdisciplinary understanding and knowledge are not taken into account and alarmingly, once a concept is formed and developed, it becomes the paradigm for all future business. Based on rational thinking and reasoning, policies of banking and finance decided by the polities tend to be instrumental as well as operational whereas any interdisciplinary dynamism is often excluded from such patterns of thinking. As a result, as illustrated in Figure 3.1, the instrumental marketdriven and market-oriented mechanisms easily become the dominant influence on those in power when deciding on the systems and policies of the financial industry.

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The moral sphere – the level of holism The moral sphere is situated at the bedrock level, which is the level of philosophical manifestation. Lessem maintains that, at the bedrock level, ‘we are dealing with the holistic philosophies and policies, that is the ideologies’.9 Unlike the western pragmatic orientation or the northern rational approach, the eastern holistic manner is very much contextual. Lessem and Palsule state that ‘The western world is all about defining identity through formation of structures and the articulation of boundaries, and the northern one about becoming a concrete entity. In contrast, the eastern world is about dissolving one’s finite and local identity in order to discover one’s infinite and global “non-entity” or universality.’10 Within this moral sphere of living, ‘a man may come to understand that a society exists, of which he is a member. This society constitutes a whole and he is a part of that whole’.11 Through this understanding, the righteousness of a man takes priority over his personal profit. He is, therefore, a moral man and everything he does has a moral significance. A moral person within Confucianism is someone who is virtuous, righteous and altruistic. These characteristics of the East are firmly embedded in the philosophy of holism. Under a holistic political system, people are empowered to live morally and happily. Policies are no longer dogmatic and cannot be reduced solely to instrumental or operational matters such as our present financial systems. An interdisciplinary knowledge, which is based on an integrated study taking into account an understanding derived from history, economy, society, philosophy and psychology, is profoundly needed for the enablement of the development and sustainability of humankind. However, as illustrated in Figure 3.1, the present dominant financial systems and the relevant governing policies are disconnected from the necessary interdisciplinary and holistic concerns.

The transcendent sphere – the level of humanism This transcendent sphere of living is the highest sphere where a man realizes that there is the universe over and above society. He understands that he is both a citizen of society and Heaven as well. Therefore, he does everything for the benefit of the universe. As Fung states, ‘This understanding and self-consciousness constitute for him a higher sphere of living which I call the transcendent sphere.’12 The transcendent sphere, which is situated at the core level of a society, is where one’s cultural images lie: ‘They are key sources of creativity and innovation. They are the source of transformation, drawn from nature, the humanities or indeed from the depths of religion; that includes languages in its original context, informing our imagination.’13 In other words, this core level is where the identity of a person, society and nation is based. To live in the transcendent sphere requires one to be familiar with the principles of Dao. While the spirit of Dao fosters the balance nature of Yin–Yang, it also nurtures the harmonious and interconnected sequence of the Five Elements. From an interdisciplinary knowledge perspective, banking and finance, at the core of all other socio-economic subsystems, is beyond the remit of policies decided by a small number of power-players. Banking and finance should be developed as resources to be constantly shared by humanity at large. If banking and financial industries are only interested in benefiting the minority rich and excluding the poor from opportunity and equality, or their only concern is economic achievement ignoring social and human

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development, then the existence of the industry is in violation of the ultimate socioeconomic goal of attaining the development and sustainability of mankind. Attaining harmony and human sustainability should always be a priority of every government. Regarding Confucianism, ‘The intention of the whole political system is to enable people to live virtuously and happily.’14 More importantly, a good government is the key to attain social and cosmological harmony.

3.4 Time to be Critically Conscious If the ultimate goal of social sciences is to successfully attain social harmony, human growth and sustainability, and if banking and finance is the foundation of all the interdependent and intersubjective socio-economic subsystems, given that this book is rooted in a Chinese context, it is both critical and crucial to develop a financial model which is embedded in the eastern holistic spirit whilst manifesting itself in western financial rationale. To successfully achieve sustainability requires critical consciousness of the government, administrators and the respective citizens, who are, on the one hand, an integral part of the ecological whole, whilst, on the other hand, such actors are constantly making impacts on the whole system’s sustainability. The topography of the masculine– yang-characterized banking and financial industry illustrates that the fundamental and structural establishment of a particular financial system is a function of the polity within. The policies and systems implemented come from decisions made by the few within the political entity, although the outcome of these depersonalized policies and systems affects the livelihoods of the entire population. Marketization, the dominant force of economies for decades, has long overshadowed the importance of a society being supported by or operating within a framework of interdisciplinary considerations. Governments’ decisions and polices are, by and large, manipulated and controlled through short-term market competitiveness as well as market performance. Long-term human sustainability, which has to be a function of a much broader interdisciplinary understanding and knowledge, is mostly neglected. Due to this phenomenon, the priority of achieving harmony and sustainability for humankind has, to a large extent, been replaced by marketization. Since the financial systems lie at the core of stability of all other socio-economic subsystems, the establishment of a financial model which enables and empowers the sustainable development of the intersubjective socio-economic subsystems is the most pressing challenge.

3.4.1 Why critical consciousness is essential While this book aims to foster social and economic transformation, social and economic transformation is, in fact, rooted in history. Critical theorists, like Horkheimer and Habermas, contend that ‘knowledge is historically rooted and interest bound’.15 In other words, history is the foundation of knowledge creation. Although this book is not about methodology, the underlying approach to understand and create financial knowledge, however, makes fundamental differences. Given that both social and economic transformation and critical theory emphasize deep understanding of a particular individual, society in general, its history, economy and culture, these disciplines also foster an interdisciplinary and intersubjective approach of understanding and knowledge. It is,

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therefore, appropriate to apply the core characteristics of critical theory as the foundation of studying and understanding finance in the social and economic sphere. Being critical requires an immanent critical approach, which is an irreplaceable element to understand the ever-changing world from an interdisciplinary knowledge base. Habermas views that social norms can be related to empirical or analytical propositions, but that their validity is grounded only in the intersubjectivity of the mutual understanding of intentions. Since banking and finance lies at the heart of all the interconnected and interrelated socio-economic subsystems, an effective study and understanding of such cannot be fully explained and illustrated by reductive and instrumental quantitative tools or methods alone. The industry and its systems also have to be understood and analyzed qualitatively from an intersubjective perspective. Furthermore, in view of our technically dominated world, Habermas argues that ‘The increasing tendency to define practical problems as technical issues threatens an essential aspect of human life; for technocratic consciousness not only justifies a particular class interest in domination, but also affects the very structure of human interests.’16 As well as Habermas, another leading critical theorist, Horkheimer, insists that critical consciousness is built on exploring the question of the interconnection between the economic life of society, the psychic development of the individual and the transformation in the realm of culture. If the holistic eastern values are taken into consideration, the understanding of financial knowledge should adopt an interdisciplinary approach on the one hand. On the other hand, an interdependent knowledge within Chinese history, its economy, sociology, philosophy and psychology – the five fundamental elements of knowledge – should be fostered. These Five Elements are indeed interconnected and intersubjective. The interdisciplinary characteristics of critical theory fits well with the Chinese philosophy of the Five Elements (Wuxing) (五行). Fung Yu-lan states in A History of Chinese Philosophy that ‘Each of the Five Elements circulates according to its sequence; each of them exercises its own capacities in the performance of its official duties.’17 While capitalism is considered to be incapable of resolving disparity, countries such as China and Russia which had adopted planned economies have also suffered from painful economic failures. Countries in the last 60 years have, by and large, adopted either capitalist free or socialist planned economic systems. While capitalism has been unable to take care of society holistically, Soviet socialism has failed to create economic and social prosperity. People with critical consciousness begin to question both schools of thought since neither of them seems to be able to lead to overall stability and sustainability. While our present world is full of distrust and mistrust, wealth disparity and unemployment have led to the insecurity of and hostility between rich and poor. Sustainability seems to be an unachievable ideal. Besides critical consciousness, a feminist perspective, a contrasting understanding of the underlying relationship between banking/finance and society/humanity to that of the present male-dominant interpretation, is as necessary. Given that Chinese culture is rooted in the dynamic tension and relationship between the Yin and Yang, it is natural for female and male to interrelate and coexist. Apart from the Yang characteristics which have long dominated financial behaviour, the characteristics of Yin described by Linda Shepherd18 as yielding, sense of community, intuition and application of knowledge, or as mentioned in The Soul of Money19 as cooperation, giving, connecting and caring, attempt to explain the whole system rather than just analyzing parts of it. The Yin characteristics provide a significant basis for consideration of how banking and finance can benefit humanity as a whole. In Lifting the Veil, Linda Shepherd states:

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As the ‘principle of relatedness,’ all the qualities of the Feminine arise from a sense of interconnectedness. Feeling, nurturing, receptivity, cooperation, intuition – all are based on interdependence, a keen awareness of relationship to the other and to the whole.20

3.5 Conclusion In this book, the review and study of the financial industry of China is supported by the backdrop of an interdisciplinary study of the Chinese historical and social development over the past 160 years. The socio-economic changes and events that occurred during the period studied give a broader understanding of the impact of underlying Chinese economy, society, politics, philosophy and psychology on events. From the understanding derived, the core values of Chinese society and people are identified. The discovery and recovery of Chinese identity is extremely important to the establishment of the Finance-in-Society Model (FISM) in a Chinese context since it is aimed at bringing about stability and sustainability in Chinese society.

Endnotes 1

Kindleberger, C.P. 2000. Manias, Panics, and Crashes, 4th edition. New York, NY: John Wiley and Sons.

2 3

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell. Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

4

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

5

Lietaer, B. (unpublished). The Soul of Money.

6

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

7

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

8

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

9

Lessem, R. (unpublished). Local Identity to Global Integrity.

10

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

11

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

38 12

Finance and Society in 21st Century China Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

13

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

14

Shenk, D.W. 1999. Global Gods, 2nd edition. Scottdale, PA: Herald Press.

15

Held, D. 1980. Introduction to Critical Theory. Cambridge, UK: Polity Press.

16

Held, D. 1980. Introduction to Critical Theory. Cambridge, UK: Polity Press.

17

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

18

Shepherd, L.J. 1993. Lifting the Veil. Boston, MA: Shambhala.

19

Lietaer, B. (unpublished). The Soul of Money.

20

Shepherd, L.J. 1993. Lifting the Veil. Boston, MA: Shambhala.

chapter

4 Banking and Finance in a Global Context

Faced with widespread destruction of the environment, people everywhere are coming to understand that we cannot continue to use the goods of the earth as we have in the past. A new ecological awareness is beginning to emerge, which rather than being downplayed, ought to be encouraged and developed into concrete programs and initiatives. Pope John Paul II

4.1 Introduction It now comes to the point that we need to, through studying and analyzing the different economic theories, identify the reality gap between economic theories and financial reality. More importantly, from the knowledge derived, a different approach is encouraged to effect financial application in the hope of promoting and achieving better socio-economic equilibrium. It is debatable that the free flow of capital, in particular the free flow of shortterm capital, which exists hand-in-hand with free trade, is likely to be the underlying cause of justifying and facilitating financial speculation. This chapter is structured to provide a close examination of the validity of this claim and consists of three parts. The first part analyzes the fundamental arguments of the theories of market capitalist and market socialist economic systems. From the analysis made, a synthesis of the dichotomy between the respective economic theories and the practice of banking and finance is attained whilst the reality gap between such is identified. The second part of this chapter creates an understanding, from a critical perspective, of the reality of close to four centuries of recurrent financial crises and more significantly, the resulting disastrous social and economic damage that, in turn, has proved to be hazardous to the stability and sustainability of humankind itself. The final part of this chapter, derived from the identified reality gap, aims to raise critical consciousness of the importance of promulgating an interdisciplinary-oriented rather than a purely mathematically driven financial system in the hope of bringing about better social and economic stability. Hughes and MacDonald state that since the introduction of the first world bourse (stock market) in 1460 in Antwerp ‘where capital and credit were made available to royal borrowers on an ongoing basis in return for guaranteed tax revenue or other promises of repayment’,1 the core activity of banks was no longer just acting as intermediary between depositors and borrowers or facilitating trade in goods. Since then, banking and money have become instruments for financial trading and speculation. Unfortunately, the free

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movement of capital has been controlling the fortunes and manipulating the lives of many individuals over the globe. Shelagh Heffernan, in her book entitled Modern Banking states: Kindleberger (1978) employs the Minsky (1977, 1982, 1986) model as his framework for explaining financial crisis. Kindleberger’s interpretation of Minsky is as follows. Any financial crisis is an endogenous part of the business cycle. There is an exogenous shock to the financial system, which is significant enough to improve profit opportunities in a new or existing sector of the economy, and worsen them in others.2

Nonetheless, in respect of the liberation of financial markets, which, to a large extent, encourages the free flow of capital, George Soros has made the following statement in his book entitled The Crisis of Global Capitalism: The system is very favourable to financial capital, which is free to go where it is best rewarded, which in turn has led to the rapid growth of global financial markets. The result is a gigantic circulatory system, sucking up capital into the financial markets and institutions at the centre and then pumping it out to the periphery either directly in the form of credits and portfolio investments or indirectly through multinational corporations. As long as the circulatory system is vigorous, it overwhelms most other influences. Capital brings many benefits, not only an increase in productive capacity but also improvements in the methods of production and other innovations; not only an increase in wealth but also an increase in freedom. Thus countries vie to attract and retain capital and making conditions attractive to capital takes precedence over other social objectives.3

Soros comments further that the system which allows free capital flow is deeply flawed and he states that ‘As long as capitalism remains triumphant, the pursuit of money overrides all other social considerations. Economic and political arrangements are out of kilter.’4

4.2 Capitalism versus Socialism Society has been perplexed by the controversial intellectual and practical disputes between capitalism and socialism over the past 150 years. Arnold provides an explanation of such a phenomenon in his book entitled The Philosophy and Economics of Market Socialism – A Critical Study: On the face of it, the dispute seems to be about economic systems. However, some writers have used the terms ‘capitalism’ more broadly to refer to a society in its entirety or even to a culture. ‘Socialism’ has sometimes been used in a similar way, and it has also been used to refer to a social movement. Using these terms in such broad ways serves to emphasize the interdependence of social institutions and the interconnectedness of social phenomena generally.5

For Arnold, the important types of economic systems in history are a product of the individual kinds of property rights that comprise them. Therefore, in order to identify an economic system as a capitalist or a socialist one, it is advisable to apply the term free enterprise system to define such. According to Arnold, the free enterprise system ‘is any

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economic system in which (1) most of the means of production (raw materials, capital goods, and so on) are privately owned and (2) people are free to sell their labour on the market’.6 In other words, the free enterprise system is a laissez-faire discipline in which individuals and groups are free to acquire as well as to dispose of most of the means of production as and when they see fit, although the State can own some means of production. As a result, investments made in the free enterprise system are driven by private initiatives while the large-scale investment planning implemented by the State does not occur in such a system. On the other hand, in a socialist economic system, private ownership is, by and large, prohibited while social ownership and social control are the dominant features. As summarized in The Philosophy and Economics of Market Socialism – A Critical Study: A crucial difference between the most defensible form of market socialism and a free enterprise system is that the former; but not the latter, mandates by law a certain type of economic organization, the self-managed cooperative. By contrast, in a free enterprise system, production can be and is in fact organized through a variety of different organizational forms.7

Nevertheless, whilst the socialists that criticize free enterprise systems mention ‘exploitation, material inequality, unemployment caused by the business cycle, alienation, and a lack of democratic control over one’s economic life’, the critics of socialist economic systems describe that ‘they are grossly inefficient, gratuitously restrictive of personal freedom, and non-fortuitously associated with totalitarian political systems’.8 The analysis that follows is structured to analyze and synthesize the literature of various capitalist and socialist schools of economics. The apparent dichotomy between capitalist and socialist theories gives rise to the question of a reality gap between the economic theories and actual practice of banking and finance.

4.2.1 The classical wisdom of market and freedom The beginning of the era of classical economics is thought to be 1776, the year when Adam Smith’s Wealth of Nations was published, although some argue that its starting point is 1750.9 Adam Smith (1723–1790), the most prominent economist to advocate free market theory, opposes any form of economic concentration or monopolization. Smith maintains that an efficient market economic system would facilitate the activities of entrepreneurs and owner-managed private enterprises in trading goods freely with little government intervention. The term free market economy can be defined as an economic system in which small- and medium-size private owners and producers are free to make their own economic gains through free competition. Smith argues that within the economic structure of the free market, ‘there was a minimum unifying social force in all economic activity – individual material self-interest – and sought to show that the results in a decentralized system, provided markets were competitive and particularly provided there was minimum government interference’.10 The only mention of his famous invisible hand in the entire 1,000 pages of The Wealth of Nations asserts that the invisible hand of the market transforms the pursuit of self-interest into the benefit of a society. In relation to the role of an individual in a free market, Smith states that:

42

Finance and Society in 21st Century China By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.11

However, the practice of today’s businesses acts rather differently from the above presumption of Smith. While profit maximization has been the core motive of enterprises, wealth accumulation has, by and large, been the major orientation of individuals. Nevertheless, Smith views that whilst pursuing his own interest, an individual would have passed on the benefit to a society. For Smith, such benefit would be derived from the division of labour. Therefore, monopolization, with its exclusivist orientation promoting special economic advantage, is most hazardous. As Smith puts it in The Wealth of Nations: To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful.12

From the above statement made by Smith, it is obvious that he objects to any form of monopolization, trade protection, or any kind of government intervention in the employment of private capital which prohibits the freedom of trade. Therefore, the focus of Smith’s monetary theory lies in the heart of facilitating free trade. As O’Brien states in The Classical Economists Revisited: The essentials of the analysis came from the Wealth of Nations. Money was a commodity which came to serve a special role in the transition from a barter to a monetary-exchange economy. It had to act as a standard of value, medium of exchange, and store of value.13

Since Smith viewed paper money as an efficient means of circulating capital and an effective medium of exchange for trade, he stressed that the creation of money should be in line with the effectual demand. For Smith, the substitution of paper for metal as money was a great advantage to the country as long as the amount of issued paper money could be readily converted into metal. In other words, the amount of paper currency in circulation should be equivalent to metallic currency available. Any unhealthy creation of money is likely to upset the balance of the economic system. Smith clearly believed that there was potential danger where too much money was in circulation within a country. However, taking into consideration that Smith did not view money simply as wealth but as a generally acceptable medium of exchange, he was not concerned with its quantity. Smith never really precisely identified the quantity of money that a country should have in circulation but he could see the importance of regulating the supply of paper money for the purpose of trade, particularly when there was a shortage in metal. Smith states that ‘well-regulated paper money will supply it, not only without any inconveniency, but, in some cases, with some advantages’.14

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Although Smith did not live to see subsequent monetary turmoil and financial crises, he, in a sense, demonstrated an acute awareness of the dangers of ‘hot money’ these days. He would, however, not be able to foresee his free trade theory being quoted and applied by the liberal monetarists as a justification for the free flow of capital. For example, the influx and efflux of hot money into and out of financial markets has arguably never really benefited the actual production or employment of countries. At the same time, the volatility of the supply of money has unquestionably challenged the social and economic equilibrium. Apart from Adam Smith, David Ricardo (1772–1823) is the other prominent figure of classical economics. Ricardo has been named the principal founder of the classical school of political economy. The renowned Ricardian theory of comparative advantage represents the next stage in the development of freedom of trade, in particular for the benefit of foreign trade. As Ricardo states in The Works of David Ricardo (2002): It has indeed been contended, that the great profits which are sometimes made by particular merchants in foreign trade, will elevate the general rate of profits in the country, and that the abstraction of capital from other employments, to partake of the new and beneficial foreign commerce, will raise prices generally, and thereby increase profits.15

For Ricardo, trade is related to comparative costs which enable a more efficient allocation of resources. As a result, economies are made which bring about a given income while at the same time increasing the possible output from such given resources. While both Smith and Ricardo were convinced of the benefits of free trade, they recognized the growing importance of banking and finance once paper money was introduced. While Smith asserted that the amount of paper money should be equivalent to the metal available, Ricardo viewed that the balance-of-payments and price relativity in different countries could ensure equilibrium in trade without the need for physical settlement in metal. Ricardo, in his labour theory of value, believes that goods are exchanged against goods without overproduction, underconsumption or cycle. It is very important to note that the Ricardian value theory has led to the neo-classical approach to the problem of value from the supply side, which puts the emphasis on all costs of production. The Austrian School, on the other hand, approaches this problem from the demand side, where utility or subjective value plays the major role. The Ricardian theory assumes a perfect market with free competition where monopoly does not exist. Ricardo purposely focuses on the long-term values of all commodities operating within a balanced economic system and incorporating the absolute value of labour. He views any short-term market value and force as illogical and unstable. David Ricardo, as described by O’Brien, ‘was in many ways the most powerful exponent of the quantity theory, and there is no doubt that his formulation provided a focus for the Currency School later in the 19th century’.16 Similar to the other rigid Bullionists, including Boyd, Wheatly and Lord King, Ricardo views ‘the high price of bullion and the depressed exchange as clear symptoms of a high domestic price level in terms of paper currency’.17 In other words, it is a phenomenon which points to domestic price levels being too high in relation to those of other countries. This will result in a balanceof-payments deficit where ‘Ricardo argued that what he regarded as the symptoms of inflation automatically required contraction of the note issue’.18 For the rigid Bullionists, ‘the price of bullion provided a measure of the differences between the existing price level and that which would have prevailed under convertibility’.19

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However, Ricardo argues that with ‘the value of money and the amount of payments remaining the same, the quantity of money required must depend on the degree of economy practised in the use of it’.20 Nonetheless, although he was born in the year when Britain experienced a fierce financial storm, he had not seen that the creation of paper money had long been disconnected from actual economic needs. Ricardo and other Bullionists ‘were preoccupied with the development of the theory of monetary policy under a regime of inconvertible paper, assumed that, if convertibility were once restored, it would not be endangered by over-issue’.21 Therefore, they did not entertain the possibility of the inconvertibility of paper money into metal. As a result, although Ricardo clearly recognized the threat of inflation, he had not worked on resolving the problem of the over-issue of paper money, which certainly triggers high inflation and threatens the state of economic equilibrium. In The Classical Economists Revisited, O’Brien states that ‘The assertion that the money supply depended on the price level (or on the price and income levels), which led to passive money creation with such disastrous results in the mid-20th century, especially in the 1970s, had already been shown by the Classical economists to be fundamentally flawed.’22 Finally, while Ricardo’s original foreign trade theory did not really go beyond the twocountry and two-commodity scenario, it has been adopted by speculators as justification for their financial trading above and beyond the trade in real goods and services. The reality is that since 1971, only 5 per cent of international trade has been contributed by the actual trade of goods and services, while international money exchange has been dominated by foreign exchange speculation.23 More precisely, following the collapse of the Bretton Woods system and the beginning of floating exchange rates, with the inconvertibility of paper money becoming an accepted practice of finance, the global economy has been repeatedly challenged by financial crises and crashes.

4.2.2 The neo-classical concepts of market capitalism Friedrich August von Hayek (1899–1992), a supporter of Smith, was one of the most influential monetarists and economists of the 20th century. Hayek came from the Austrian tradition and was particularly concerned with the liberal civilization of Europe of the 19th century being rapidly replaced by growing totalitarianism with the principle of laissez-faire increasingly challenged by government control. Hayek shared the view of de Tocqueville and Lord Acton ‘that socialism means slavery’.24 He strongly opposed collectivism or a planned economic system, stating that: It is socialism which has persuaded liberal-minded people to submit more to that regimentation of economic life which they had overthrown because, in the words of Adam Smith, it puts governments in a position where ‘to support themselves they are obliged to be oppressive and tyrannical’.25

While Hayek viewed economic control as the total control of human lives, he was particularly alarmed by ‘the decline of competition and the growth of monopoly’.26 The phenomenon of monopoly capitalism, according to Hayek, threatened the balance of economic relationships built upon the fundamental principle of laissez-faire. In view of the Hayekian theory, a monetary disturbance, created by the injection of new money through credit markets, can induce an ‘intertemporal discoordination of economic

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activities’.27 Such a dis-coordination will lead to an artificial economic boom and when this is eventually recognized, a bust will occur. While the injection of new money may suppress the real rate of interest and trigger an increase in economic activity, resources become intertemporally allocated according to an incomplete restructuring of creditfinanced capital. Since such an economic increase is not supported by actual resource availabilities, the unanticipated money injection, as a result, distorts the long-run equilibrium between relative prices and real wages. The resulting disequilibrium will lead to an economic bust with a recovery only taking place once market adjustments are made to eventually reabsorb unemployed capital and labour into the structure of production. Therefore, Hayek’s claim is that any government intervention or artificial increase of credit by banks leads to ‘changes in the total quantity of money that can never contribute to the maintenance of equilibrium but on the contrary must always disrupt it’.28 Furthermore, in the context of Hayek’s theory, monetary manipulation falsifies real interest rates and the amount of investment. As a result, it causes misinformation relating to saving and consumption. Such market misinformation, resulting from the monetary disturbance, leads to economic disequilibrium and volatility. Although Hayek’s theory of economic equilibrium undoubtedly illustrates the danger of the oversupply of money, it has not really tackled the challenges of economic and financial imbalance resulting from the free flow of hot money. More precisely, his theory of economic freedom has not really postulated a solution focused on preventing the recurrence of financial crises and crashes triggered by the freedom of financial speculation. Hayek’s economic theories have been revived and used by right-wing monetarists such as Nobel Prize winner Milton Friedman (1912–2006). Both Hayek and Friedman ‘are often considered the two leading libertarian thinkers of the 20th century’.29 Although both Hayek and Friedman were committed to freer markets and less government control, Hayek did, in fact, criticize Friedman for putting too much stress on positivisticempirical analyses and statistical data regarding his monetarism. Nonetheless, it is generally viewed that one of Milton’s major contributions to monetary development has been his work on flexible exchange rates. Friedman, in his book entitled Capitalism and Freedom, argues that: A system of floating exchange rates would therefore enable us to proceed effectively and directly towards complete free trade in goods and services – barring only such deliberate interference as may be justified on strictly political and military grounds; for example, banning the sale of strategic goods to communist countries. So long as we are firmly committed to the strait jacket of fixed exchanges rates, we cannot move definitely to free trade.30

Friedman proclaims a number of benefits of his theory of flexible exchange rates. First of all, the system of flexible exchange rates increases the liberation of trade and secondly, it avoids direct governmental control. Moreover, whilst such a system facilitates rearmament, it also harmonizes internal monetary and fiscal policies. However, arguably, the flexible exchange rates system has been seen as triggering the instability of prices and international financial speculation. Regarding monetary freedom, Friedman sees ‘the most important aspect of monetary stimulus or contraction is its degree both with respect to economic activity and average prices’.31 It is fair to say that Friedman’s monetary theory is by and large empirically oriented. It tends to underemphasize negative socio-economic effects, including the misallocation of resources and misdirection of investments, caused

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by the force of influx and outflow of hot money resulting from financial speculation, or more precisely, the liberation of finance which provides room for such speculation to gain ground. This claim can be justified by Friedman’s view on the Great Depression in his book entitled Capitalism and Freedom as follows: The stock market crash in October, 1929, which terminated the bull market of 1928 and 1929 is often regarded as both the start and the major proximate cause of the Great Depression. Neither is correct. The peak of business was reached in mid-1929, some months prior to the crash. The peak may well have come as early as it did partly as a result of relatively tight money conditions imposed by the Federal Reserve System in an attempt to curb ‘speculation’ – in this indirect way, the stock market may have played a role in bringing about the contraction. The stock market crash in turn undoubtedly had some indirect effects on business confidence and on the willingness of individuals to spend which exerted a depressing influence on the course of business. But by themselves, these effects could not have produced a collapse in economic activity.32

Friedman blamed the Reserve System for having allowed the money stock to decline by 3 per cent from August 1929 to October 1930 and as a result, triggering a series of bank failures that eventually led to widespread bank runs. After that, the economy was trapped in recurrent liquidity crises and a general loss of confidence in banks which depressed the economy further. Friedman goes on to state in Capitalism and Freedom that ‘Again, the Reserve System stood idly by. In the face of an unprecedented liquidation of the commercial banking system, the books of the “lender of last resort” show a decline in the amount of credit it made available to its member banks.’33 In Friedman’s monetary framework, the flexible rates system is not unstable and instabilities are caused by government’s intervention. Friedman maintained in Exchange Rates and International Finance Markets: An Asset-Theoretic Perspective with Schumpeterian Innovation that ‘Advocacy of flexible exchange rates is not equivalent to advocacy of unstable exchange rates. The ultimate objective is a world in which exchange rates, while free to vary, are in fact highly stable.’34 For Friedman, stable international exchange rates can be attained if all nations are able to achieve stable domestic prices. In order to achieve financial stability, Friedman’s view is that further banking and fiscal reforms that convert governmental financing operations to predictable and stable lending and investment activities are required. However, what is really missing in Friedman’s theoretical interpretation is the undeniable and powerful force of the free flow of hot money. Given Lietaer’s claim that 95 per cent of international money exchanges are related to financial speculation, unless governments can intervene in such a way that hot money can be transformed to become constructive rather than destructive, the benefits and advantages of financial liberation advocated by Friedman are going to be continuously offset and overshadowed by financial turmoil. While Milton Friedman achieved his peak influence in economics from the late 1950 through the 1980s, the triumph attained by John Maynard Keynes (1883–1946) in the same economic arena occurred during the 1950s and 1960s. John Kenneth Galbraith commented that, in respect of the history of economics, ‘The age of John Maynard Keynes gave way to the age of Milton Friedman.’35 However, though Keynes and Friedman shared similar views in support of free trade and capitalism, Keynes nonetheless favoured

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government intervention. The view of Keynes is that the classical doctrine of automatic recovery from economic slump is fatally flawed both theoretically and empirically. Keynes holds that government intervention has to replace laissez-faire in order to lift the economy out of a deepening depression. In Milton Friedman – A Biography, Ebenstein states that ‘Keynes expressly rejected socialism (common ownership of the means of economic production) and communism (common ownership of all property), favouring instead government intervention in a free market economy.’36 Keynes made enormous efforts in analyzing and establishing the relationship between economics and unemployment. According to the classical economists, including Smith and Ricardo, unemployment would result if wages could not be adjusted downwards to absorb excess labour supply. Accordingly, the classical theory views that market forces, in particular the price adjustment mechanism, is efficient enough to restore an economy to full employment without the need for government intervention. Keynes, on the other hand, advocated that ‘if the government could control changes in output through adjustments in investment and fiscal policy then resulting cumulative forces of activity might be a way of pulling the economy out of recession or depression’.37 As a result, unemployment could then be avoided. The differences between the classical thinking and Keynesian theory can also be illustrated through contrasting the views of Hayek and Keynes. As a whole-hearted supporter of market and freedom, Hayek’s view is that business cycles are caused primarily by over-investment which in turn distorts the natural levels of supply and demand and prevents them from returning automatically into a state of equilibrium. For Hayek, the natural level of supply and demand is attained when they are in equilibrium. Keynes, however, holds a different view. He calls for the government to invest in public works as a solution for the prevention and alleviation of unemployment. The Keynesian theory advocates that a greater State involvement can somehow integrate into the overall economy and stimulate greater activity in the private sector. This theory, however, is criticized by Friedman as spurious and not comprehensive. Friedman argues that, on the one hand, government expenditures may not necessarily result in an improvement of income. Friedman points out, ‘A rise in government expenditures relative to income is not expansionary in any relevant sense.’38 On the other hand, government expenditures may increase monetary income, however, private expenditures may remain unchanged since the additional income generated may well be absorbed by government expenditures. As a result, private expenditures may even become smaller in real terms. It is worth noting that the post-war prosperity enjoyed by the industrialized nations is often credited to the adoption of Keynesian ideas. However, since the abandonment of the Bretton Woods system, as pointed out by Bernard Lietaer, foreign exchange volatility has been four times greater than the period of pegged exchange rates.39 Arguably, a shift to the reliance on mathematics rather than policy in economic management has been seen after the rise of Friedman and the monetarists during the Thatcher and Reagan eras of government.

4.2.3 Market socialism and control The worker becomes all the poorer the more wealth he produces, the more his production increases in power and range. The worker becomes an ever cheaper commodity the more commodities he creates. With the increasing value of the world of things proceeds in direct portion the devaluation

48

Finance and Society in 21st Century China of the world of men. Labour produces not only commodities; it produces itself and the worker as a commodity – and does so in the proportion in which it produces commodities generally. Karl Marx – Economic and Philosophic Manuscripts of 1844

While a capitalist free enterprise system relies on market and freedom, the term of socialist economic system is harder to define because socialists hold different views as to what socialism is. Arnold states in The Philosophy and Economics of Market Socialism that: Those who favour socialism generally speak of social ownership, social control, or socialization of the means of production as the distinctive positive feature of a socialist economic system. But what does this amount to? The main idea seems to be that an economic system is socialist only if control of the means of production is exercised in the interests of society at large or at least in the interests of the working class.40

While Marx (1818–1883) criticized capitalism as exploitative and alienated, socialism is viewed as economically impracticable and not feasible since it is seen to be unable to provide labour with adequate incentives. Given that socialism was identified as central planning and since the central planning board of a socialist government performs the functions of the market, the question is then raised as to whether a centrally planned socialist economy allows free consumer choice and effects a rational allocation of resources. In On the Economic Theory of Socialism, Oskar Lange (1904–1965) states that ‘the real danger of socialism is that of a bureaucratization of economic life’,41 while it is also viewed that ‘the problem of a rational allocation of resources is the central problem of socialist economics’.42 Lippincott further states that Professor von Mises (1883–1953), a leading opponent of socialism, ‘has argued vigorously that a rational allocation of resources is impossible in a socialist state on the ground that public ownership of the instruments of production does away with a market for capital goods’.43 Mises’ argument is supported by Arnold, who points out that the key individuals under a socialist economy do ‘have a strong incentive to prevent the efficient allocation of resources’.44 Arnold argues that since the key individuals are evaluated according to their success in meeting production targets, they have the tendency to underestimate plant capacity and overstate production capability. The question is raised as to the reliability of economic calculations in view of a socialist economic system. Hayek reinforces Mises’ argument by stating that in the absence of market prices, no accurate valuation of the true costs of production will be arrived at: ‘Since central planning does away with market pricing, it cannot properly value economic inputs and outputs. This makes it profoundly and inherently inefficient.’45 In other words, if there is no market for capital goods, there will not be any price for them, and, without prices, economic calculation becomes impossible. Nevertheless, in On the Economic Theory of Socialism, Lippincott states the following: Lange argues that if prices are looked at not in the narrow (ordinary) sense of the word as exchange ratios on a market (or the money for which a material thing or service can be obtained), but in the generic sense of ‘terms on which alternatives are offered’, then there is no difficulty for socialism. For the absence of a market does not prevent the setting up of accounting prices of provisional valuations for the purpose of allocating resources.46

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Furthermore, Barone, an Italian economist, maintains that since production would be ordered, to a great extent, in the same way in a socialist regime as in a competitive one, the accounting prices of a socialist economy would, as a result, be economically as significant as the market prices of a competitive capitalist system. However, Hayek and Robbins view that although a rational allocation of resources in a socialist economy is theoretically feasible, the practicality of such remains impossible. Nonetheless, Lange argues that the determination of prices in a socialist economy and a competitive capitalist economy would basically be the same. Given the trial and error method applied to attain and maintain an economic equilibrium is shared by both capitalist and socialist economies, Lange claims that a socialist economy is able to reach the right equilibrium prices within a much shorter succession of trials than a competitive market. The supporting reason of such a claim is that a socialist economy, under the administration of the central planning board of a State, would be able to access a much wider knowledge base in comparison than any private entrepreneur in a capitalist system. Moreover, since social costs would also be evaluated in a socialist economy, as a result, much of the social waste associated with private enterprises would be eliminated or avoided in a socialist economy. Hayek, on the contrary, challenges the efficiency and effectiveness of production under central planning, given the fact that the only manageable way to gather and process the huge quantities of information required for planning a large economy is to adopt a form based on statistics. Hayek’s critique of statistical information is that given its nature, it is unable to identify, record and measure all minor differences and consideration. At the same time, the minor factors may be crucial to specific economic decision making. Hayek remains convinced that informational and motivational difficulties are the major hurdles of the centrally-planned socialist system. The catastrophic failure of central planning and the argument for the superior efficiency of a market system against central planning have prompted socialist theoreticians to consider employing market mechanism in a socialist economic system. In The Philosophy and Economics of Market Socialism, Arnold states that ‘If a market socialist system is to be about as efficient as a free enterprise system, it must employ a market pricing mechanism.’47 The term market socialism, therefore, is being attached to any central planning socialist system which adopts the market pricing mechanism. As a result, the dispute between capitalism and socialism is reduced to the point which can be defined and characterized between different types of market systems. Oskar Lange states in On the Economic Theory of Socialism: Professor Mises’ challenge has had the great merit of inducing the socialists to look for a more satisfactory solution of the problem, and it is only too true that many of them became aware of its very existence only after this challenge. But, as we have seen, those of the socialists who did not or do not realize the necessity and importance of an adequate price system and economic accountancy in the socialist economy are backward not only with regard to the present state of economic analysis; they do not even reach up to the great heritage of Marxian doctrine.48

The reality is that while socialists criticize a capitalist economic system as exploitation, alienation, unemployment, inequality and injustice, capitalists argue that a socialist economic system is bureaucratic, grossly inefficient and does not permit personal freedom whilst perpetuating totalitarian administration. While market capitalism advocates that

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freedom is the most legitimate consideration for running an economy, market socialism is viewed to be authoritarian, giving the State all kinds of justification for controlling individual lives through the economic system. Therefore, one of the fundamental arguments between capitalism and socialism is freedom, or to be exact, the appropriate degree of freedom that an economy should have in order to achieve the balance between economic development and social equilibrium. Nevertheless, it is worthwhile pointing out that the importance of money or finance is not restricted to a capitalist economic system. Karl Kautsky (1850–1938), the GermanAustrian socialist, states that socialism does not mean the abolition of money. In On the Economic Theory of Socialism, Kautsky states that: Without money only two kinds of economy are possible: First of all the primitive economy already mentioned. Adapted to modern dimensions, this would mean that the whole of productive activity in the State would form a single factory, under one central control, would assign its tasks to each single business, collect all the products of the entire population, and assign to each business its means of production and to each consumer his means of consumption in kind. The ideal of such a condition is the prison or the barracks. This barbarous monotony lurks in fact behind the ideas of the ‘natural economy’ of Socialism.49

In view of the fact that financial capital is an irreplaceable ingredient in either a capitalist or a socialist economic system, it then raises the question of how much freedom should be allowed for the access and use of such an instrument. The challenge for either a capitalist or a socialist economic system is how to correctly and efficiently deploy financial capital or money supply in order to attain socio-economic sustainability and stability.

4.2.4 The cooperative movement Given that there was no apparent solution to the fundamental dispute between capitalism and socialism, it is perhaps worthy of mention that the cooperative movement played an intermediate role, offering an alternative between the two mainstream philosophies at that time. Notwithstanding the fact that economic development has never been isolated from social and political struggles throughout human history, the cooperative movement that began in England in mid-19th century reinforces this statement. It came about when the effects of the Industrial Revolution and its associated increase in mechanization were making a profound impact on the socio-economic conditions in Britain where such an economic transformation threatened the livelihoods of many workers. Frustration and hostility towards the bourgeois–capitalistic principles of competition and profit motive arose. The cooperative movement, with its self-help, communitarian approach to the economics of unrestrained capitalism, established a successful compromise between a free enterprise system and its opposite of a socialist centrally-planned system in that particular period. Although the first cooperative was founded as early as in 1761, it was not until 1844 that the Rochdale Pioneers was established, forming the basis for development and growth of the modern cooperative movement. In The Matriarchs of England’s Cooperative Movement: A Study in Gender Politics and Female Leadership, 1883–1921, Blaszak states that:

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It was the decade of the ‘hungry ’40s’. Britain was then suffering through a downward phase in the cyclical economic patterns that industrialization had established, and this particular recession was especially severe. Unemployment in the industrial districts of England and Scotland, along with famine in Ireland, produced the conditions that gave the decade its sobriquet.50

Since the cooperators believed that capitalism contributed to the debasement of moral values, they concluded that cooperative societies would indeed bring about a world with new ethics. The description of this New Moral World came from Robert Owen (1771–1858), who was considered to be one of the ideological founders of the cooperative movement. On the one hand, the cooperators found the capitalist principles immoral, but, on the other, they were opposed to a planned community imposed upon the masses by the idealists. Although the cooperators agitated for a more equal distribution of wealth, they were not convinced by an argument for a centrally imposed solution on a community, since freedom would not be found in it even though an equitable distribution of wealth might be achieved. When it comes to the question of ownership, the cooperatives offer the working class the possibility of owning shares in and earning dividends from their mutually owned stores in comparison with the private or publicly traded ownership in a capitalist system or the centrally-held social-political ownership in a socialist economic system. From that time, the cooperative movement has spread widely throughout the UK, its Commonwealth and beyond. Plenty of local cooperatives have been federated into nationwide wholesale and retail distributive enterprises with a widespread membership population. The cooperative type of organization is now widespread in Europe and credit unions are cooperatives which offer banking and other financial services to their customer members. The history of such credit unions began in 1844 when a group of weavers founded the Rochdale Society of Equitable Pioneers. The weavers sold shares to members and the capital raised was spent on buying goods at lower than retail prices. Goods were then sold to members at a discount. Since then, credit unions have developed to become worldwide alternative banking organizations taking deposits and offering loans working for the good of their members. Credit unions share a mission of taking care of the interests of their members on an inclusive basis, aiming to provide such services to customers that are often excluded from ordinary banking and financial institutions. These unions are not for commercial profit and democratically controlled by a volunteer board of directors on behalf of members. While they are not open to the general public, members of a credit union must share some kind of common bond, such as working for the same organization or living in the same community. Credit unions set aside any surplus earnings in order to offer higher dividends and lower loan rates to their members. However, the question raised is, given that credit unions are structured and operated on a social and humanistic basis, why is it that financial crises have continued to be a recurrent threat to social and economic equilibrium? Before any appropriate answer is to be sought and derived, it is actually worthwhile making a comparison or contrast between credit unions and international financial institutions which illustrates their main characteristics and practices.

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Table 4.1 Credit unions versus international financial institutions Credit Unions General Characteristics

International Financial Institutions General Characteristics

Privately owned by members

Many are publicly owned by shareholders

Serve members in principle

Serve the general public

Funds from local sources

Funds from both local and global sources

Offer ordinary banking services, that is, savings, current and deposit accounts, loans, certificate of deposits, and so on

Besides acting as financial intermediaries, a large portion of their businesses is engaged in financial trading and involved in offering financial investment activities

Undercapitalization is a challenge to many credit unions. They are likely to be the first hit by recession and the last to recover, even though some successful mutual organizations, such as building societies, have been converted into publicly owned commercial banks in the late 20th century

The mega-sized capital size has, to a certain extent, allowed them to be relatively more resilient during recession and able to get bailed out by governments. Moreover, their publicly listed status provides them with better flexibility to raise funds

In view of this comparison and if the fact that only 5 per cent of international trade is contributed by the actual trade of goods and services is taken into consideration, whereas the international money markets have been dominated by foreign exchange speculation since 1971, it is of no surprise that credit unions have not become a significant financial market force. On the one hand, international financial institutions have been able to access the international money supply easily. On the other, through different financial vehicles including mergers and acquisitions, initial public offerings, and so on, many of the international financial institutions have been able to increase the size of their capital value immensely. This increased scale of capital has allowed them to participate more actively in international financial activities. Even more importantly, their abundant financial capital has also enabled them to create and develop different speculative financial instruments to attract investments and as a result, many of them have grown to become mega-sized organizations and, therefore, have, to a large extent, dominated international financial activities.

4.3 Conclusion Taking into account the above analysis and synthesis as well as the critical review of the historical development of banking and finance which is to follow, it seems appropriate to form the opinion that further financial turmoil will continue to happen as financial crashes are not going to be stopped by simply adopting a capitalist free market system, a socialist centrally planned system, or a cooperative system. In this book, an attempt is made to discover the underlying causes of these recurrent financial devastations and using the understanding derived to establish the knowledge base of the Finance-inSociety Model (FISM).

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Endnotes 1

Hughes, J.E. and MacDonald, S.B. 2002. International Banking. Boston, MA: Pearson Education.

2

Heffernan, S. 2005. Modern Banking. Chichester, UK: John Wiley and Sons.

3

Soros, G. 1998. The Crisis of Global Capitalism. New York, NY: PublicAffairs.

4

Soros, G. 1998. The Crisis of Global Capitalism. New York, NY: PublicAffairs.

5

Arnold, N.S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

6

Arnold, N.S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

7

Arnold, N.S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

8

Arnold, N.S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

9

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

10

Wilken, F. 1982. The Liberation of Capital, translated by D. Green. London, UK: George, Allen and Unwin.

11

Smith, A. 2000. The Wealth of Nations, edited by E. Cannan. New York, NY: Modern Library.

12

Smith, A. 2000. The Wealth of Nations, edited by E. Cannan. New York, NY: Modern Library.

13

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

14

Smith, A. 2000. The Wealth of Nations, edited by E. Cannan. New York, NY: Modern Library.

15

Ricardo, D. 2002. The Works of David Ricardo, edited by J.R. McCulloch. Honolulu, HI: University Press of the Pacific.

16

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

17

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

18

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

19

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

54 20

Finance and Society in 21st Century China Ricardo, D. 2002. The Works of David Ricardo, edited by J.R. McCulloch. Honolulu, HI: University Press of the Pacific.

21

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

22

O’Brien, D.P. 2004. The Classical Economists Revisited. New Jersey, NJ: Princeton University Press.

23

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

24

Hayek, F.A. 2001. The Road to Serfdom. Abingdon, UK: Routledge Classics.

25

Hayek, F.A. 2001. The Road to Serfdom. Abingdon, UK: Routledge Classics.

26

Hayek, F.A. 2001. The Road to Serfdom. Abingdon, UK: Routledge Classics.

27

Garrison, R.W. 1986. Hayekian Trade Cycle Theory: A Reappraisal. The Castro Journal [Online], vol. 6, no. 2 (Fall). Available at: http://www.auburn.edu/~garriro/c4refah.htm [accessed: 28 March 2008].

28

White, L.H. 1999. Hayek’s Monetary Theory and Policy: A Critical Reconstruction. Journal of Money, Credit and Money [Online], vol. 31. Available at: http://www.question.com/googleScholar. qst?docId=5001234798 [accessed: 30 March 2008].

29

Ebenstein, L. 2007. Milton Friedman – A Biography. New York, NY: Palgrave Macmillan.

30

Friedman, M. 2002. Capitalism and Freedom, 40th anniversary edition. Chicago, IL: The University of Chicago Press.

31

Ebenstein, L. 2007. Milton Friedman – A Biography. New York, NY: Palgrave Macmillan.

32

Friedman, M. 2002. Capitalism and Freedom, 40th anniversary edition. Chicago, IL: The University of Chicago Press.

33

Friedman, M. 2002. Capitalism and Freedom, 40th anniversary edition. Chicago, IL: The University of Chicago Press.

34

Streissler, E.W. 2002. Exchange rates and international finance markets: An asset-theoretic perspective

with

Schumpeterian

innovation.

[Online].

Available

at:

http://www.questia.

com/read/103333840?title=Exchange%20Rates%20and%20International%20Finance%20 Markets%3a%20An%20AssetTheoretic%20Perspective%20with%20Schumpeterian%20I nnovation# [accessed: 3 May 2008]. 35

Ebenstein, L. 2007. Milton Friedman – A Biography. New York, NY: Palgrave Macmillan.

36

Ebenstein, L. 2007. Milton Friedman – A Biography. New York, NY: Palgrave Macmillan.

37

Cord, R. 2007. Keynes. London, UK: Haus Publishing.

Banking and Finance in a Global Context 38

55

Friedman, M. 2002. Capitalism and Freedom, 40th anniversary edition. Chicago, IL: The University of Chicago Press.

39

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

40

Arnold, N S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

41

Lange, O. and Taylor, F.M. 1964. On the Economic Theory of Socialism, in On the Economic Theory of Socialism, edited by B.E. Lippincott. New York, NY: McGraw Hill Book.

42

Lippincott, B.E. 1964. Introduction, in On the Economic Theory of Socialism, edited by B.E. Lippincott. New York, NY: McGraw Hill Book.

43

Lippincott, B.E. 1964. Introduction, in On the Economic Theory of Socialism, edited by B.E. Lippincott. New York, NY: McGraw Hill Book.

44

Arnold, N.S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

45

Arnold, N.S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

46

Lippincott, B.E. 1964. Introduction, in On the Economic Theory of Socialism, edited by B.E. Lippincott. New York, NY: McGraw Hill Book.

47

Arnold, N.S. 1994. The Philosophy and Economics of Market Socialism – A Critical Study. New York, NY: Oxford University Press.

48

Lange, O. and Taylor, F.M. 1964. On the Economic Theory of Socialism, in On the Economic Theory of Socialism, edited by B.E. Lippincott. New York, NY: McGraw Hill Book.

49

Lange, O. and Taylor, F.M. 1964. On the Economic Theory of Socialism, in On the Economic Theory of Socialism, edited by B.E. Lippincott. New York, NY: McGraw Hill Book.

50

Blaszak, B.J. 2000. The Matriarchs of England’s Cooperative Movement: A Study in Gender Politics and Female Leadership, 1883–1921. Westport, CT: Greenwood Press.

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5 The Developmental Path of Finance

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. John Maynard Keynes

5.1 Introduction Considering all the repetitive financially-related crises, panics and crashes throughout history, it is astonishing to see how uncritical human beings can be in accepting their hegemony. It is also alarming to observe that, for close to four centuries, human beings, driven by their greed, have continually created a range of different speculative financial instruments to fulfil this urge. These instruments, in turn, have been at the root of socioeconomic instability. It is even more surprising to see the acceptance, even justification, of the unsustainable and unstable economic culture of boom and bust and bull and bear markets. Throughout the last four centuries, various speculative financial tools have been invented and applied for the fulfilment of the urge of greed. From the metallic coins during the Holy Roman Empire between 1618–23 to today’s collateralized debt obligations (CDOs), financial institutions have successfully developed numerous financial products which keep stimulating and provoking human greediness for the sake of obtaining their financial returns. Before detailing the history of crises, here is a very brief history of finance itself.

5.2 The Historical Development of Banking and Finance 5.2.1 From early banking to trade-related banking The origin of modern banking can be traced back to the 18th century BC and the core activity of banking at the time was ‘to act as intermediaries between depositors and borrowers’.1 While there is no precise record of when banking began, nonetheless, one of the earliest references to the banking practices is the Code of Hammurabi. In International Banking, Hughes and MacDonald explain: Drawn up by King Hammurabi, the founder of the Babylonian Empire (1728–1686 BC), the Code contains around 150 paragraphs that pertain to loans, interest, pledges and guarantee.

58

Finance and Society in 21st Century China Economic historians further surmise that bank operations by temples and great landowners had become prevalent enough that King Hammurabi felt compelled to establish standard rules of procedure.2

The Code of Hammurabi provides one of the earliest records of financial dominance and control by the few powerful and rich organizations as well as individuals. When human history reached the period between 640 and 630 BC, with the creation of coinage by the Lydians and the development of sea travel, trade was able to spread throughout the Mediterranean, Indian Ocean and the Far East. Although, at that time, the concept of banking was at a rudimentary stage, the function of money and banking was solely linked to facilitating trade. As trade developed further, banking activities became more sophisticated. Hughes and MacDonald go on to point out in International Banking: Although our knowledge of Greco–Roman banking is not extensive, it is believed that the oftmentioned coin dealers, deposit-and-transfer bankers, silver smiths and collectors, money changers, and inspectors of currency fulfilled many of the functions of international bankers. There was also a clear link to trade – most of these early ‘bankers’ raised their surplus capital from trade.3

Although trade-oriented finance was originally the core objective of early banking, the role of money as a medium for trade began to change during the period of the Holy Roman Empire when metal coins became a speculative tool. The speculation of metallic coins sets the scene for the recurrent financial crashes and crises that have occurred in subsequent human history.

5.2.2 The Yang and Yin currencies While the late medieval commercial revolution originated in Italy to support local, intercity trade development, its spread to the rest of Europe resulted in the introduction of cross-border credit with the system encouraging and underwriting trade fairs. Contracts made at one fair were transferable and could be enforced anywhere within the system. Commercial credit was introduced and the first international banking network for credit transfer was established. Thus, the cross-border credit system represented the first sign of mobility of capital. However, it is interesting that Bernard Lietaer has pointed out in his forthcoming work, The Soul of Money, that there were only two periods of human history when the demurrage-charged currencies were used. He makes the point that: There was first the well-known ‘long-distance’ currency system that was used routinely by merchants involved in foreign trade, and episodically by military or royal elite to pay for or receive gifts, tributes or ransom. This currency system initially was based on rare and valuable commodities that became later the standardized gold and silver coins. It is what numismatic collections proudly show as ‘the’ coinage of the period. I will call them the Yang currencies of these times.4

At the same time, there was another kind of local currency circulating among farmers for their everyday use – crude shards of pottery. Lietaer calls them the Yin currencies.

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Lietaer further makes the point that the coincidence identified is that remarkable economic results were achieved in the Germanic area during the mid-Middle Ages and in Egypt when the demurrage-charged currencies were in use. However, as a result of the rapid development of international trade, international banking took a considerable leap forward between 1350 and 1600 when the long-distance Yang currency system became the dominant monetary force. Moreover, the development of international banking to a large extent has strengthened this dominance of the Yang currencies. However, taking into consideration the following brief overview of the close to four centuries of financial turmoil, neither the capitalist nor the socialist economic systems have successfully saved humanity from the damage and devastation caused by financial disasters. Achieving economic equilibrium, despite the core objective of both capitalistic and socialist schools, has so far proved to be an unsustainable ideal. This chapter, therefore, seeks to identify the gap between economic theories and financial reality through the study of capitalist and socialist economic theories while revisiting the different financial crises.

5.3 Centuries of Financial Crises and Crashes Since the establishment of Antwerp, Europe’s first financial hub, human history has always been entangled with financial crises and crashes. The most critical challenge and frightening fact is that financial crises and crashes do not only belong to history, they are also part of the present and the future. Nobel laureate Joseph Stiglitz commented that something was wrong with the global financial system since ‘international financial crises or near crises have become regular events. The question is not whether there will be another crisis, but where it will be’.5 The following section aims to provide a brief overview of the different financial crises and manias which have occurred throughout human history, in the hope of raising critical consciousness of the devastating consequences caused by these financial catastrophes.

5.3.1 The 17th and 18th centuries Default, dishonesty and fraudulence are essential characteristics that cannot be omitted from the entire history of financial crises though greed seems to be their underlying cause. The Kipper- und Wipperzeit, a monetary crisis from 1619 to 1622 at the outbreak of the Thirty Years War, sets the scene of how human beings have used different financial tools and instruments to fulfil their urges. In this case, the dishonest ‘money changers who took the debased coins pouring from the rising number of princely mints and wagged their scales as they sought to exchange bad money for goods with naïve peasants, shopkeepers, and craftsmen’.6 It had led to a rapidly rising debasement of exchange with the coins used in daily transactions soon becoming worthless. Not long after this monetary crisis, speculation in tulip bulbs triggered the next financial turmoil. With the Dutch becoming independent by 1600, Holland became relatively secure and was able to provide a degree of domestic political stability, essential for commerce and trade to flourish. By 1602, the Dutch had established organized markets for dealing in financial instruments and the shares of the Dutch shipping company, Verenigde Oostindische Compagnie, had the first shares traded in the history of the world. The commencement of trading of shares, commodities and

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futures led to a wave of speculation. The speculative trading of tulip bulbs ended in the bizarre tulipmania in 1637, only 15 years after the Kipper- und Wipperzeit crisis. Tulip bulbs were traded at public exchanges and tulip prices were published in Dutch newspapers just like stocks and commodities of today’s date. During the peak of tulip mania between 1634 and 1637, the Dutch abandoned their jobs, businesses, wives, homes and children to grow tulips full time. People borrowed huge sums of money to support this speculation and did not take into account either the tough credit terms or the high interest rates on borrowed funds. Although Dutch government officials had tried to issue regular public warnings of such insanity, the greedy people caught in the mania of speculation refused to listen. On 27 April 1637, the Dutch Government issued a decree that tulips and tulip bulbs were products not investments. They had to be physically bought and sold. Moreover, tulips had to be paid for in cash and Dutch banks could no longer accept tulips as collateral for loans. A financial crash resulted and tulipmania was eventually brought to an end. Tulip owners and speculators were financially ruined, as were those who had lent money and extended credit to the speculators. Thousands of Dutch people went bankrupt and many businesses as well as financial institutions were closed down. The country and its people were left impoverished. It is worth noting that Dutch banks played an important part in causing the financial catastrophe of tulipmania. Taking into consideration that as the banks extended credit to the Dutch for the purpose of speculating in tulip bulbs, the banks themselves had to gear up financially to achieve this. It is reasonable to form the opinion that, without such bank credit, the extent of speculation would have been far less significant and the resulting devastation would have been less severe. The change in role of the banks from acting solely as facilitators of trade to becoming active participants in financing speculations has, in fact, become a major cause of the subsequent financial crashes. The South Sea Bubble in 1720 happened just before the birth of Adam Smith. Many investors in England became immersed in a massive wave of speculation in the stock of the South Sea Company. This became known as the South Sea Bubble. The aftermath of the speculation had a knock-on effect with Åkerman labelling this 1720 phenomenon as ‘The first international crisis because the speculation of 1717 to 1720 in France and England had its echo in the cities of the Netherlands and northern Italy as well as in Hamburg.’7 The South Sea Company was formed in 1711 and the holders of £9 million worth of government bonds were allowed to exchange their bonds for stock of the company. The company was given a monopoly of British trade with the islands of the South Seas and South America. However, the company had a very fragile commercial base because its monopoly was based on the expectation of extensive trading concessions being secured. Nonetheless, the company offered its own stock in exchange for government bonds again in 1720. Since such a deal was expected to be profitable, a speculative craze pushed the share price in August close to eight times higher than its level in January of the same year. Furthermore, many other dishonest and imprudent speculative ventures imitated that of the South Sea Company. The country became entangled in the craze for speculation. The stock price soared and huge fortunes were made by some but the bubble ultimately burst in September 1720. Stock prices crashed and banks failed due to their inability to collect outstanding loans with the funds gambled away on the inflated stock. Many people lost their cash and life savings overnight and suicide became a daily occurrence. The whole country suffered

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from a catastrophic loss of money and hope. The directors of the South Sea Company were arrested and authorities including the monarch, King George I, and many members of his Government were also exposed. In less than a century, the ordinary people of the Netherlands and England had suffered from social and economic catastrophes resulting from financial crashes mainly caused by greed. Ironically, such uncontrollable greed and speculation were actually facilitated by banks because they made available the finance to support the speculative activities.

5.3.2 The subsequent financial crises With their highly respected economic theories, Adam Smith and David Ricardo are regarded as the leading classical economists. Their postulation of free trade and economic balance has laid the foundation of modern capitalism. It is, however, rather absurd to see the disconnection and contrast between these recognized theories and human practice. The following set of quotations from Manias, Panics, and Crashes taken from newspapers, government reports and expert opinions demonstrates that the financial systems operated in a capitalist economic structure have hardly achieved the economic equilibrium or social balance envisaged by Smith and Ricardo: 1772

Britain: ‘One of the fiercest financial storms of the century.’

1825

Britain: ‘A panic seized upon the public such had never been witnessed before.’

1837

United States: ‘One of the most disastrous [panics] this nation ever experienced.’

1847

Britain: ‘In the last nine months more reckless and hazardous speculation than any other known in modern times.’

1847

Britain: ‘It may safely be affirmed, that since the fall of Napoleon, the City has never been in a state of greater excitement.’

1857

Britain: ‘Crisis of 1857 the most severe that England or any other nation has ever encountered.’

1857

Hamburg: ‘So complete and classic a panic has never been seen before as now in Hamburg.’

1857

Hamburg: ‘Panic of a violence hitherto unknown.’

1866

Britain: ‘Crisis of 1866 most serious in modern times.’

1866

Britain: ‘Wilder than any since 1825.’

1873

Germany: ‘In 56 years, no such protracted crisis.’

1882

France: ‘Never have I seen an equal catastrophe.’ 8

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The above demonstrates that financial crises had brought about numerous socioeconomic catastrophes throughout the 18th and 19th centuries. Although these devastating financial events inflicted serious damage on different countries and their people, the countries which experienced such catastrophes seem to have failed to learn how to prevent their reoccurrence. More precisely, neither the capitalist economic system adopted by Britain nor the more socialist-oriented economic systems used in France and Germany were able to save their societies from subsequent financial disasters. Sadly, only 50 years after the collapse of the French stock market in 1882, the Wall Street crash of 28 October 1929 yet again led to a long period of worldwide catastrophic social and economic disruption. The 1929 financial crisis was the greatest cycle of speculative boom and collapse in modern times since the South Sea Bubble. It is further described in ‘The Global Financial Crisis’ (1998): ‘Wall Street was swerving dangerously in volatile trading in the months which preceded the 1929 crash.’9 Comment in ‘Wall Street Crash of 1929 and its aftermath’ (n.d.) reconfirms that the Wall Street 1929 crash led to the following disastrous socio-economic consequences: 1. 2. 3. 4. 5. 6.

12 million people out of work; 12,000 people being made unemployed every day; 20,000 companies had gone bankrupt; 1,616 banks had gone bankrupt; 1 farmer in 20 evicted; and 23,000 people committed suicide in one year – the highest ever.10

It is both unfortunate and distressing to see the constant replication of financial crashes and the immediate question to ask is whether human beings really do have such a short memory or is our ego the most difficult hurdle to overcome? From the first recorded financial crisis, resulting from the debasement of coinage during the early 16th century, to the recent sub-prime mortgage crisis, societies have always been trapped in the volatility of boom and bust financial cycles. It, therefore, makes it appropriate to take account of Lietaer’s intriguing theory of Wall Street Fauna. In his forthcoming book entitled The Soul of Money, Lietaer has described the following: Everybody has surely heard of Bulls and Bears of Wall Street (respectively market optimists and pessimists). But fewer people really know about the archetypal origin of this colourful fauna. Bull: masculine solar symbol in Mithraism and other Indo–European traditions. Etymologically comes from the Indo–European verb Bhel meaning to shine, flash, burn. The ancient god Baal has the exact connotation. In Old English the verb Bellan means to bellow, to blow up, to spread a non-sensible rumour.11

From Lietaer’s illustration, the masculine solar symbol of bull is hard and strong, and it also tends to expand horrendously and is then followed by a collapse. A bull represents an unjustifiable and unconscious belief. Lietaer then goes on to describe the characteristics of bear as:

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Bear: feminine North Pole symbol, which is why the Big and Small Dipper are also known as the Big and Small Bears. From an Indo–European verb, Bher means to carry, to give birth. In Old English Borian means to bore, to pierce. The ‘Bear skin jobber’ in Wall Street jargon is someone who sells short shares he does not have.12

Bear is the opposite of bull in financial terms. Although bear is a feminine symbol, it tends to dig and pierce. Its nurturing element tends to be overshadowed by its harmful and risky characteristics. Bernard Lietaer further analyses the behaviour of Lambs and Wolves. He describes the innocent non-professional small investors as lambs and large professional investors as wolves who engage in ‘fleecing the lambs’.13 Lietaer then puts this entire fauna into action to explain the full boom–bust cycle in the following manner: ‘A shiny Bull based on flashy rumour sucks the Lambs into the market. Then comes the Bear who pierces the pregnant bubble. Only the fastest Wolves escape unhurt.’14 The recurrent financial crises and manias demonstrate a reality in which the naïve lambs tend not to learn. Rooted in greed and driven by the unconscious crowd or mass thinking, the wolves are able to take advantage of the irrational speculative behaviour of the lambs in order to maximize profits repeatedly. In a bull–bear cycle, by and large, the large professional traders (the wolves) are usually the first to take positions, followed by the mass media which arouse the interests and enthusiasm of the small investors (the lambs). The market continues to soar and bull optimism kicks in. The lambs then start rushing into the market and push it further up to the point where professional investors unload their investments on to the smaller investors. Pessimism then reasserts itself and pressurizes the market to contract. A bear market is finally the result and the lambs are once again fleeced. The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy agrees on the point that the more sophisticated the financial market is, the more financial crises are going to result: Stock prices are not predictable because the market is too efficient. In an efficient market, as information becomes available, a great many smart people (Fama called them ‘rational profit maximizers’) aggressively apply that information in a way that causes prices to adjust instantaneously, before any can profit.15

The rational profit maximizers are professional investors. The professional investors of our time include both institutions and individuals, from the leading international investment banks to individuals such as Buffett and Soros. It is ironic that the volatile bull–bear and boom–bust cycles have been accepted by humankind as the very nature of finance. If a closer examination is made of the masculine and feminine principles, a connection with the following Jungian model would be seen: Eros, the feminine principle of relatedness, and Logos, the masculine principle of objective interest. In regarding them as principles of human behaviour, Jung saw Eros and Logos operating in the psyche as eternal opposites. He associated these qualities with Eros: emotionality, aesthetics, spirituality, value reached through feeling, subtlety, the urge to relate, to value, to join, to be in the midst of, to reach out to, to get in touch with, to connect, to get involved with concrete feelings, things, and people rather than to abstract and theorize.16

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Shepherd goes on to state that: With Logos, Jung associated reason, clear thinking, activity, high mindedness, problemsolving, discrimination, judgment, in-sight, abstraction, and nonpersonal truth reached through objectivity. Because he had observed the crippling effects of one-sided development of one principle or the other, Jung insisted on the importance of Eros-relatedness for men and Logos-directness for women. He observed that as an individual grows too one-sided, he becomes hindered, crippled, and loses flexibility.17

If combining the masculine and feminine theory of Jung with the fauna theory of Lietaer, it is appropriate to say that the large professional investors (the wolves), are usually those who contain the masculine characteristics. They are rational and emotionally detached from the financial markets. They speculate with clear thinking and insight. Conversely, the small innocent investors (the lambs), are generally manipulated by enthusiasm and rumours. They have the urge to relate and join. They are emotional and indeed controlled and affected by the herd behaviour. Small investors have a long history of being trapped in a crisis with the crisis itself being triggered by their panic. A panic is caused by sudden fright without reasonable grounds. Therefore, crisis and panic are triggered by anything real or unreal that suddenly reverses expectations. Given that, in reality, the capitalist economic system does not seem to be capable of curbing the never-ending greed of humankind whereas the socialist economic system does not seem effective in the prevention of financial catastrophes, this already critical situation is further challenged by the free exchange rates system. It is stated in Our Future Economy: Money and Sustainability – The Missing Link (2005) that: Since 1971, foreign exchange trading has also become a significant speculative tool and as today less than 5 per cent of the international money exchanges is justified by the international trade of goods and services, and the balance of 95 per cent are performed only for speculative purposes.18

The following provides a critical examination of the world’s economic and financial phenomena following the collapse of the Bretton Woods fixed exchange rates system. It also offers some insight into the concept of floating exchange rates, which generates enormous incentives for the free flow of short-term capital but as a result, the occurrence of financial crises in the past two-and-a-half decades has become more constant and intensified.

5.3.3 The lost decade – 1982–1990 ‘The Latin American debt crisis of the 1980s and its historical precursors’ makes the point that it would be impossible to carry out an economic analysis of the 1980s debt crisis without including a perspective from the collapse of the Bretton Woods system in 1971.19 The Bretton Woods system of fixed exchange rates was established after the Second World War and, until its collapse in 1971, this system was able to create and maintain a period of foreign exchange stability. In Our Future Economy: Money and Sustainability – The Missing Link, it is stated that ‘The past 25 years of floating exchanges has revealed an average foreign exchange volatility four times higher than under the Bretton Woods fixed exchange system’.20 The collapse of the Bretton Woods system set the stage for financial

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globalization and led to increasing foreign exchange speculation and international lending activities. The Latin American debt crisis was actually a result of the Organization of the Petroleum Exporting Countries (OPEC) cartel’s abrupt quadruplication of the crude oil price in 1973. The hike of oil prices led to a huge inflow of capital deposited with the US and Europe banks. Such a huge inflow of capital from the US and European banks gave the Latin American countries the opportunity to access massive loans, in particular when lending from the International Monetary Fund (IMF) and the World Bank was being directed towards even poorer nations at that time. The following point is made by Theberge in ‘The Latin American debt crisis of the 1980s and its historical precursors’: In 1961 more than half of Latin American’s foreign debt was owed to foreign governments or international agencies. However, by 1970 only 36 per cent of foreign debt was owed to official sources. Latin American’s foreign debt continued to shift towards commercial banks and by 1982 only 12 per cent of its foreign debt was owed to international agencies and foreign governments.21

The move from lower interest rates on long-term loans to short-term ones with higher interest rates was a major factor which triggered the debt crisis of the 1980s. This significant change of the loans structure from government borrowing to commercial borrowing had placed a very high financial burden on Latin America. The heavy indebtedness involved inhibited the sustainable socio-economic and socio-political stability of these countries. Banks at that time lent lavishly and did not give much consideration as to how the money would be used or more importantly, how borrowers could repay the loan principal with high compound interest. When Mexico defaulted on its debt repayments in 1982, the IMF and the World Bank stepped in to provide new loans to the country under strict conditions. However, the IMF, a western-dominated Yang currency lender, did not provide short-term loans to help Mexico to pay off other loans. In fact, the banks treated the debt crisis as a crisis of liquidity rather than solvency, and, therefore, extended temporary finance to the country in the case of an emergency. Furthermore, this same approach was imposed on other Latin countries and, in turn, these nations eventually found themselves in a similar financial situation to that of Mexico. Their debts continued to accelerate and the new loans added a further burden on the States concerned. Indeed, it is a common phenomenon that whenever a financial crisis occurs, the poor and disadvantaged are always those who suffer the worst.

5.3.4 Black Monday – The stock market crash in 1987 The Dow Jones Industrial Average fell 22.6 per cent of its total value on Monday, 19 October 1987. It was in percentage terms the largest-ever one-day fall in stock prices in the US stock market and it became known as Black Monday. The horrendous fall in the USA spread to other stock markets the following day. However, although there were many suspected causes of the 1987 crash, no study has been able to fully explain what actually made it happen. Nevertheless, the main suspects of the 1987 stock market crash include the use of programme trading, the insufficient liquidity of the financial markets to deal with high volumes of sales transactions, the large trade and budget deficits of the third quarter of 1987 and the overvaluation of the markets. One of the most devastating

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impacts was that 15,000 jobs were lost in the financial industry. Nonetheless, in my personal experience, the 1987 stock market crash was not an isolated incident. This event, however, has had an important impact on my own life which was already discussed in Chapter 1, ‘1.2 Life as Story’, page 2.

5.3.5 The Asian crisis Following the debt crises in Latin America in the 1980s, through the 1987 stock market crash, the burst of Japanese economic bubbles in the early 1990s and the Mexican 1994– 95 crisis, the Asian crisis in 1997–1998 was the second to last of the series of financial disasters to occur in the 20th century. In this case, the booming international lending to the emerging Asian markets in the mid-1990s came to an abrupt halt in mid-1997.22 Before the Asian crisis struck, the emerging economies of Asia were benefiting from economic growth and gains. Li and McDonald write in ‘The Asian Crisis: The End of an Economic Miracle’: Countries such as Hong Kong, Singapore, Indonesia, South Korea, Malaysia and Thailand were given the title of ‘Asian Tigers’ because of their ability to sustain high growth and to capture an ever-expanding share of the world market for manufactured products. The ‘Asian Tigers’ were seen as dynamic economies following the footsteps of Japan and destined to become major centres of economic activity.23

In ‘The Asian Economic Crisis’ (1999), Karunatilleka states: Growth in the late 1980s was export-led and resulted in severe labour shortages that, in turn, fuelled sharp rises in real wages. Average nominal wages in manufacturing doubled between 1987 and 1991 in Korea, and they rose 60 per cent in Taiwan. These rapid wage increases spurred the growth of private consumption.24

When both the laissez-faire and centrally planned economies were seen to be incapable of delivering rapid growth and promising adequate returns, the international banks turned their lending focus to the emerging Asian economies. Simultaneously, the governments of the Asian countries began to deregulate their financial markets and the explosion of short-term capital flows that came with the liberalization of the markets triggered the Asian financial crisis. It began in Thailand in July 1997 when capital flight sparked the devaluation of the Thai baht. The markets then began offloading other South East Asian currencies. As a result, the Thai baht, Malaysia ringgit and Indonesia rupiah also experienced significant devaluations. The flight of capital spread outward to South Korea, the Philippines, Hong Kong and Singapore and these countries were also caught in the crisis. Or, as Li and McDonald put it, ‘The resultant financial crisis spilled over into the real economy and led to political and social upheaval.’25 It seems absurd that the Asian countries had changed from being the most successful developing economies in modern history into a state of economic stagnation and decline in less than a year. An average growth rate of 8–10 per cent per annum over many years turned negative and these economies, which used to enjoy continuous high employment, were put under tremendous social pressure as a result of a rapid rise in unemployment. Their respective stock markets which had once attracted global investment funds suffered from significant losses in value.

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This crisis was initially a financial one but developed into a real economic, social and political downturn. The stereotypical Asian crony capitalism allowed close collaboration between governments, banks and businesses and therefore, limited the constitution of objective, reliable and ethical financial assessments: ‘This crony capitalism limited sound financial assessment of investments and encouraged a deepening of relationships between banks and companies that led to overinvestment with many projects providing low or negative returns’.26 As in previous crises, the poor and disadvantaged suffered the most. The aftermath of the crisis was the impoverishment of the societies and economies of the Asian ‘Tiger’ States. The Asian crisis has highlighted the significance of maintaining the stability of financial systems. It was caused by serious current account deficits and vastly inflated property values as well as stock prices. These components brought about a catastrophic loss of confidence which led to the withdrawal of capital and thereafter to the depreciation of relevant currencies. The asset values of banks and corporations began to plummet and the financial cycle switched into reverse gear. While the value of assets of financial institutions fell, the deteriorating financial situation began to spread into the real economy with the depreciation of asset values eating into the wealth of individuals and corporations, with consumption highly discouraged as a result. The reduction in consumption soon halted new investment with cancellations of projects in progress becoming commonplace. Company failures and large-scale losses in stock markets resulted. Further rising unemployment dampened already subdued consumption, triggering a further plunge of asset prices and loss of confidence which, in turn, led to a greater withdrawal of capital. Once again, the volatility of banking and finance threatened the stability and sustainability of humankind.

5.3.6 The Internet Bubble – 1999–2000 In an article entitled ‘The Internet Bubble’ (2001), Wallace refers to his favourite Thoreau quotation: Men have an indistinct notion that if they keep up this activity of joint stocks and spades long enough all will at length ride somewhere, in next to no time, and for nothing; but though a crowd rushes to the depot, and the conductor shouts ‘All aboard!’ when the smoke is blown away and the vapour condensed, it will be perceived that a few are riding, but the rest are run over, and it will be called, and will be, ‘A melancholy accident’.27

Wallace describes that in the midst of speculation and the lure of money, every fool aspired to be a knave. When his Internet investment went up by 80 per cent, a psychological epidemic took place: ‘At one point this small portfolio was up around 80 per cent in a few months time, and like many other idiots, I felt like a genius.’28 Nonetheless, Wallace views that ‘The dividing line between knaves and fools is that the knaves get their money out early, like the chairman of the South Seas company who sold out while still aggressively touting the stock to the public.’29 He further explains that, by this definition, the founders of Internet companies were fools and the investment banks were knaves given that a lock up agreement is always imposed on the founding shareholders of public companies by their investment banks to enforce a condition which disallows the disposal of their shares

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for at least six months after the public offering. Conversely, the investment bankers, who buy the listed shares at the offering price, sell them the first day at market price. Wallace’s statement has more than a ring of truth when he states that: In most IPOs, the investment banks line up ten to twenty large institutions – their regular customers – who subscribe for the entire first day allotment. Stock reaches small investors on the first day only if some of these institutions flip their shares. During the Internet bubble, the public – supposedly the central concept in ‘initial public offering’ – bought new offerings only at the Ponzi price, the maximum price after which there are no more buyers.30

In this way, Wallace is reminiscent of the Wall Street Fauna theory of Lietaer, with the investment bankers and professional investors acting as wolves, subscribing to new shares at the offering price and selling them at the Ponzi price to the lambs, who just happen to be naïve non-professional small investors.

5.4 Conclusion The recent sub-prime mortgage crisis, another global economic and financial turmoil, resulting from over-lending, was a disaster. The world’s central banks, investment banks, regulators, rating agencies, mortgage lenders, as well as home owners all have played a part. While the memory of the burst of the Internet bubble and the damaging financial and economic consequences at the beginning of this century is still very fresh in our minds, it is extremely frightening to see yet another incidence of a global financial crash within the same decade. On the one hand, US consumers found investing in properties logical after the collapse of Internet stocks. On the other, in view of the rising US trade deficit, cash-rich global investors viewed bonds backed by pools of mortgages appealing. As a result, other kinds of speculation-driven financial products, such as CDOs in this particular case, were structured to fulfil the craving of the investors. A CDO, in fact, is an investment in the cash flows of the assets, the returns on a promise backed by complicated mathematical models of the intermediary rather than investing in the underlying assets directly. Therefore, the investment itself depends on the quality of the metrics and assumptions applied for defining such risk and reward. However, following the burst of the US housing bubble and in the wake of the sub-prime mortgage market together with the credit crunch in 2007, the respective corporate, institutional and individual CDOs investors suffered significant losses as the value of the underlying mortgage assets declined tremendously. Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of July 2008. The above demonstrates that, despite the economic and social balance being continuously distorted by the volatility of the masculine–yang-dominated financial markets, different kinds of speculative financial instruments have still been created, at a given time, to satisfy the greed of investors and bankers. On the one hand, the creation and speculation of financial instruments have been shown to be risky and hazardous. On the other, these respective harmful financial tools have been justified and proved statistically through data and charts. This is hardly surprising when the majority of textbooks of finance focus largely on the scientific study of mathematical models and

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the quantitative assessment of financial tools, which are unlikely to resolve the critical challenges facing the industry. Horkheimer and Adorno in their book titled Dialectic of Enlightenment state that: ‘By sacrificing thought, which in its reified form as mathematics, machinery, organization, avenges itself on a humanity forgetful of it, enlightenment forfeited its own realization.’31 Therefore, as a result of an absence or lack of critical consciousness, human beings have long been travelling on the wrong road with regard to financial development, and, more importantly, have long become the victims of such financial domination and oppression. However, Habermas believes that ‘Consciousness exists as the middle ground on which the subjects encounter each other, so that without encountering each other they cannot exist as subjects.’32 It may be a coincidence that since the collapse of the Bretton Woods fixed rates system, financial turmoil has occurred much more frequently. Or it may well be the fact that the free flow of capital, in particular the free flow of short-term capital, has been the major cause of financial volatility and instability. Kindleberger states that, ‘Floating exchange rates encouraged a certain amount of foreign-exchange speculation’,33 so, the free flow of capital and the floating exchange rates do provoke financial trading and speculation which can lead to financial crises and crashes being an unwelcome outcome. The recurrence of financial turmoil has unquestionably imposed tremendous pressure on social and economic stability. As Lietaer and Brunnhuber put it: .

Indeed, the gap between the rich and the poor is progressing more rapidly than at any time in recent history. The gap between the bottom 20 per cent and the top 20 per cent of humanity has widened from 30:1 to 74:1 over the past three decades. According to the World Bank, the number of people living on less than $2 per day grew from 2.4 billion to 2.7 billion between 1981 and 2001.34

Unfortunately, whenever there is a financial crisis, it is the poor who always suffer the most. However, the middle class has also been badly affected by the present recession. The widening disparity between rich and poor is particularly alarming. Although the World Bank proclaims that ‘our dream is a world free of poverty’,35 the reality is that the number of people living in poverty has actually increased by 300 million within the past 20 years. A critical question to ask is whether the dream of the World Bank will ever come true. It is of concern that the world’s population is going to increase from 6 to 8 billion in the next quarter of a century with the majority of this increase coming from the developing world, while banking and financial operations, which underpin all socioeconomic subsystems, remain in such an incredibly unstable state. Furthermore, while 95 per cent of today’s international money exchanges are performed only for quick profit-driven purposes, speculation is driven by the draw of making money for nothing and greed is likely to be the underlying driving force. A substantive criticism of the present masculine–yang-dominated banking and financial systems is necessary for the development of a cognitive, holistic knowledge of the industry and its effects. Although numerous regulations have been imposed to monitor and govern financial markets throughout history, there has not been any alternative financial culture powerful enough to counterbalance the overwhelming dominance of short-term, competitively-driven and quick profit-oriented financial characteristics.

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The reality gap identified in this chapter is that neither the private capitalist economic systems nor the public socialist economic systems have proven to be able to free humanity from financial turmoil and devastation. As a result of the sub-prime mortgage crisis, the federal takeover of Fannie Mae and Freddie Mac poses further challenge to the free market system. Whilst placing these two Government-sponsored enterprises (GSEs) into conservatorship incurred a massive cost to the US taxpayers, more unfortunately, the present economic recession, led by the sub-prime mortgage crisis, has become a massive cost to every citizen of the world. Nonetheless, the credit unions have made a successful example of integrating society with finance. However, their size of organization and capital remains small and lacking in influence compared to mega-sized international financial institutions. Furthermore, taking into account that the monetarists tend to embrace a mathematical and quantitative orientation in the design and analysis of monetary policies, perhaps understandably, such empirically driven policies have been unable to create and maintain economic equilibrium. Therefore, from the perspective of transformation, the instinctive, goal-getting and competitively driven characteristics of the masculine–yang-dominated financial systems, which are situated in the topsoil and subsoil levels of the cultural topography, have been disconnected from philosophies and cultural values. As a result, there is an undeniable need to explore the possibility of building an interdisciplinary and holistic structure and model of finance in the hope of bridging the reality gap between economic theory and monetary practice. Last but not least, if attaining better socio-economic stability and human sustainability are the fundamental goals of social sciences, in the light of the volatility of the banking and financial industry, an interconnected and intersubjective culture of finance should be developed. In consideration of the interdisciplinary nature and approach of critical theory, while it articulates holistic understanding, it also fosters the interconnection of related knowledge. It, therefore, makes a lot of sense to apply critical theory to establish a new financial model with a better balance between social and economic forces. Furthermore, since this book is rooted in a local Chinese context and, given the increasing impact of the Chinese financial practice on the global economy, taking into account that China has close to a quarter of the world’s population within its borders, it cannot be logical to ignore the role of Chinese philosophy in global financial methodology. It is considered entirely justifiable to apply and integrate such Chinese philosophy since it carries within it the fundamentals of interconnectedness and interdisciplinary characteristics of critical theory. Among the different Chinese philosophical schools of thought, the cosmological spirit of the Five Elements particularly emphasizes the essentiality of interdependence. Its theory of Xiangsheng-Xiangke (相生相尅) promotes mutual existence whilst it also raises the concern of distorting the universal balance if its interconnectedness is upset or disrupted. Therefore, the theory of Five Elements works particularly well alongside the interdisciplinary consideration of history, sociology, economics, philosophy and psychology in critical theory in the light of studying and understanding humanity. The following chapters of this book aim to establish and provide a better picture of the common features shared between the Five Elements and critical theory. As well as the Five Elements (五行), the school of Yin and Yang (阴阳) also promotes the importance of attaining and maintaining a balance. Moreover, the allembracing doctrine of Dao (道) and the socially oriented theories of the Mean (中庸) and Knowledge (知) serve as valuable elements in the development of a Finance-in-Society

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Model (FISM) in the Chinese context. Although having said so, it does not necessarily mean that the Chinese philosophy is superior to other cultures in respect of promoting the importance of cooperation or mutual existence. However, an alternative financial theory integrating traditional Chinese philosophy with western financial rationale offers China a good possibility to empower better socio-economic equilibrium. My argument remains that the free flow of capital, in particular the free flow of short-term capital, should be regulated or encouraged in a way that such capital would be diverted into investments which would help to attain economic and social equilibrium. Otherwise, the greed-driven and speculation-oriented short-term capital flow can only continue to cause further financial crises and crashes in due course. Free capital movement, particularly in the form of hot money, has exposed humankind both locally and globally to increasing economic and financial risks. So, an interdisciplinary financial model which attempts to transform the insecurity and greed of humankind into constructive financial practices is of the utmost importance. Furthermore, a historically contextualized and interdisciplinary financial model is, therefore, worthy of development and implementation in the hope of counterbalancing the dominant force of the present masculine and mathematically driven banking and financial systems. Given that Shanghai has announced its plan to become a major international financial centre by 2020, will it be able to become one which delivers financial stability or will it just be another financial market which will again lead humankind to further financial crises and crashes?

Endnotes 1

Heffernan, S. (2005). Modern Banking. Chichester, UK: John Wiley and Sons.

2

Hughes, J.E. and MacDonald, S.B. (2002). International Banking. Boston, MA: Pearson Education.

3

Hughes, J.E. and MacDonald, S.B. (2002). International Banking. Boston, MA: Pearson Education.

4

Lietaer, B. (unpublished). The Soul of Money.

5

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

6

Kindleberger, C.P. 2000. Manias, Panics, and Crashes, 4th edition. USA: John Wiley and Sons.

7

Kindleberger, C.P. 2000. Manias, Panics, and Crashes, 4th edition. USA: John Wiley and Sons.

8

Kindleberger, C.P. 2000. Manias, Panics, and Crashes, 4th edition. USA: John Wiley and Sons.

9

Chossudovsky, M. 1998. The Global Financial Crisis. [Online]. Available at: http://www.nettime.org/ Lists-Archives/nettime-l-9801/msg00005.html [accessed: 6 May 2006].

10

Trueman, C. Wall Street Crash of 1929 and its Aftermath. [Online]. Available at: http://www. historylearningsite.co.uk/wall_street_crash.htm [accessed: 1 May 2006].

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11

Lietaer, B. (unpublished). The Soul of Money.

12

Lietaer, B. (unpublished). The Soul of Money.

13

Lietaer, B. (unpublished). The Soul of Money.

14

Lietaer, B. (unpublished). The Soul of Money.

15

Hagstrom, R.G. 1999. The Warren Buffett Portfolio. New York, NY: John Wiley and Sons.

16

Shepherd, L.J. 1993. Lifting the Veil. Boston, MA: Shambhala Publications.

17

Shepherd, L.J. 1993. Lifting the Veil. Boston, MA: Shambhala Publications.

18

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

19

Theberge, A. 1999. The Latin American debt crisis of the 1980s and its historical precursors. [Online]. Available at: http://www.coursehero.com/file/2179591/theberge/ [accessed: 18 May 2006].

20

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

21

Theberge, A. 1999. The Latin American debt crisis of the 1980s and its historical precursors. [Online]. Available at: http://www.columbia.edu/~ad245/theberge.pdf [accessed: 18 May 2006].

22

Hughes, J.E. and MacDonald, S.B. (2002). International Banking. Boston, MA: Pearson Education.

23

Li, H. and Donald, F. 2001. The Asian Crisis: The End of an Economic Miracle?, in Global Change: The Impact of Asia in the 21st Century, edited by R. Thorpe and S. Little. Basingstoke, UK: Palgrave.

24

Karunatilleka, E. 1999. The Asian Economic Crisis (Research Paper No. 99/14). [Online: Economic Policy and Statistics Section, House of Commons Library]. Available at: http://www.parliament.uk/ commons/lib/research/rp99/Rp99-014.pdf [accessed: 10 May 2006].

25

Li, H. and Donald, F. 2001. The Asian Crisis: The End of an Economic Miracle?, in Global Change: The Impact of Asia in the 21st Century, edited by R. Thorpe and S. Little. Basingstoke, UK: Palgrave.

26

Li, H. and Donald, F. 2001. The Asian Crisis: The End of an Economic Miracle?, in Global Change: The Impact of Asia in the 21st Century, edited by R. Thorpe and S. Little. Basingstoke, UK: Palgrave.

27

Wallace, J. 2001. The Internet Bubble. The Ethical Spectacle [Online], vol. 7. Available at: http://www. spectacle.org/0101/bubble.html [accessed: 10 June 2006].

28

Wallace, J. 2001. The Internet Bubble. The Ethical Spectacle [Online], vol. 7. Available at: http://www. spectacle.org/0101/bubble.html [accessed: 10 June 2006].

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Wallace, J. 2001. The Internet Bubble. The Ethical Spectacle [Online], vol. 7. Available at: http://www. spectacle.org/0101/bubble.html [accessed: 10 June 2006].

30

Wallace, J. 2001. The Internet Bubble. The Ethical Spectacle [Online], vol. 7. Available at: http://www. spectacle.org/0101/bubble.html [accessed: 10 June 2006].

31

Horkheimer, M. and Adorno, T.W. 2002. Dialectic of Enlightenment, edited by G. S. Noerr, translated by E. Jephcott. Stanford, CA: Stanford University Press.

32

Habermas, J. 2004. Theory and Practice, translated by J. Viertel. Cambridge, UK: Polity Press.

33

Kindleberger, C.P. 2000. Manias, Panics, and Crashes, 4th edition. USA: John Wiley and Sons.

34

Lietaer, B. and Brunnhuber, S. (unpublished). Our Future Economy: Money and Sustainability – The Missing Link.

35

Mallaby, S. 2005. The World’s Banker. London: Yale University Press.

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6 The Interdisciplinary Nature of Finance

An interest in a rational organization of human activity which it [critical theory] has set itself to elucidate and legitimize. For it is not only concerned with goals as they have been prescribed by pre-existent life-forms, but with mankind and all its possibilities. Horkheimer

6.1 Introduction Further to the preceding chapters which closely examined the reality gap between the different economic theories and financial actuality, this chapter is positioned to defend, explain and justify the interdisciplinary approach for studying, examining and developing financial theory and practice. It is, in fact, important to establish an allembracing and multidimensional foundation for the study and analysis of banking and finance from a qualitative rather than a quantitative perspective. The qualitative aspects of finance, in fact, have tremendous potential and value for helping the industry liberate itself from the domination of mathematics and figures since its purely quantitatively led approach is neither sensitive to nor capable of achieving social and economic stability and sustainability.

6.1.1 Why critical theory? Critical theory was developed by a group of interdisciplinary social theorists located in the Institut für Sozialforschung (Institute of Social Research), the home of the Frankfurt School. The Institute was established in 1923 in Frankfurt and was the first Marxistoriented research centre. Critical theory, a quasi-Marxist theory developed at the Frankfurt School, became popular after the Second World War. As described in Keller: The critical theory of society of the Frankfurt School continues to excite interest and controversy. The critical theorists have deeply influenced contemporary social theory, philosophy, communications theory and research, cultural theory, and other disciplines for six decades. The dream of an interdisciplinary social theory continues to animate the sociological imagination. In recent decades there have been many different attempts to articulate the connections between the economic, political, social, and cultural dimensions of contemporary society in the spirit of critical theory.1

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Critical theory draws on different strands of contemporary thought, which include Hegelian dialectics, Marxian theory, and the work of Friedrich Nietzsche, Sigmund Freud and Max Weber. The Frankfurt School, after Grunberg’s retirement in 1930, was led by Horkheimer. Many talents at the School including Pollock, Fromme, Marcuse and Adorno came under Horkheimer’s directorship. An interdisciplinary social theory was to be developed for social transformation. Max Horkheimer, Theodor Adorno, Herbert Marcuse and Jürgen Habermas are generally viewed as the central proponents of critical theory. Critical theory became a core element in the establishment of the New Left at the time. While critical theory provides an interesting interpretation of Marxist theory, it is concerned with a wide scope of issues and problems, which range from family to sexuality and impact on mass culture. Indeed, the originality of critical theory is critical of both capitalism and Soviet socialism. As discussed in Chapter 3, given the fact that neither private capitalist nor public socialist economic systems have proven to be capable of delivering better social and economic equilibrium, a critical and holistic orientation, therefore, becomes a feasible alternative for the development of finance and economics.

6.1.2 Critical theory and political economy Social philosophy and social psychology are the two basic concerns of the leading critical theorists. They view the dominant role of production as the central problem in the structure of capitalism. Horkheimer demonstrated his agreement with Marx’s analysis of the commodity economy in his essay Traditionelle und Kritische Theorie which was published in 1937. In Introduction of Critical Theory, Horkheimer’s view regarding commodity economy is: In its totality, the unfolding of the single existential judgement. Crudely formulated, it states that the fundamental form of the historically given commodity economy on which [more recent] history rests, contains in itself the internal and external contradictions of [its] epoch, which it generates in an increasingly intensified form.2

From the above, it can be seen that Smith believes that the pursuit of self-interest within a free market capitalist economic system will ultimately benefit a society. However, Horkheimer’s view is critical of this in that production which has occurred under a capitalist regime is actually not geared to concern for the life and needs of the entire community since it is only geared to benefit the few in power, who are not interested in the life of the community. From such a perspective, class and class conflict remain an important element in the critical theorists’ understanding of capitalism. Although there are major differences among the members of the Institute in relation to their assessment of the development of capitalism, their analyses do share familiar Marxian principles. They all consider that we live in a society dominated by the capitalist method of production and, indeed, that society works through the exchange of commodities. Products are manufactured for their material value and return rather than for the fulfilment of the real needs of consumers, with their wants manipulated, to a large extent, through the use of the mass media, which prevents them from realizing their actual needs; that is, demand is actively engineered. The critical theorists acknowledge that capitalism is not able to create a harmonious social whole and its production system produces conflicts in both the cultural and economic spheres. Moreover, growth is the only economic security in a capitalist economy.

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The success of such growth is predominantly interpreted through and preoccupied by the concept of and orientation towards maximizing financial gain. It is sad to see that whilst a capitalist economy promotes efficiency through the accelerating concentration of capital, the free market economic system has become a marketplace occupied by the oligopolistic and sometimes monopolistic mass production of standardized goods. Nevertheless, a capitalistic dominant society is not exclusively a western or northern phenomenon. In the case of China, although the country has a holistic philosophical tradition, it has been demonstrating the development of state-capitalism. The Chinesecontextualized state-capitalism, or quasi-capitalism, as described by Greenspan,3 is very much built on an uneven and disproportional distribution of wealth. Under a totalitarian reform of State capitalism, the State has the absolute power. This State power is formed by the most powerful vested interests groups which include the higher strata of the State bureaucracy, the top-ranking personnel in businesses and industries and the leading figures of the victorious party’s bureaucracy. Everybody who does not belong to this group of power is just a mere object of domination. Although the Chinese Communist Government has demonstrated its pride in the success of the country’s economic transition from the planned to market economy as one of the special characteristics of Chinese socialism, this special feature of Chinese socialism – its state-capitalism, or quasi-capitalism – has led to the challenge of a fourworld4 phenomenon. This four-world phenomenon principally resulted from the uneven economic development of China, which has led to the present huge disparity in four different levels of social and economic standards of the country. Since the 1990s, there has been increasingly uneven social, economic and human development within the country and such an imbalance has led to a widening socio-economic disparity across Chinese society. In Introduction to Critical Theory, Held cites Pollock: Concentration of economic activity in giant enterprises, with its consequences of rigid prices, self-financing and ever growing concentration, government control of the credit system and foreign trade, quasi-monopoly positions of trade unions with ensuring rigidity of the labour market, large-scale unemployment of labour and capital and enormous government expenses to care for the unemployed, are as many symptoms of the decline of the market system.5

6.1.3 The interdisciplinary characteristic of critical theory Critical theory introduced themes that dominated social theory for three decades, from the 1930s through to the 1960s. The Institute of Social Research, under Max Horkheimer, was oriented to develop an interdisciplinary-based social theory. The interdisciplinary social theory developed in the 1930s remains a compelling model for the critical social theory of today. Since Horkheimer views society as a totality, interdisciplinary work seeks to leave the one-sidedness of the individual disciplines as they are and then reconstructs as well as reinterprets these disciplines in a total context. The recent sub-prime mortgage crisis has once again demonstrated the possible disastrous outcome caused by irresponsible decisions and actions made by a certain group of financially and politically powerful people while the population at large suffers from the resulting devastating consequences. Critical theory, in other words, criticizes validity claims based on individual disciplines alone and attempts to create a new kind of all-embracing social theory. For Horkheimer, this new kind of social theory emphasizes the necessity of a programme of interdisciplinary study.

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Horkeimer emphasizes the necessity of creating a new unity between philosophy and science, science and criticism as well as fact and value. Horkheimer views that ‘there are no general criteria for critical theory as a whole, for such criteria always depend on a repetition of events and thus on a self-reproducing totality …’.6 Moreover, Horkheimer asserts that the understanding of society through the application of critical theory has to be inductively structured while critical social research is required to delve deeper and deeper into the particular context in order to discover the universal law therein. Therefore, instead of moving from one particular context to another, critical understanding can only be uncovered by analyzing, in an interdisciplinary context, the way in which particular phenomena are mediated and formed whereas their identities are sustained interdependently with other phenomena.

6.1.4 Dialectic of enlightenment During the Second World War the Institute of Social Research disbanded. Marcuse and others worked for the US Government fighting fascism whereas Horkheimer and Adorno focused on the compilation of their collective book, Dialectic of Enlightenment, in California. Dialectic of Enlightenment is critical of how enlightenment at that time had been supportive of its opposites. So, enlightenment transformed from an instrument for discovering truth bringing about liberation into a tool of domination. Since the impulse and influence of natural sciences alchemized into the Age of Enlightenment, great faith was placed in the instrument of reason rather than mere accumulation of knowledge. The discipline of banking and finance, has, without any doubt, adopted at its core the instrumental approach of natural sciences. Its behaviour and performance have always been measured, analyzed and evaluated from quantitative perspectives. However, this quantitatively driven orientation, very much disconnected from the more qualitative nature of the humanities, has not been able to resolve the critical challenge of recurring financial crises and crashes. It has, in fact, resulted in the entrapment of the human race into the overwhelmingly use of figure-centric data when assessing economic outcomes which, in turn, has ended up in recurrent financial volatility and turmoil. So, while science and technology have improved living standards in general, they have also created catastrophic weapons of destruction and death. Technology has become the essence of knowledge whereas myths are dispelled. It is, indeed, unfortunate that culture is no longer embedded in history and philosophy. Culture has become associated with mass-produced commodities while, more alarmingly, human lives are increasingly dominated by technology in a broad spectrum. From the Internet technology to financial programme trading, we, human beings, have almost unconsciously allowed technology to run our lives while accepting financial volatility as our destiny. In Dialectic of Enlightenment, Horkheimer and Adorno put it as follows: The whole world is passed through the filter of the culture industry. The familiar experience of the moviegoer, who perceives the street outside as a continuation of the film he has just left, because the film seeks strictly to reproduce the world of everyday perception has become the guideline of production. The more densely and completely its techniques duplicate empirical objects, the more easily it creates the illusion that the world outside is a seamless extension of the one which has been revealed in the cinema.7

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Dialectic of Enlightenment is not only an inquiry into and a study of the structure of enlightenment, it also investigates the ever-present threat of domination. For Horkeimer and Adorno, dialectic is between two aspects of reason. They are reason as universal, which is common to every being, and reason as domination of the particular. The first aspect has provided the ideals and legitimized the interpretations of people’s activities. The second aspect has generated the structure of traditions and conventions that have actually conditioned daily practice. The Enlightenment is, therefore, a unity of enlightened thought, myth and domination. Horkheimer and Adorno conclude that individuals have been oppressing their own souls and bodies. Their repressive beliefs have caused them to become instruments of labour and war. Horkheimer and Adorno also see that the dominant regime has been using their interpretation of reason to control the world and such reasoning has been applied to humankind in oppressive and monstrous ways. They believe that reason has become both institutionalized and embodied into the very structure of society. It has been used as a tool to strengthen rather than transform the system. Looking back on recurrent financial crises and manias, the repressive beliefs of individual investors have permitted them to become instruments of greed and speculation. Every rise or fall in financial markets is both interpreted and rationalized by the market’s own professional traders and experts. Instead of being an immanent critique of man-made instability, such reasoning is instead used to justify opportunistic speculation and profit making regardless of its underlying socio-economic effect.

6.2 The Different Concepts of Critical Theory Most members of the Frankfurt School share the opinion that individuals are living in a world where capital is highly concentrated and where the economy and polity are increasingly interlocked. One of critical theory’s defining characteristics is that it was created by scholars who were inspired by Marxism but were also shaken by the sociopolitical events of the 1920s and 1930s. They tried to seek answers to questions raised by Marxist theory but, at the same time, wondered why ‘political events and revolutionary practice were not coincided with the expectation derived from the Marxist theory of the day’.8 All the original critical theorists rejected a philosophy of identity that tacitly implied a unity between subject and object. They rejected Hegel’s idealistic identity theory in which the process of history was reduced to an absolute subject. They rejected the theory of materialist identity of the orthodox Marxists since they held the view that history should not be interpreted as the manifestation of economic laws leading towards socialism or communism. They also rejected dialectical materialism and were critical of Marxist humanism. All of them rejected the positivist understanding of science and a correspondence theory of truth. The work of the critical theorists provided an alternative to, or a replacement of, traditional Marxist political economy by introducing wider, more general considerations of social philosophy, culture and social psychology. Politics and economy are not the only concerns of a society. Its historical roots as well as its related philosophy and psychology all carry equivalent significance. In embodying the work of critical theory in the Chinese context, the question raised is that while the Chinese Communist Government has celebrated the achievement of impressive gross domestic product (GDP) growth of the

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country, has it given any consideration to the rapid loss of the indigenous cultural values resulting from the subjugation of the domination of economic growth? Although the central critical theorists have a lot in common in respect of their philosophical pursuit, there are clear differences in their focus of attention. Using critical theory, an overview of the different major disciplines aims to provide a better understanding of events. According to Horkheimer, there are three core elements in critical theory. Firstly, critical theory encompasses a critique of ideology, similar in structure to the immanent critique of capitalist commodity production and exchange. Secondly, it places an emphasis in a context of interdisciplinary study and on ‘the central role of praxis in the ultimate verification of theories’.9 Lastly, Horkheimer insists that ‘truth inheres in and is a moment of correct practice’.10

6.2.1 Theory and practice In his book Theory and Practice, Jürgen Habermas strives ‘to develop the idea of a theory of society conceived with a practical intention, and to delimit its status with respect to theories of different origins’.11 The theory encompasses a dual relationship between theory and praxis. Jürgen Habermas in Theory and Practice states: The theory specifies the conditions under which reflection on the history of our species by members of this species themselves has become objectively possible; and at the same time it names those to whom this theory is addressed, who then with its aid can gain enlightenment about their emancipatory role in the process of history. The theory occupies itself with reflection on the interrelationships of its origin and with anticipation of those of its application, and thus sees itself as a necessary catalytic moment within the social complex of life which it analyses; and this complex it analyses as integral interconnections of compulsions, from the viewpoint of the possible sublation – resolution and abolition – of all this.12

Habermas is critical of the monologic form of communication since it discourages the process of successfully attaining enlightenment. Habermas comments in Theory and Practice that ‘Social philosophy, having taken on monologic form, is no longer capable of essentially relating to praxis, but merely to goal-directed purposive action guided by social-technical recommendations.’13 However, monologic and goal-oriented purposeful actions in themselves are incapable of developing the necessary level of individual and social consciousness for social evolution. Today’s financial news and analyses are merely reports of figure-centric market performance, which are unconnected in any way with the concept of conscious development. Before the recent sub-prime mortgage crisis occurred, property owners and stock investors were deluded by the ever-increasing value of their investments without being conscious of the associated risks. Financial news, with its tendency to focus on purely analytical reporting of figures and charts, often ignored any potential socio-economic consequences. Taking into consideration that self-consciousness and self-emancipation drive liberation and set people free from domination, Marcuse’s orientation of critical theory provides a means of empowering self-consciousness and freedom of development through the understanding of all kinds of social practice and behaviour. Therefore, financial news reporting should routinely incorporate the possible or probable socio-economic outcomes resulting from such financial gains or losses in the medium to long term.

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6.2.2 Dialectic and negative thinking Dialectic, being a core methodical approach of critical theory, has undergone different stages of development. Under Hegel, dialectical method is all-encompassing and it ‘treats all objects as “many-faced, coming-into-being, acting and passing away in time”. As a result, reality is comprehended as a process of becoming’.14 Reality itself is, therefore, a whole that is constructed by many individual particulars and parts. Dialectic seeks to liberate human beings from the authoritarian, rigid or superficial explanations and interpretations. Adorno views that subject and object, although constituted by their relationship to one another, cannot be reduced or subsumed by each other. He is against those philosophers who tend to reduce subject to object or vice versa. Adorno objects to identity thinking since it aims to subsume all particular objects under general definitions. On the one hand, Adorno is impressed by Hegel’s emphasis on process but on the other hand, he is critical of Hegel’s notions of the identity of subject and object as well as the absolute idea. He promulgates the concept of negative dialectics instead. Negative dialectics aims to liberate dialectics or human understanding of history from the fallacies resulting from the emphasis on subjectivity or systemic approaches. Marcuse also recognizes that the driving power of dialectic is negative thinking. The power of negation is to deconstruct the established rules, principles or beliefs since it is a manifestation of alternatives. Therefore, negative thinking is historical thinking while historical thinking is critical thinking since it reveals ways and contents of thought that transcend the arranged pattern of validation. The dialectical method derives truth from negativity and it has both a positive and a negative character. Marcuse, similar to Horkheimer and Adorno, also believes that knowledge is rooted in history. However, unlike Horkheimer and Adorno who departed from social theory and radical policies in the 1940s, Marcuse continued to focus on the construction of the theory of social change. In the form of critical theory, dialectic is communication. The process of emancipation can, in fact, overcome distorted communication and Habermas suggests that communicative competence is acquired from cognitive knowledge, linguistic and interactive abilities. Referring to Reading Freire and Habermas, Morrow and Torres state that: For Freire and Habermas, therefore, the key to reconstructing the theory of praxis is found in the dialogical learning process that might mediate between the realities of human need and the capacity to reflect and act in liberating ways.15

However, Habermas and Freire hold different conceptions of ideal speech. For Habermas, an ideal dialogue is grounded within the model of scientific communities. It is an idealized discourse or form of dialogue but it does not ‘adequately address the practical obstacles to procedural rationality in other contexts’.16 Freire has instead rooted his conception of dialogue in the pedagogy of the specific oppressed groups within the historical context of ‘the absolute domination experiences of rural and urban illiterate proletarians’.17 Paulo Freire, one of the internationally best-known educators in postwar adult education, regards dialogue as an encounter between men, and dialogue is, therefore, an existential necessity.18 Freire further states that:

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Finance and Society in 21st Century China And since dialogue is the encounter in which the united reflection and action of dialoguers are addressed to the world which is to be transformed and humanized, this dialogue cannot be reduced to the act of one person’s ‘depositing’ ideas in another, nor can it be simple exchange of ideas to be ‘consumed’ by the discussants.

A subject–subject dialogue embodying self-reflection and self-emancipation is the epistemological ideal for Freire. Freire considers that a subject–object relationship brings with it an absence of communication since it involves the subject imposing ideas on the object and the object submitting to such imposing circumstances. Dialogue requires participation, social and political responsibility. Furthermore, dialogue cannot exist without humility. When referring to the financial industry, it is particularly true that a small number of rich or powerful people exert control over the livelihoods of the majority of human race through the domination role played by the industry. In order to set themselves free from such domination, human beings have to be socially, economically and politically responsible. Choosing to be reactive or uninvolved will only further legitimize domination.

6.2.3 One-dimensional philosophy Herbert Marcuse shares the view of Horkheimer regarding the centrality of human practice in the composition and assessment of knowledge as well as the importance of adopting interdisciplinary approaches in order to understand society as a whole. However, despite the considerable commonalities, there are also core differences in their respective positions. On the one hand, Hegel’s conception of reason dialectics and understanding of the structure of history had a profound impact on Marcuse. On the other, Marcuse is critical of the technological domination of human society and he makes the following point: ‘Technological rationality reveals its political character as it becomes the great vehicle of better domination, creating a truly totalitarian universe in which society and nature, mind and body are kept in a state of permanent mobilization for the defence of this universe.’19 Marcuse further expresses his frustration with totalitarian administration, which uses the story of economic growth and progress to overshadow its exploitative act: Thus, in the analysis of an economy, capitalist or not, which operates as an ‘independent’ power over and above the individuals, the negative features (overproduction, unemployment, insecurity, waste, repression) are not comprehended as long as they appear merely as more or less inevitable by-products, as ‘the other side’ of the story of growth and progress.

The One-Dimensional Man of Marcuse plays an essential role in recent human history since both capitalist and Soviet communist societies have proved their inability to bring about human liberation and sustainability. These thoughts of Marcuse are important resources that provide currently relevant stimuli for the development of radical theory and political analysis. Critical theories of contemporary society are capable of development, based on the concepts of Marcuse, in order to effect change and establish a new global economic and political system. Marcuse views that although social theory should be set in a historical context, it must also take into account the salient phenomena of the present age as well as changes from earlier social structures. Social analysis should not stop at any given period of human history. It requires continuous analyses reflecting and building on the constantly changing economic and political configurations of the human society.

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6.3 Critical Theory in Relation to Banking and Finance Taking into consideration the different concepts of critical theory discussed above, it has a rich, dynamic and qualitatively oriented nature which is well-suited for the investigation of financial theory and practice. The following endeavours to illustrate how the different concepts of critical theory might be applied in the context of banking and finance.

6.3.1 The interdisciplinary approach As proposed in this book, banking and finance play the most fundamental role in establishing or upsetting overall socio-economic stability, whereas Horkheimer’s perspective is that society is a system with different interdependent elements and phenomena forming the whole. This interdisciplinary argument is, in fact, wholly applicable to the sphere of finance. Learning from the present financial and economic turmoil resulting from the collapse of the sub-prime mortgage system, a better developed financial knowledge, derived from an interdisciplinary study of philosophy, sociology, economics, history and psychology is becoming ever more necessary and important. Moreover, while the last update of the Report to the Club of Rome in 2004 states that our present financial and monetary system is the core mechanism that generates unsustainable development, it is also possible that the essential interrelationship between the monetary system and sustainability is overlooked. This book aims to identify and to raise an awareness of the interrelationship between finance and sustainability since it has, in turn, very powerful and profound effects on the entire socio-economic system. The interdisciplinary approach of critical theory is, therefore, necessary for the development of a deeper understanding of the interrelationship between banking, finance, society and humanity at large. It is, in fact, important that every government should consider having its economic advisory bodies not exclusively made up of economists, but also inclusive of philosophers, historians, sociologists and psychologists. While the monetary system is regarded as the most powerful domain, it is, at the same time, the most overlooked one. This meta-system not only influences human behaviour and choices but also shapes many other social institutions. Therefore, to examine a universally used tool such as monetary policy and practice involves investigating the implications of a diverse scale of change in socio-economic and socio-political domains. In fact, if better financial sustainability is to be achieved, a large-scale behavioural change is required in both the construction and operation of the industry. Although Lietaer and Brunnhuber have suggested that an appropriate examination of monetary practice requires investigation into a larger number of disciplinary domains, they have not explicitly suggested which common theories, philosophies or methodologies should be used in order to gain such knowledge. However, if different methods are applied in the analysis of different domains, such study will be unable to obtain the necessary interdisciplinary orientation and the interdependent relevance. Without the ability to delve deeper into the particulars of these domains, a large-scale behavioural change is unlikely to happen. Therefore, an interdisciplinary approach engendering a deeper understanding is necessary if the removal of obstructions on the critical path to a large-scale behavioural change is to be achieved.

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6.3.2 An immanent criticism While Horkheimer emphasizes the importance of an interdisciplinary approach to knowledge and understanding, Adorno focuses on the manner of immanent criticism. The interdisciplinary approach and interrelated concept of critical theory provides a complex, dynamic, rich, critical and exceptional philosophical basis for studying and understanding finance. Critical theory provides the study and understanding of finance with a multifaceted analytical framework, which takes account of the fundamental importance of the industry within the entire socio-economic domain. An immanent critique of the theory and practice of the free flow of capital as well as the deregulation of financial markets appropriately raises an awareness of the potentially damaging effects on humanity caused by recurrent financial crises and crashes. Moreover, an immanent criticism of the speculative behaviour of humankind which, in turn, triggers financial instability, provides an insightful understanding of the critical nature of the Rubicon to be crossed if financial stability is to be attained and maintained.

6.4 Critical Consciousness This book calls for a level of critical conscious awareness of the conflict between the present financial practice and the attainment of human liberation and freedom. The onedimensional theory of Marcuse would take in the different dimensions in the construction of financial systems to ensure they did not act as a tool for economic aggression and financial domination, but fostered social and human enhancement and empowerment. As stated by Finser: ‘Government is supposed to struggle for the rights of every single human being. It has to guarantee those rights and adjust as the implementation of those rights changes.’20 However, the one-dimensional decision of governments, led mainly by the US, first abolished the Bretton Woods fixed exchange system and then increasingly deregulated financial markets. It has allowed the trading of derivatives and hedge funds on a massive scale and such trading has, in turn, become the major tools of global speculation while the resulting financial crises and turmoil have further prevented the poor and unprivileged from obtaining a better and more sustainable living. Notwithstanding the effects on the under-, if not unprivileged, the middle class has been the most adversely affected by the recent sub-prime financial crisis. Many have lost their homes and jobs and ended up heavily in debt. The entire global economy is now in the depths of a recession with many people challenged by a likely lengthy period of uncertainty and difficulty.

6.5 Conclusion In the view of critical theory, the political task is to liberate individuals from poor material conditions and any form of domination. Critical theory raises conscious awareness of the necessity to break away from the dominant control of the mass media and the politically weighted value of economic growth through dialectic aimed at preventing distorted communication. Castells states in The Rise of the Network Society:

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Financial markets are markets, but so imperfect that they only partly respond to laws of supply and demand. Movements in financial markets are the result of a complex combination of market rules, business strategies, politically motivated policies, central banks’ machinations, technocrats’ ideology, crowd psychology, speculative manoeuvring, and information turbulences of various origins.21

The banking and financial industry, as a significant contributor to the economic production whole, should not be geared solely to benefit the few in power or the rich minority. The industry and its mission should be redesigned and restructured in a way which brings humankind better social and economic equilibrium as its first priority. Critical theory provides an understanding of the underlying importance of banking and finance to the socio-economic development of humankind. It also drives the development of critical thinking about the generally and widely accepted pragmatic financial practice. While Soros states that ‘classical economic theory was based on the assumption of perfect knowledge and the concept of equilibrium’,22 the critical theorists view ‘capitalism is not a harmonious social whole’.23 Since there is ‘a general tendency exists towards capital-intensive industries and increased concentration of capital’,24 therefore, a state of equilibrium is unattainable. Critical theory, on the one hand, poses a challenge to the authoritarianism and domination of either capitalism or Soviet socialism. On the other, it reinforces a systematic and critical review of the injustice and inequality imposed on humankind resulting from the globalization of financial industry. Finally, critical theory encourages and fosters a deeper understanding in order to catalyze social change from the knowledge derived. Critical theory acts to engender consciousness through the critical study of finance from both the global and Chinese perspectives.

Endnotes 1

Kellner, D. (n.d.). Critical theory today: Revisiting the classics. [Online]. Available at: http://www.uta. edu/huma/illuminations/kell10.htm [accessed: 13 June 2007].

2

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

3

Greenspan, A. 2007. The Age of Turbulence: Adventures in a New World. New York, NY: The Penguin Group.

4

Hu, A.G. 2003. 一个中国四个世界: 中国地区发展差距的不平衡性 One China Four Worlds: The Uneven Development of China, in 第二次转型: 国家制度建设 The Second Time of Transition: The Country’s Institutional Construction, edited by A.G. Hu et al. Beijing, China: Tsinghua University Press.

5

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

6

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

7

Horkheimer, M. and Adorno, T. W. 2002. Dialectic of Enlightenment, edited by G.S. Noerr, translated by E. Jephcott. Stanford, CA: Stanford University Press.

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8

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

9

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

10

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

11

Habermas, J. 2004. Theory and Practice, translated by J. Viertel. Cambridge, UK: Polity Press.

12

Habermas, J. 2004. Theory and Practice, translated by J. Viertel. Cambridge, UK: Polity Press.

13

Habermas, J. 2004. Theory and Practice, translated by J. Viertel. Cambridge, UK: Polity Press.

14

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

15

Morrow, R.A. and Torres, C.A. 2002. Reading Freire and Habermas. New York, NY: Teachers College Press.

16

Morrow, R.A. and Torres, C.A. 2002. Reading Freire and Habermas. New York, NY: Teachers College Press.

17

Morrow, R.A. and Torres, C.A. 2002. Reading Freire and Habermas. New York, NY: Teachers College Press.

18

Freire, P. 2005. Education for Critical Consciousness, edited by M.B. Ramos. London: Continuum.

19

Marcuse, H. 2002. One-Dimensional Man. London: Routledge Classics.

20

Finser, S.E. 2006. Money Can Heal: Evolving Our Consciousness. Great Barrington, MA: Steiner Books.

21

Castells, M. 2000. The Rise of the Network Society, 2nd edition. Oxford, UK: Blackwell.

22

Soros, G. 1998. The Crisis of Global Capitalism. New York, NY: Public Affairs.

23

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

24

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

chapter

7 Chinese Philosophy

in Banking and Finance

Principles are patterns according to which all things come into being, and [Dao] is the cause of their being. Therefore it is said that [Dao] puts things in order (li). Things have their respective principles and cannot interfere with each other. Since things have their respective principles and cannot interfere with each other … principles are controlling factors in things. Everything has its own principle different from that of others, and [Dao] is commensurate with all of them [as one]. Hanfeizi

7.1 Introduction The word bank (yinhang) (銀行) and the term banking (yinhang ye) (銀行業) were first introduced into China in 1845 when the British-owned Oriental Banking Corporation set up its branch in Guangzhou. However, the beginnings of the earliest Chinese indigenous form of financial operations of Qianzhuang (钱庄) can be traced back to the early Qing Dynasty (1644–1911). Some reports actually mention that the initial appearance of Qianzhuang was as early as in the late Ming Dynasty (1368–1644). Besides Qianzhuang, sometimes named as Qianpu (钱铺), the indigenous Chinese forms of financial operations also include Zhangju (帐局) and Piaohao (票号). Since the traditional Chinese financial houses were privately owned and the social stratum of merchants and businessmen was actually ranked the lowest within the overall Chinese social strata, the study of finance was insignificant in China’s long history and the result is that such study is very limited in availability. Given this historical background, there is a fundamental disconnection between the study of finance and the traditional Chinese schools of thought. This explains the fact that there is no well-established indigenous Chinese financial theory or philosophy, even though ‘the Chinese probably invented money, but it was the Lydians in ancient Anatolia (modern-day Turkey) who get the credit in the West’.1 This may well provide one of the fundamental reasons of why financial rationale is mainly a product of the West. Since the entire banking and financial industry is intrinsically involved in offering credit, it is quite understandable that the current framework of financial principles, practices and rationale adopted by the Chinese banking and financial industry are, by and large, imports from the West. However, since such an imported financial culture is unlikely to integrate into the Chinese cultural core, a distortion of the process of transformation is justifiably expected. As a result, an acute consciousness is required for addressing such disintegration and disengagement.

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The holistic orientation of the Chinese philosophical spirit provides an interdisciplinary and intersubjective dimension to the understanding of banking and finance. The different Chinese schools of thought also offer the potential to form an incremental and resourceful foundation for qualitative learning about banking and finance, which provides a useful alternative to the multitude of quantitatively driven western texts and literature on the subject. For example, Bernard Lietaer has applied the philosophy of Yin–Yang (阴阳) in studying money and Linda Shepherd has adopted the same in identifying masculine versus feminine characteristics. This chapter aims, firstly, to revisit the concepts of Chinese philosophy and, secondly, to identify the different Chinese original philosophical concepts in order to establish a qualitative base for understanding and interpreting finance from both the Chinese and the western perspectives.

7.2 The Concepts of Chinese Philosophy There are different philosophical schools of thought throughout Chinese history and it is appropriate to divide Chinese philosophy into two eras. The first is that of the Chinese Classics, which begins with Confucius and lasts until about 100 BC, and the second is the Classical Period, which ran from circa 100 BC to recent times.2 The concepts and categories of classical Chinese philosophy cover a very broad spectrum and the ancient Chinese philosophical tenets have both a definite and an indefinite nature. As Mary Clabaugh Wright describes in The Last Stand of Chinese Conservatism: Chinese civilization has been unique in its resistance to institutional change. The wars, rebellions, and successions of dynasty that have marked its vast recorded history have appeared to be cyclical fluctuations within an enduring society rather than milestones in a progression of changing societies. From this millennial accumulation of evidence, Chinese historians and statesmen have concluded that there is in the affairs of men a natural cycle of flourishing and decay, the governing force in which is human ability (jen-ts’ai).3

This explains the fundamental Chinese belief in nature as well as their objection to unnatural manipulation. For the Chinese, there is no absolutism and to force institutional change is unnecessary since the natural cyclical fluctuations have changes built into them. However, cyclical fluctuations are the result of the performance and behaviour of humankind. Wright further refers to Wo-jen, a leading philosopher–official of the mid-20th century, who compared the cycle of human affairs to the alternation of Yin and Yang: Each phase carried within it the genesis of the other; as one reached its highest point, the other was already developing to replace it. In this process, as the mind dominates nature, so the quality of the officials decides the fate of the Empire.4

From the Chinese perspective, cyclical fluctuations are, in fact, the result of the combined efforts of natural practice and behaviour of humankind. If one integrates this theory into the fluctuations of the financial markets, it becomes obvious that the extremes of boom and bust; or bull and bear cycles are not the nature of finance itself. These cycles of fluctuation actually resulted from the actions driven by the greed of

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men. More financial crises and crashes will result from increasing human manipulation and speculation. The critical task of this book is to identify the major tenets of Chinese philosophy, which offer an alternative orientation in respect of understanding, interpreting and practising finance. In view of the interdisciplinary and intersubjective nature of banking and finance, the tenets chosen must be firmly embedded in the root of holistic Chinese philosophy and carry the characteristics of fostering balance, harmony, stability and sustainability. Furthermore, it is essential that from the tenets chosen, one must be able to derive an interdisciplinary understanding and explanation of philosophy, economics, culture and politics in a Chinese context. It should be borne in mind that the broad focus of this element of the research draws from the period from the late Qing Dynasty to the present age, with this particular period representing a significant historical interval in Chinese financial development. From the early climax of the indigenous Chinese financial operations in the late Qing Dynasty to the present age of publicly listed Chinese commercial banks, the development of the Chinese financial industry has, in fact, moved from a purely locally contextualized model to a structure propelled by the practices and techniques of masculine–yang-dominated banking and financial systems. Du Weiming (杜维明), the leading neo-Confucian philosopher, refers to the comment made by Li Shenzhi (李慎之), the renowned political scientist of Communist China, that although Chinese culture is over 5,000 years old, the memory of the Chinese nation, in particular of the last 100 years, is, however, very short and full of serious lapses. From the first outbreak of the Opium War in 1839 to the establishment of New China in 1949, there was political upheaval or turmoil on average every ten years. However, the establishment of New China did not end the socio-political and socio-economic turmoil of the country. The phenomenon of a very ancient culture combined with a short memory relating to the very recent past and the present tends to provoke very complex challenges and problems. A disconnection or disengagement from the roots of culture poses a critical threat to the integration of the four spheres of living. According to Fung Yu-Lan, the innocent sphere is the lowest that requires almost no self-consciousness whereas the utilitarian sphere requires more understanding of what one is doing. Nonetheless, the tradition of Chinese philosophy is to help humankind to achieve the two higher spheres of living, which are the moral and transcendent spheres. However, to live in the moral sphere requires a good understanding of history and culture where the moral principles lie. It is, therefore, significant and essential to set the memory of Chinese modern history into a longer-term context from an interdisciplinary perspective in order to restore if not establish the moral principles and values underlying the tacit knowledge base of Chinese banking and finance. The following aims to establish the connection between Chinese traditional philosophy and finance in order to set the moral principles and values for understanding and practising finance.

7.3 The Key Chinese Tenets in the Context of Finance Despite the dominant philosophical position of Confucianism, Daoism also plays an irreplaceable role in Chinese minds. The chosen tenets for studying and interpreting finance draw from both Confucianism and Daoism since these schools of thought are built around the cosmological and moral ideas that lay the foundation of Chinese philosophy.

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7.3.1 Yin and Yang (阴阳) The Book of Changes (Yijing) (易经) is the single most important work in the history of Chinese philosophy and Yijing can be either a pre-Confucian or a post-Confucian text. The Book of Changes is viewed as a book of divination while the theory of Yin and Yang is connected primarily with it. As one of the earliest Chinese tenets, the Yin and Yang school of thought is probably the most commonly used Chinese philosophy in western scholarly work. The theory of Yin and Yang explains the origin of the world. While Yang meant sunshine and light, Yin meant shadow or darkness. Yang and Yin became two cosmic principles or forces in later development. Fung Yu-Lan states that: … respectively representing masculinity, activity, heat, brightness, dryness, hardness, etc., for the Yang, and femininity, passivity, cold, darkness, wetness, softness, etc., for the Yin. Through the interaction of these two primary principles, all phenomena of the universe are produced. This concept has remained dominant in Chinese cosmological speculation down to recent times.5

The Chinese philosophical understanding is that ‘good and evil always coexist and interrelate. This idea is rooted in the Yin–Yang (female–male) principle’.6 If one applies this Yin and Yang concept to interpret finance, it would explain that it is unnatural to have adopted only masculine–yang characteristic-dominated financial systems. The absence of the equally important or powerful feminine–yin structured financial systems will hinder the natural interaction of the universe and result in absurd phenomena such as financial turmoil and crises, which have occurred. If the masculine, hard and bright Yang represents a financial boom and the feminine, cold and dark Yin represents a financial bust, then whenever a financial boom occurs, a financial bust is certainly going to follow. From the Yin and Yang perspective, the coexistence of boom and bust or bull and bear is part of the cosmological nature. If the outcome of a bust phenomenon is always devastating, then, perhaps, the creation of a boom ought to be prevented in the first place.

7.3.2 The Five Elements (Wu Xing) (五行) The two lines of thought in ancient China that tried to interpret the structure and origin of the universe are the tenets of Yin–Yang and the Five Elements: ‘The five agents, or elements, become intimately associated with yin–yang theory in the Han Dynasty’.7 However, the Yin– Yang School and the School of Five Elements started to have existed quite separately in the 4th century BC and Fung writes: Heaven has Five Elements; the first is wood, the second fire, the third earth, the fourth metal, the fifth water. Wood is the starting point of (the cycle of) the Five Elements, water is its conclusion, and earth its centre. Such is their heavenly sequence. Wood produces fire, fire earth, earth metal, metal water, and water wood.8

The Five Elements are dynamic and interacting forces. Fung goes on to state:

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Each of the Five Elements circulates according to its sequence, each of them exercises its own capacities in the performance of its official duties. Thus wood occupies the eastern quarter, where it rules over the forces (ch’i 气) of spring; fire occupies the southern quarter, where it rules over the forces of summer; metal occupies the western quarter, where it rules over the forces of autumn; water occupies the northern quarter, where it rules over the forces of winter.9

Finally, earth provides the foundation since it is the ruler of the Five Elements. Earth, which has abundant power, is the assister of Heaven. Earth, therefore, cannot be assigned to any single season but it, in fact, embraces all. From the Chinese concept of wholeness, ‘Heaven, Earth, the Yin and Yang, and wood, fire, earth, metal and water, make nine: together with man, they make ten. Heaven’s number is with this made complete.’10 A stable universe is unable to exist and will be in a state of chaos where any of these cosmological elements is missing or is in disorder. The interactive, correlated and interdependent philosophy of the School of Five Elements has some common ground with the interdisciplinary approach of Horkheimer, who emphasizes the necessity of interdisciplinary study jointly created through the interaction of philosophers, sociologists, economics historians and psychologists. While it is appropriate to apply the interdisciplinary approach of critical theory to study and understand banking and finance, it is of equal importance to adopt the interconnected and cyclical philosophy of the Five Elements to interpret the practice and process of the industry. While critical theory offers a western way of raising critical consciousness of domination, the philosophy of the Five Elements provides an incremental eastern perspective of realizing the value of nature and harmony. Furthermore, the four seasons of the Five Elements are well interpreted by the Four Sources of Knowledge. As mentioned in Managing in Four Worlds (1997), ‘the four pervasive sources of knowledge, or historical based philosophies, are pragmatism, rationalism, holism and humanism’.11 Lessem and Palsule further state that ‘These four parts of our new “businessphere” – eastern and western, northern and southern – are underpinned by contrasting philosophies and hold complementary sets of values.’12 The contrasting philosophies of Yin–Yang and the complementary sets of values of the Five Elements, in fact, nurture the balance and harmony of the whole. Nevertheless, it is important to recognize that while critical theory is historically rooted, the earth element in Chinese philosophy is situated at the heart of the universes where history is based. Wood, the eastern holistic spirit and philosophy, is the beginning of the cosmological cycle. Fire, the South, is rooted in communities and culture where individual and group psychologies are formed and manifest themselves. While metal entails the pragmatic approach of western capitalistic economies, water fosters a knowledge society of the North. The objective of Figure 7.1 is to illustrate the interdependent and interactive relationship of the cosmological Five Elements and four sources of knowledge. In the light of Horkheimer’s view, a critique of knowledge that requires that all thought be located in the historical context. This diagram depicts the incorporation of the five schools of interdisciplinary knowledge suggested by Horkheimer into the cosmological Five Elements. While the cosmological wholeness nurtures all lives and, given that banking and finance holds together the other socio-economic subsystems, it should, therefore, be grounded in an interdisciplinary and holistic knowledge base. Such an interdisciplinary knowledge base is firmly embedded in totality.

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Northern Rationalism Water Sociology Western Pragmatism Metal

Eastern EARTH History

Economics

Holism Wood Philosophy

South Humanism Fire Psychology

Figure 7.1 The interdisciplinary Five Elements philosophical knowledge base

7.3.3 The Way (Dao) or (Tao) (道) From the Yin–Yang School and the School of Five Elements, it is easily observed that the belief ‘in the unity of Nature and the human world, mind and matter, body and spirit, or man and the universe, became the foundational thesis for Chinese cosmology’13 whereas Chinese cosmology is built according to the cosmic pattern. Nonetheless, Dao is one of the most important terms in Chinese philosophy. The Chinese ancient philosophers usually referred to Dao as being embedded in the cosmic pattern and the pursuit of Dao was an ultimate goal of all Chinese philosophers. Fung Yu-lan states that ‘the “Way of man”, that is, human morality, conduct or truth’.14 All things belong to Dao and when there is Dao, all things become complete: ‘Man’s standard is Earth. Earth’s standard is Heaven. Heaven’s standard is Tao. Tao’s standard is the spontaneous’.15 Dao is an all-embracing entelechy and Dao as ‘being the first all-embracing principle, it is not an individual thing, and so it is difficult to designate it by such a name as would be used to designate an object having individual existence’.16 Laozi indeed views Dao as the unnameable. In Selected Philosophical Writings of Fung Yu-Lan (1991), Fung states the following: All things that ‘lie within shapes and features’ have names, or, at least, possess the possibility of having names. They are nameable. But in contrast with what is nameable, Lao Tzu speaks about the unnameable. Not everything that lies beyond shapes and features is unnameable. Universals, for instance, lie beyond shapes and features, yet they are not unnameable. But, on the other hand, what is unnameable most certainly does lie beyond shapes and features. The Tao or Way of the Taoists is a concept of this sort.17

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From the above quote, the difference between Daoism and Confucianism is observable. Although both schools of thought agree that the ideal state is to have a sage as its leader, Confucianism expects the sage to do a lot for his people whereas Daoism hopes that the sage ruler should undo or even not do at all. If the governments of today’s nations are compared to the sage leaders, from the perspective of Dao, the more sophisticated the financial markets have become and the more objects of speculation are made available, the more financial crises and crashes are likely to happen. Instead of enforcing more rules and regulations on financial governance to prevent the occurrence of financial crises, governments should instead eliminate the opportunities for speculation. While the unemployed and the poor, in most cases, have to live on charity in the aftermath of every financial catastrophe, charity, in fact, also demeans humanity since it is only required when there is injustice. Therefore, charity is neither going to resolve or stop the widening wealth disparity between the rich and the poor nor the increasing number of people living on less than $2 per day. The domination of the masculine–yang financial principles and practices clearly demonstrates its dehumanizing consequences, which is surely against the all-embracing nature of Dao. In An Introduction to Chinese Philosophy, Liu states: The Dao (of Heaven) is the female principle, which represents the soft, the passive, the infant, and other similar attributes. Laozi says: ‘The gateway of the mysterious female is called the root of heaven and earth.’ In this depiction, he is giving Dao a more specific nature: that of the female principle emphasized in Yijing (the Book of Changes).18

Since things are incomplete without Dao, the universe cannot attain harmony and balance without it. Since Laozi identifies the all-embracing Dao as the maternal force of the nourishment and sustenance of all lives, the female principle of Dao should serve as the foundation of humanity and therefore, taking into consideration its central position, banking and finance should undoubtedly adopt the feminine principle at the core of its structures and values.

7.3.4 The Doctrine of the Mean (Zhong Yong) (中庸) In addition to the previously selected cosmological concepts of the Chinese philosophy, there are two remaining tenets chosen for studying finance in this research. They are the moral ideas selected from the socially and politically oriented Confucian philosophy. The first of these two tenets is the Doctrine of the Mean. Zhong is a basic concept of Confucian philosophy that means centrality and commonality. The following is taken from Key Concepts in Chinese Philosophy: The character zhong literally means ‘the centre’. It is used in moral philosophy to refer to moderation in all things, neither going to excess nor falling short of the mean. Even in popular culture the Chinese see this as one of the greatest ideals of daily life.19

Zhong, or the mean, embodies the idea of equilibrium and it represents the highest state of human development: ‘The gentleman aims at moderation and harmony; the little person is opposed to moderation and harmony.’20 In other words, once the centre is upset, there will be a disruption of the ecological and social balance. Chaos and crises will

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then occur. If banking and finance, at the core of all socio-economic subsystems, loses its balance, financial turmoil and economic crises are likely to result and, therefore, social instability and political upheaval will probably take place. The greed and craze-driven bullish or bearish financial phenomena that upset the nature of moderation should be discouraged if not forbidden. A craze is actually a psychological symptom of the inability to maintain a correct balance and crazes can release uncontrollable intense emotions. Fung Yu-lan refers to Zhong Yong as the state of having no emotions of pleasure or anger, sorrow or joy, but, if pent-up emotions are in due proportion to each other, then the result is a state of harmony. Zhong is indeed the foundation of the world and harmony is the great highway for the world. All creatures are nourished while Zhong and harmony are established and Heaven and Earth are in their proper position. Emotions within Zhong are desires instead. In Selected Philosophical Writings of Fung Yu-Lan, Fung states: ‘What is said about the emotions also applies to the desires.’21 Whether in personal conducts or in social relations, there are always appropriate limits for the satisfaction of desires and emotions. A person has achieved harmony when his desires and emotions are satisified and expressed within the right limits. If the person has attained harmony, he will also achieve good mental health. The same applies when the desires and emotions of the different types of people who comprise a society are satisfied and expressed to the right limits. The society will be able to attain a harmonious environment where peace and order are found. In considering the last four centuries of social and economic devastation resulting from financial crises and crashes, it is undeniable that the underlying emotions of human greed and the crazes it inspires are distortions that prevent the attainment of harmony. The successful prevention of future financial crashes cannot just rely on the respective governments and their policies. It requires a greater critical conscious awareness of all human beings to maintain on the one hand, a healthy level of desires and on the other, the need to become immune from greed-inspired crazes. Otherwise, humankind is going to suffer continuously from recurrent periods of social and economic devastation.

7.3.5 Knowledge (Zhi) (知) For Confucius, it was particularly important to recognize the complex nature of knowledge as well as to realize the significance of treating knowledge with an honest attitude. In Understanding Confucius, Ding states that, ‘You know what you know; you do not know what you do not. That is knowledge.’22 The epistemological approach of knowledge from a Chinese philosophical perspective is not concerned with how knowledge is acquired but is particularly concerned with ‘what knowledge should be acquired and ought to be the object of knowledge and research’.23 In An Introduction of Chinese Philosophy, Liu states: Confucius depicted a lofty ideal for individuals and for the State. His ideal human being is one who never lapses in the pursuit of self-improvement. Our moral cultivation is like climbing a virtue ladder – we can always become better since there is always room for improvement. Learning to know the Way (Dao) and to lead a life in accordance with the Way are the ultimate goals in life. Knowledge is for the moral growth of the individual learner; education is for building moral character. But at the same, Confucius also focused on the moral duty to make others better.24

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Although Confucius did not explicitly apply the term self-emancipation or even the word emancipation as the underlying force of self-improvement, the self-development concept of Confucius can well be associated with the emancipatory interest evoked by Habermas as the self-formative process of human beings where history is free from domination and constructed by will and consciousness. ‘By bringing to consciousness the determinates of the self-formative process, structures of distortion can be revealed, isolated and, under the proper, specifiable conditions, eradicated.’25 Self-improvement, therefore, results from self-understanding and the underlying impetus to attain selfunderstanding is manifested in the emancipatory interest in knowledge. The ability and capability of self-reflective and self-determining are, therefore, the essential elements of obtaining consciousness. As previously discussed, it is not just the responsibility of governments or polities but it is instead the responsibility of humankind to prevent further occurrences of financial crises and crashes. The successful prevention of financial devastation requires the demonstration of consciousness and consciousness is only possible through self-reflection and self-emancipation. If taking the traditional Chinese philosophy into consideration, the attainment of a high level of self-consciousness is required in order to be able to live in the moral and transcendent spheres. Knowledge is gained from consciousness. Knowledge of banking and finance obtained from the cause of consciousness and emancipation will have an interest in fostering an interdisciplinary foundation of balance and harmony. It is also worthy of mention that while Confucius treats knowledge, courage and benevolence as an interdisciplinary value of a gentleman, Mencius believes that the mind of a man has the ability to discriminate and that is the starting point of knowledge. Key Concepts in Chinese Philosophy refers to how Analects talks about the value of knowledge and states that, ‘The one who knows does not go astray: the one who is benevolent does not worry and the one who is courageous does not fear.’26 It is an implicit implication that the ancient Chinese interpretation of the greatest knowledge is the knowing and practising of benevolence. Benevolence (jen) (仁) is, in fact, the ultimate virtue of all human beings from an ancient Chinese philosophical moral standpoint. As Fung Yu-Lan mentioned in A History of Chinese Philosophy, ‘Jen is often loosely used in the sense of general goodness, but more specifically it denoted the graded kind of love that should be practised in the Confucian form of hierarchical society.’27 The Confucian theory of benevolence should be adopted by all respective governments and polities as the fundamental characteristic of their political structures and the core mission of their policies governing financial systems. This is particularly relevant for the Chinese Government, which would more naturally root the country’s financial systems in the highest Chinese virtue of benevolence. While the graded kind of love is the essential core of Chinese society, the western financial rationale and principles can also serve as a technical information base. In Global Gods, the point is made that, ‘In dramatic contrast to Marxism, Confucianism abhors coercion. Being a good example, rather than laws and coercion, is the essence of good government.’28 A benevolent government should always prioritize the prevention and avoidance of financial crises and devastation within its political disciplines and policies.

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7.4 Conclusion Financial systems, at the heart of all other socio-economic systems, are required to be firmly rooted in an interdisciplinary and holistic environment. If the particular financial systems cannot facilitate a social and economic wholeness, then those other critical systems will fail. In other words, a financial industry fails when it allows or triggers the occurrence of financial crises and panics whereas a successful financial industry fosters harmony and balance while avoiding extremes. While a failing financial industry propels manias and instability, a successful one promulgates ethical virtue and sustainability. The recurrence of financial crashes, panics and manias over the last four centuries posits the reality of the long-practised and accepted domination of the masculine–yang characteristics of banking and financial systems that are incapable of espousing socioeconomic balance and harmony. Since the aftermath of every financial crisis is social and economic devastation, the most pressing challenge is to establish other alternative financial theories and models that can effectively bring about human stability and harmony. Given that harmony and stability are within the disciplines of holism and wholeness, the Chinese interdisciplinary, intersubjective, holistic and all-embracing nature of the Yin–Yang, the Five Elements, the Way, the Doctrine of the Mean as well as Knowledge offer invaluable insights and essential developmental elements for banking and finance in China. In view of the recent sub-prime mortgage financial turmoil, China, as well as other leading economies, is seen and believed to be more resilient to the present global economic recession. However, the resilience of the Chinese economy is rather more a function of the country’s US$1.8 trillion foreign exchange reserves and the RMB 4 trillion which the Government has injected into the economy than an emancipated social and economic manifestation resulting from the Chinese original holistic and interdependent philosophical nature. Therefore, the sustainability of the resilience of the Chinese economy becomes questionable.

Endnotes 1

2

Hughes, J.E. and MacDonald, S.B. 2002. International Banking. Boston, MA: Pearson Education. Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

3

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

4

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

5

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

6

Shenk, D.W. 1999. Global Gods, 2nd edition. Scottdale, PA: Herald Press.

Chinese Philosophy in Banking and Finance 7

97

Zhang, D.N. 2002. Key Concepts in Chinese Philosophy, translated by E. Ryden. Beijing, China: Foreign Languages Press.

8

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

9

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

10

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

11

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

12

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

13

Liu, J.L. 2006. An Introduction to Chinese Philosophy: From Ancient Philosophy to Chinese Buddhism. Malden, MA: Blackwell.

14

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

15

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

16

Liu, J.L. 2006. An Introduction to Chinese Philosophy: From Ancient Philosophy to Chinese Buddhism. Malden, MA: Blackwell.

17

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

18

Liu, J.L. 2006. An Introduction to Chinese Philosophy: From Ancient Philosophy to Chinese Buddhism. Malden, MA: Blackwell.

19

Zhang, D.N. 2002. Key Concepts in Chinese Philosophy, translated by E. Ryden. Beijing, China: Foreign Languages Press.

20

Zhang, D.N. 2002. Key Concepts in Chinese Philosophy, translated by E. Ryden. Beijing, China: Foreign Languages Press.

21

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

22

Ding, W.D. 1997. Understanding Confucius. Beijing, China: Panda Books.

23

Zhang, D.N. 2002. Key Concepts in Chinese Philosophy, translated by E. Ryden. Beijing, China: Foreign Languages Press.

98 24

Finance and Society in 21st Century China Liu, J.L. 2006. An Introduction to Chinese Philosophy: From Ancient Philosophy to Chinese Buddhism. Malden, MA: Blackwell.

25

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

26

Zhang, D.N. 2002. Key Concepts in Chinese Philosophy, translated by E. Ryden. Beijing, China: Foreign Languages Press.

27

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 2, translated by D. Bodde. Princeton, NJ: Princeton University Press.

28

Shenk, D.W. 1999. Global Gods, 2nd edition. Scottdale, PA: Herald Press.

chapter

8 The Story of Modern China

May love flood over the myriad things: heaven and earth are one body. Zhuangzi 33

8.1 Introduction In The Rise of Modern China, Hsü states: With a recorded history of nearly 4,000 years, Chinese civilization is one of the oldest in the world. Until modern times its development had been largely indigenous, partly because of the independent spirit of the Chinese people and partly because of China’s isolation from the other great civilizations. However, with the advent of the Age of Discovery a drastically different situation set in.1

In other words, the convergence of Chinese and western history brought an end to the seclusion of China and the country has started to increase its involvement in world affairs. Nevertheless, there is a different opinion among scholars about when modern China began. Although Chinese and western history started to confront each other in the 16th century, its consequences did not become significant until the middle of the 19th century when activities of the West intensified and effected radical changes in China. There are, however, two schools of thought regarding the beginning of modern China. One influential school, consisting mostly of western historians and political scientists, Marxist as well as many western-educated Chinese scholars, view the Opium War as the starting point, whereas traditional Chinese scholars consider the arrival of European explorers during the transition from the Ming Dynasty (1368–1643) to the Qing Dynasty (1644–1911) to be more appropriate. Nonetheless, as discussed in the previous chapter, the last 160 years have seen tremendous socio-political and socio-economic changes and turmoil in China. Therefore, if considered in relation to the comment made by Li Shenzhi (李慎之), the renowned political scientist of the Communist China, although Chinese culture is over 5,000 years old, the memory of the last 100 years of the Chinese nation is particularly temporary and full of serious lapses. As a result, the present political and economic systems are, to a large extent, disconnected from Chinese cultural tradition. This disconnection is likely to lead to a disintegration of society, economy and politics. Taking into account the central position of finance within the entire socio-economic system, such disintegration poses a critical challenge to the stability of the country. According to Fung Yu-Lan, the orientation of Chinese philosophy is to lead humankind in the achievement of the moral and transcendent spheres of living. When a man occupies the moral sphere of living, he understands that he is a member of a

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society. While the society constitutes the whole, he is part of that whole. Only with this understanding will a man be able to act for the benefit of the society since whatever he will do will be for the sake of righteousness rather than personal profit. He is, therefore, ‘the truly moral man and what he does is moral action in the strict sense of the word’.2 Given the undoubted importance of moral values in the achievement of financial stability, members of the society have to be conscious of what they are doing and more importantly, have to understand what they do should be for the benefit of the society at large. A connection with cultural roots and values is required to reach this moral sphere of living. However, in order to be financially moral, it is necessary to reconnect the fractured memory of history to provide a more complete historical context for the study, understanding and structuring of finance. Without financial stability, a society is likely to be trapped in turmoil and chaos. Nevertheless, with the development of the trade in goods, the original money exchange business of traditional Chinese financial houses of Qianzhuang (钱庄) had evolved into receiving deposits and offering credit by the mid19th century. It makes sense that the chosen period of study of this book starts with the beginning of the first stage of the Opium War in 1839. Since the objective of this book is to establish an interdisciplinary knowledge base underlying Chinese banking and finance, the central contextualization is, therefore, the history of China itself. While social and economic transformation and critical theory are rooted in history, history is also situated in earth, the centre of the Five Elements. While earth embraces all, history becomes the core of an interdisciplinary study. It is particularly true that the Opium War marked the beginning of the socio-political and socio-economic struggles as well as the suffering of the Chinese people. This chapter is designed to recollect the broken memory of Chinese history since the outbreak of the first stage of the Opium War from the perspective of eastern philosophical spirit and western financial rationale, in the hope of deriving a fundamental historical base for the study of Chinese banking and finance. Moreover, since the same period of time embraces both the growth and collapse of traditional Chinese financial houses, it provides invaluable sources for the study of the present and future development of the Chinese financial industry. In accordance with Horkheimer, who is ‘contented that a critique of knowledge, presented as a dialectical critique of ideology, must locate all thought in its historical context’,3 critical theory, which is historically contextualized and emphasizes critical thinking, is fundamental to the study of finance, having given due consideration to close to four centuries of financial crises and crashes resulting from the instability and volatility of the industry.

8.2 The Historical, Social and Economic Transformation of China China, the Central Kingdom (Zhongguo) (中国), which possesses one of the longest human histories, has been undergoing radical socio-political and socio-economic changes over the last two centuries. This book applies the study of the last 160 years of modern Chinese history as a backdrop to the understanding and interpretation of the development of Chinese banking and financial systems of the present age. The backdrop derived is

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necessary if the cracks in historical memory are to be repaired to establish both functional and genetic explanations. After the door of China was ordered to close by Emperor Qian Long (who ruled from 1736 to 1795), this sleeping eastern dragon became a mystery to the rest of the world. The letter which Emperor Qian Long wrote to the then British King George III in 1793 clearly indicated that Qian Long had unquestionably withdrawn into his highly developed sense of ethnocentrism and egocentrism and, thus, chose to disregard growing foreign aggression. For Qian Long, China was totally self-sufficient and therefore, had no need for external relations and foreign trade. His monumental arrogance and indifference to diplomatic niceties led to a hardening of the British attitude towards China and the underlying rivalry ultimately resulted in the outbreak of the Opium War which occurred 50 years later. In the same letter, Qian Long used the word barbarian to describe foreigners. Qian Long labelled foreigners as rude, stubborn and ignorant and those who had a need to rely on China to survive. He had strongly rejected English customs, ceremonies and religion as well as trade. From such an unfriendly and aggressive tone in the letter, hostility and tension grew. In spite of the hostility and arrogance displayed by Qian Long himself, it also indicated that Chinese civilization was very inexperienced in dealing with foreigners and was too arrogant to be interested in learning about other cultures. In The Last Stand of Chinese Conservatism, Wright states: Chinese skill in the peaceful ordering of international relations was no new development. The tributary system which included all the world known to China, had proved through centuries to be an enduring and effective system of international organization, a hierarchy in which the place of each people was determined by the degree to which it was permeated and transformed by the Confucian doctrine. The magnetic centre of this Confucian world order was China, from which civilizing influences radiated to all nations. In the ideology that held the system together, little account was taken of the manner in which Chinese civilization had throughout its history been influenced by contact with the non-Chinese people.4

The above clearly explains the very enclosed nature of Chinese society at a time when Qian Long referred to the British people and, indeed, any ‘foreign barbarians’ as only partially Sinicized people. Nevertheless, while Emperor Qian Long did try his best to prohibit foreign trade activities in China, the traditional Chinese financial houses of Qianzhuang were already active and developed to be major facilitators of foreign trade in China after the Opium War. In terms of Sino–western relations, it can be concluded that: The modern invasion of China by the Western world really began in the middle of the nineteenth century, after the first Anglo–Chinese treaty was signed in Nanking in 1842. Until that time relations with the West had been based upon the ancient Chinese tribute system; after that time they were based upon the ‘unequal’ foreign Treaties.5

8.2.1 Years of trial, turmoil and turbulence Without the recognition of Emperor Qian Long, or Chinese scholars and officials, Great Britain had gained superiority over China in terms of technology and tactics. At

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a more superficial level, opium looked to be the immediate cause of the outbreak of the Opium War. However, the core of the problem was the underlying differing concepts of international relations, trade and jurisprudence between China and the West. Hsü says: Far deeper than the opium question was the incompatibility of the Chinese claim to universal overlordship with the Western idea of national sovereignty; the conflict between the Chinese system of tributary relationships and the Western system of diplomatic intercourse; and the confrontation between self-sufficient, agrarian China and expansive, industrial Britain.6

The Opium War brought about consequences for Chinese politics, military, economy, society and diplomacy. Politically, the cession of Hong Kong allowed Britain to further advance its interests in China. Militarily, foreign gunboats could anchor at the five Chinese ports to enable foreign warships to navigate freely and legally within the Chinese territory. Economically, the influx of highly competitive foreign goods resulting from fixed customs rates led to the bankruptcy of local Chinese handicrafts which, in turn, led to social unrest and rebellion. From a societal point of view, the deepened opium problem led to the growth of foreign trade in the five ports. A new class of business entrepreneurs, the comprador class, was born and came to have an increasing influence in society. In retrospect, from the diplomatic point of view, China had begun to enter into official contracts with the western powers and the Opium War brought about the first step towards the country’s membership of international society. However, the socio-economic and socio-political outcome together with the war’s impact on the country at large did not raise the conscious awareness of the Chinese people to their relative backwardness. The Chinese people viewed the Opium War as only a historical accident and they were reluctant and refused to acknowledge the military inferiority and retrogressive political behaviour of the Qing Dynasty. At the same time, the government of late Qing became steadily weaker, more ineffective and corrupt. The history of the late Qing is mainly composed of domestic rebellion and foreign war. Disintegration proceeded at an accelerated rate in the 1850s and the end of the old order came closer. It was during this period of turmoil that my great-grandfather brought his family to Hong Kong, the then British colony. This marked, in turn, the beginning of the disconnection of my father’s family from its indigenous Chinese roots.

8.2.2 The idea of a restoration While the Opium and the Arrow wars brought disasters and humiliation externally, the domestic revolution and rebellions gave serious blows to the ruling power internally. The greatest among the numerous upheavals was the Taiping Revolution which almost toppled the ruling dynasty of the time. From 1850 to 1864, the Revolutation raged over 16 provinces and destroyed more than 600 cities. In view of the foreign suppression and domestic pressure, an overall sense of doom spread through China. The following, which represents the general view, is a North China Herald editorial of January 1860 quoted by Wright in The Last Stand of Chinese Conservatism: The Great Rebellion, like an old fungus of proud flesh, does not heal up; on the contrary, if popular rumours may be taken as an index of the matter, it continues to go from bad to worse … Lord Elgin’s language, when he spoke of the Chinese, ‘the rags and rottenness of their

T h e S t o r y o f M o d e r n C h i n a 103 waning civilization,’ was by some good people regarded as harsh and intemperate. It may have been so; nevertheless it was quite true. The old foundations of government are thoroughly rotten; its ranks and orders are broken; and its gorgeous decorations are in tatters. It is no mere ghoul that is devouring the body politic. The evils are legion; year by year they multiply; and no mortal can tell when or what will be the end of these things.7

To confront internal rebellion and external invasion, the then Emperor Tongzhi (T’ung-Chih) (同治) promoted a resurgence of Chinese identity. The T’ung-chih Restoration (Tongzhi Zhong Xing) (同治中兴) from 1862 to 1874 was a period when the Confucianoriented Government was restored, bringing traditional order. While maintaining peace with foreign powers, this period initiated ‘the Self-strengthening Movement through adoption of western diplomatic practices and military and technological devices’.8 However, Hsü identifies in The Rise of Modern China the core difference between the Meiji Restoration of Japan and the T’ung-chih Restoration as follows: Here, ‘restoration’ lacks the same connotation as the Meiji Restoration of Japan, which meant the return of state powers from the military dictator (shogun) and the feudal lords (daimyo) to the emperor; it refers rather to efforts at restoring the traditional order through reaffirmation of the old morality and appreciation of knowledge to practical affairs.9

Since the Han Dynasty (206 BC–25), Confucian ideology had been the central doctrine of the social and political formation of China. According to Confucius, when a world was without Dao, a breakdown of the social institution would result. In A History of Chinese Philosophy, the words of Confucius are stated: When good order prevails in the world, ceremonials, music and punitive expeditions proceed from the Sun of Heaven. When good order fails in the world, ceremonials, music and punitive expeditions proceed from nobles. When they proceed from a noble, it is rare if his power be not lost within ten generations. When they proceed from a noble’s minister, it is rare if his power be not lost within five generations. But when a minister holds command in the kingdom, it is rare if his power be not lost within three generations. When there is good order in the world, its policy is not in the hands of ministers. And when there is good order in the empire, the people do not even discuss it.10

The above illustrates the essentiality of the Rectification of Names (Zheng Ming) (正名) within Confucianism since this is recognized to be of utmost importance in Confucian doctrine. Moreover, since the Confucian ideology had united the Manchus and the Chinese, the restoration of the social order was, in a sense, rectifying the rules of the Qing Dynasty. The belief of Confucius is that the only way to restore and maintain social order would be to arrange affairs accordingly so that the Emperor would remain to be the leader, the nobles to be nobles, the ministers to be ministers and the common people to be common people. However, whilst previously successful restorations in Chinese history were usually led by strong, brilliant and virtuous rulers, Emperor Tongzhi turned out to be just a puppet king with his mother, the Dowager Empress (慈嬉), being the one in control of the imperial court. The T’ung-chih Restoration ultimately failed to regenerate the Qing Dynasty and ‘historical perspective indicates that it was hardly more than a flash of rejuvenation in

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an eventide of waning dynasty fortune – an Indian Summer’.11 Nevertheless, the T’ungchih Restoration signalled a brave revival of the old order though it failed because ‘the requirements of a modern State proved to run directly counter to the requirements of the Confucian order’.12 Wright’s intriguing view of Chinese civilization is that it has been unique in respect of its resistance to institutional change. In her book entitled The Last Stand of Chinese Conservatism, she makes the point that: The wars, rebellions, and successions of dynasty that have marked its vast recorded history have appeared to be cyclical fluctuations within an enduring society instead of milestones in a progression of a changing society. From this millennial accumulation of evidence, Chinese historians and statesmen have concluded that there is in the affairs of men a natural cycle of flourishing and decay, the governing force in which is human ability.13

Fairbank is aligned with Wright in relation to these repetitive cycles in Chinese history. In Trade and Diplomacy on the China Coast, he states that ‘Since Chinese historical thinking traditionally looked forward to repetitive cycles, the expectation that one dynasty would eventually be succeeded by another was an important factor in political life.’14 For the Chinese, sustainability is a repetitive cycle of up and down rather than the more linear progressive nature of development. From a Chinese philosophical perspective, the cycle of human affairs is in relation to the alternation of Yin and Yang. Therefore, cyclical fluctuations are natural though the quality of officials can decide the ultimate fate of a dynasty. The restoration of the Chinese State is neither the product of a coup d’état nor a revolution nor a new age. It is, indeed, an Indian summer. In other words, the Tung-chih Restoration was a part of an inevitable process of decline in history while the harmony of nature and society was temporarily re-established through reassertion of devotion to the Chinese court by indoctrinated Confucian officials. It also confirmed the Chinese philosophical belief in the importance of having good leaders. It reiterated the Chinese ideology that good or bad or up and down is embedded in the natural ecological cycle. This explains in part why the Chinese people are reluctant to propagate social and political changes as they share the belief that things will happen when their time comes, this being always the Will of Heaven. The Chinese people, who do, by and large, believe in and accept fate, tend to be less critical of events. As pointed out by Wright, Chinese historians and statesmen have treated social rebellions and turmoil as cyclical fluctuations within an enduring society. A fundamental conceptual difference between the West and the Chinese can be found in their respective views of turmoil. In the West, turmoil is treated as a symptom of the need to make progress in changing society or nature. Hopefully, knowledge is gained from unpleasant and harmful experiences in order to minimize future instability and maximize sustainability for humanity. In the case of China, history is seen as a cyclical sequence of constant renewals and adjustments built in a fundamentally stable order where basic conflicts cannot develop. Perfect harmony is attained by resolving and settling minor conflicts through compromise and concession.

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8.3 The Unsettling Era of Reformation 8.3.1 The Hundred-Day Reform A long-enclosed society based on a self-sufficient system tends to instil the development of egocentrism and ethnocentrism. Before the Opium War, the Chinese people were indoctrinated from birth to believe they were superior to other nations and cultures. To the Chinese, foreigners (wei guo ren) were ignorant, stubborn and mean. They had to depend on China, the Central Kingdom, to survive. With their perceived feeling of superiority, once defeated by those whom they viewed as ignorant and mean, it was inevitable that they felt both highly insulted and humiliated. As a result of the outbreak of the Opium War, the awful truth of the backwardness and weakness of their country dawned on the Chinese people. Following the death of Emperor Tongzhi on 12 January 1875, shortly after the failure of T’ung-chih Revolution, though the country was in the midst of foreign encroachments, wars, struggles and revolutions, China engaged in a period of self-strengthening from 1861 to 1894. This was a period of institutional reform triggered by a series of military defeats and concessions to foreign powers. Moreover, following China’s further defeat in the French war in 1885 and in the Japanese war in 1895, Chinese scholars, officials and even Emperor Guangxu (光绪) and the Dowager Empress considered that a more extensive reform was needed. It is worth mentioning that there were, at that time, conservative as well as radical reformers. One of the leading conservatives was Zhang Zhidong (Chang Chih-tung) (张之洞), who advocated the theory of Zhong Ti Xi Yong (中体西用) and promoted the application of Confucianism as a foundation whilst adopting ‘western science and technical know-how’15 or, as described in Sources of Chinese Tradition (1964), ‘Chinese learning for substance, western learning for function.’16 In other words, it is an integrated application of Chinese philosophy as the qualitative knowledge base (中学为体) and western techniques or methods as the quantitative tool (西学为用). In Zhang’s famous work entitled Exhortation to Learning, he stressed and emphasized five important facts to his countrymen. First of all, he urged his countrymen to realize the shame of having fallen behind Japan, Turkey, Siam and Cuba. Second, he asked them to learn from the fearful fate of Vietnam, Burma, Korea, Egypt and Poland. Third, he advocated the importance of realizing the impossibility of improving the efficiency of machines if the methods were not improved. Zhang then asked his countrymen to realize the essential elements in both Chinese and western learning. While Chinese learning should be practical rather than antiquarian studies, western learning should be focused on its political systems rather than technology. Finally, Zhang emphasized that one should never forget one’s originality. From the above, it can clearly be seen that Zhang emphasizes the importance of not losing one’s identity and cultural roots while adopting more advanced learning. On the one hand, Zhang’s wisdom is an essential component in raising the consciousness of today’s capitalist domination of the world. On the other, Zhang’s wisdom also explains the country’s disasters as a consequence of communism since communism was not aligned with the Chinese cultural core. While Zhang represents the conservative school of reformers, Kang Youwei (K’ang Yu-wei) (康有为) represents the radical school. Kang, who was originally a Neo-Confucian scholar, was transformed into a western-style political reformer. He promulgated critical thinking and the need for reappraising ancient books.

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Kang explicitly mentioned that Confucius had written the Six Classics and had intended to promote institutional reform instead of just interpreting them as sayings of men in the past. He also repeatedly suggested that the reform of China should treat Peter the Great and Emperor Meiji as appropriate examples. Emperor Guangxu supported Kang and they forged ahead with their bold programme of reform. The reform lasted for 103 days, from 11 June to 20 September, historically referred to as The Hundred-Day Reform (百日维新). During those 103 days, some 40 to 50 reform decrees were issued in rapid succession in the socio-political areas of government administration, education, industry and international cultural exchange. However, the ultimate control rested in the hands of the Dowager Empress, who, though a supporter of reform was, at heart, a conservative and was alarmed by the radical abolition of the ancestral institutions and traditional administration. As Hsü puts it in The Rise of Modern China: But the dowager was a conservative person, who favoured accepting some foreign methods and devices to supplement the indigenous institutions, but not at the expense of Chinese cultural heritage, basic government structure, and traditional values. Any radical change in the political and social systems that affected the precepts of the Confucian ethical code, particularly the concept of filial piety, on which her position and authority rested, was a threat.17

Needless to say, as a result, the Hundred-Day Reform failed and Kang, rescued by British legal counsel in Shanghai, safely escaped to Hong Kong on 29 September 1898. He then left for Japan after being assured of protection by the Tokyo Government. By that time, more and more Chinese felt that they had to overthrow the Manchu Dynasty in order to have a future. While the coup d’état of 1898 had helped to restore the Manchus to office, the Dowager Empress decided not to make further concessions to the foreign powers. Years of foreign aggression and occupation had triggered strong anti-foreign sentiment, which spread throughout the country. Moreover, five decades of foreign humiliation had also deeply wounded the national pride and self-respect of the Chinese people. This deep sense of injustice and humility provoked a burning desire for revenge which led to the outbreak of xenophobic attitudes resulting in the Boxer Uprising. Although the uprising made an assault on foreigners and foreign influence and looked foolish, it did bring about a primitive form of patriotic Chinese peasant uprising which, 50 years later, developed to become the ruling power of China.

8.3.2 The May Fourth Movement While Chinese society was continuously enveloped in turmoil and rebellion, the Dowager Empress had initiated an institutional reform which lasted from 1901 to 1905. However, since the Dowager was never genuinely keen on introducing a constitutional monarchy in China, the reform merely reinforced the power of the throne. The Chinese soon became disillusioned and disappointed with the tenor of the Dowager’s reform and became convinced that genuine constitutionalism was impossible under the leadership of the Manchus. In 1911, after the failure of ten consecutive unsuccessful revolutions, Dr Sun Yat-sen led the eleventh attempt at Wuchang, which finally brought down the Qing Empire. In Origins of the Chinese Revolution, 1915–1949, Bianco states:

T h e S t o r y o f M o d e r n C h i n a 107 Certain isolated individuals had been preaching in this wilderness of half a billion souls – first of all, of course, the man who long stood for the Chinese Revolution in Western schoolbooks, Sun Yat-sen. Small matter that the man himself, opportunistic and changeable, superficial and vague, did not exactly fit today’s traditional picture of China’s ‘Father of the Republic’. The important thing is that circumstances, along with his talents as a visionary and organizer and his revolutionary seniority, made him at once the indispensable leader and a sufficiently elusive and moving symbol to rally the majority of impatient men of good will to his standard.18

Under the leadership of Dr Sun Yat-sen, the Republic of China was born on 10 October 1911. Sun became the Provisional President of the Republic of China on 24 December 1911. The collapse of the Qing Dynasty succeeded by the Republic of China indicated the epochal transition from traditional China to its modern state: ‘The Confucian state and society and the old ways of life which persisted during the early and middle stages of the dynasty went through a radical transformation under the western impact after the mid19th century.’19 This is further elaborated by Hsü in The Rise of Modern China: The kinship society of China, with its age-old customs, values, and emphasis upon the family and clan as basic units, was shaken to its foundations during the last decade of the dynasty. The Confucian concepts of family loyalty, filial piety, chastity, Three Bonds, and Five Relationships gave way to Western ideas of individualism, freedom, and equality of the sexes.

The founding of the Republic of China, however, did not bring peace, order and unity to the country and people. The early republican years were, in fact, among the worst in modern Chinese history. This early republican period could be characterized and represented by moral degradation, monarchist movements, warlordism and intensified foreign imperialism. The intellectuals started to ask what should and could be done to save China. In particular the new intellectuals, who were either western-trained or western-influenced, challenged again the already shaken Confucian foundation of the Chinese society. They advocated a critical re-evaluation of the Chinese philosophical foundations as well as their cultural heritage. They questioned the elements which had caused the weakness of China and determined to accept western science, culture and democracy in the light of establishing the foundation of a new social and political order. Although the attempt of the new intellectuals was suppressed, the surge of cultural renewal could no longer be stopped. The May Fourth Movement does not refer merely to the movement which took place on 4 May 1919, but actually covers the period from 1917 to 1921. The early 1900s was indeed a stirring era both in the West and in China. As Chow states in his book entitled The May Fourth Movement: In 1917 the new thought and new literature reforms started to gather momentum due to the rallying of the new intellectual leaders around New Youth (Hsin ch’ing-nien) magazine and the National University of Peking. After 1921, the movement revealed itself more in direct political action, and for a few years intellectual and social reforms were more or less neglected.20

In view of the above quote, it is appropriate to define the May Fourth period as 1917– 1921 inclusive, though it can be divided into two phases. The first phase was when a group of intellectuals instilled their ideas of new knowledge in the students and youth of the country. The second phase was the outbreak of attacks on tradition and conservatism

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launched by students which went well beyond intellectual circles. Chinese society and its economy were also experiencing significant change from the traditional self-sufficiencybased agricultural and village economy to engagement in more industrial, commercial and financial entities. Chow further points out: The agrarian economy was beginning to give way, but it still had not been replaced by a modern economic system. A pattern of socioeconomic change embracing, successively, destruction, clearance of ruins, reconstruction, and reforms was expected in China at the beginning of the twentieth century.21

As a result of this economic transformation, the traditional social equilibrium was challenged. The rise of new merchants, industrialists and urban workers threw the selfsufficient and cooperative family and village-based structures off balance. The increasing influence of modern western civilization led to further alienation from traditional ideology. There were about 10,000,000 people who benefited from a modern, westernstyle education system implemented in China. These westernized Chinese saw their responsibility as leading ‘other restless people in a “save China” crusade. The movement reflects the regrouping of all these social factors’.22 On 4 May 1919, triggered by the verdict of the Versailles Peace Conference on Shandong, a huge demonstration was held in Peking, now Beijing, by about 5,000 students. The May Fourth Movement was a result of an indictment of the then frustrated Chinese society. The Movement was triggered by a combination of public anger, an outburst of nationalism, a deep disappointment in the West and the hatred of the traitorous warlord government in Peking. The demonstration proved to be so powerful and so far-reaching that it successfully pressurized the Chinese delegation at Versailles to reject the peace treaty. On the one hand, nationalism, pride and humiliation were provoked by the May Fourth Movement. On the other, the Movement catalyzed the intellectual revolution of the country. There was, at the same time, a split of thought among Chinese intellectuals. Those who were disappointed with the western powers started to turn to Marxist socialism under the influence of the Bolshevik revolution whereas more orthodox traditionalists blamed western materialism and considered Chinese spiritualism to be the remedy. However, as John Dewey pointed out during his visit to China from 1 May 1919 to 11 July 1921, China could not be changed without a social transformation which should be rooted in a transformation of ideas. The political revolution tended to be a failure because revolution was just external, which could only take care of the mechanisms of effecting social action but not affecting or changing the deep conceptions of life and philosophy. Dewey’s comments make it explicit that transformation cannot be attained from topsoil inclined actions. Transformation comes from the core. However, the Kuomintang Government failed to take into account the changing socio-economic and socio-political circumstances as its leaders continued to search for the old ways of dealing with economic decline, social dissolution, political incapacity and uprisings. Jiang Jieshi (Chiang Kai-shek) (蒋介石), the successor of Dr Sun, sought to restore the Confucian system instead. The Kuomintang officials viewed the Confucian ideas in the T’ung-chih Restoration as being relevant to the problems of domestic tranquillity and international security in the 20th century. Although the Kuomintang positioned itself as revolutionary before it was in power, it, nevertheless, identified itself with the imperial government when it was in control. Jiang even urged his officers to spend their leisure

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time studying the Four Books (Si Shu): The Great Learning (Da Xue), The Doctrine of the Mean (Zhong Yong), The Analects of Confucius (Lun Yu) and The Mencius (Mengzi). Under the leadership of Jiang, Kuomintang promoted Confucian ideas on an ad hoc basis – whatever, whenever and wherever it seemed appropriate to stabilize internal order – rather than re-establishing the virtues and values of Confucianism, whereas the Chinese Communists studied the Restoration and adopted its precepts. Unfortunately, the neo-Restoration of Kuomintang was a dismal failure since local control was not reasserted and army morale was not restored. There was never really any effort to revive the Confucian economy and society. The critical point is that the failure of Tongzhi (Tung-chih) Restoration came about as a result of the requirements of a modern state running counter to those of the Confucian order – a modern society versus a Confucian society. From the Opium War to the May Fourth Movement, the independent but feudalistic China had evolved into a semi-colonial and semi-feudalistic society. This was the period of time when the Chinese people became anti-imperialist and fought for freedom as well as democracy. As a result, the long-established economic and societal structure of China was seriously challenged and went through dramatic change. New social philosophies rapidly replaced the traditional ones and the need for class struggle was highly promoted. The conflicts between conservatism and modernization remain unresolved even to the present day in China. Shenk comments, ‘Modernity has put Confucian political philosophy to a severe test.’23 Mao Zedong’s version of communist political salvation further disconnected the Chinese society from its cultural tradition. Therefore, the knowledge of how to attain global integrity without sacrificing local Chinese identity or how to integrate western rationale or methods with traditional Chinese philosophy remains a critical task to be achieved for the progression and development of the country and its people. The industrial and scientific development which China has achieved in the past 30 years has been disconnected from its cultural core. In other words, transformation and sustainability remain to be a critical challenge to China for now and the future.

8.4 Socio-Political and Socio-Economic Struggles and Reforms 8.4.1 The original ideology of the Chinese Communist Party From the establishment of the Republic of China to the inception of the Nationalist Government in 1928, Kuomintang officials hardly enjoyed a day free from domestic rebellion and foreign aggression. On the one hand, the newly established legal Government of China was constantly challenged by dissident politicians within the Kuomintang Party and the unsettled warlords. Moreover, the rising Communist opposition and an increasingly aggressive Japan posed further threats to the stability of the Nationalist Government. On the other hand, the Chinese Communist Party (CCP) (中国共产党) was growing and gaining support by the public. The CCP was co-founded by Li Dazhao (Li Ta-chao) (李大钊) (1888–1927) and Chen Duxiu (Ch’en Tu-hsiu) (陈独秀) (1879–1942) officially in 1921. Chen’s conversion to Marxism was based on an explicit and complete rejection of Chinese traditions, which was in complete contrast to Li Dazhao. Although Chen was sympathetic to the tradition-bound peasantry who proved to be ignorant and backward,

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he could not believe that the most backward element of society could and subsequently did play such a significant role in the modernization of China. He believed that the backward countryside would follow the political lead of the progressive urban areas. A communist social revolution, therefore, required the sympathy and assistance of the peasants but it had to be led by a strong main force of proletariat. In Li Ta-Chao and the Origins of Chinese Marxism, it states: Ch’en judged the Chinese political scene by these rather orthodox Marxist standards until the disastrous year of 1927. Neither in the bourgeois–democratic phase, nor in the socialist phase, did the role of the peasantry loom large in his conception of the Chinese revolutionary process.24

For Li Dazhao, if the peasants were capable of substantial revolutionary initiatives and had the capacity to liberate themselves, the Communists should acknowledge this, move them from their traditional faith in the arrival of a true ruler or great leader and make them aware that they possessed overwhelming power if they organized themselves in mass political action. Li was right and although he did not live to see the triumph of the CCP that he had founded, he did much to mould the ideological orientations which guided his successors to victory. However, it was rather unfortunate that very soon after the CCP was in power, the Chinese people were once again made submissive to those in authority. Nonetheless, the philosophical ideology of Li Dazhao proposed that intellectuals should go to the villages to unify and reform the peasants. As Li said in Li Ta-Chao and the Origins of Chinese Marxism: The young revolutionary comrades ought to bring [the armed peasant groups] together by going to the villages to help the peasants to improve their organizations and to resist the oppression from which they suffer. Following rural organizational work they ought to direct their attention to the problem of raising the cultural [level] of the countryside. The comrades who go to the villages ought to know how to utilize the period of agricultural slack, especially the month of the New Year according to the old calendar, to spread all kinds of general knowledge and revolutionary education. For this work to produce the most effective results, it is necessary to prepare pictures, simple songs and magazines. It is also necessary to organize the village schools and open supplementary classes for the peasants.25

It can be clearly seen from the above comment that Li truly believed in the empowerment of the peasants. Li wanted the young intellectuals in the urban cities to bring the knowledge of civilization and modernization to the peasants. An ideology similar to Li’s was, in fact, adopted by Mao Zedong for political struggles during the Proletariat Cultural Revolution (1966–1976), which unfortunately turned out to be a political and cultural catastrophe for the nation. On the surface, the solution used by Mao was to send the intellectuals to villages to remove their bourgeois influences, but the core motive of Mao was to remove his political opponents. This most devastating Chinese Cultural Revolution changed the original Chinese socialist economy to a totally planned economy. However, after ten years of revolution, China experienced economic devastation and Chinese society was again in complete confusion. The Chinese people had become philosophically disillusioned as well as psychologically unbalanced.

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8.4.2 Social organization, economic and cultural devastation While my mother’s family left China before the CCP gained control of the country, the socio-economic circumstances of the New China following the Communist takeover remained volatile and turbulent. The country’s volatility and instability, to a large extent, were caused by Mao’s firm belief in the mass movement of the people. It is worth noting that Maoism fundamentally supports the continuous organization of mass movements in the hope of attaining specific political objectives of the party. The happenings of the Great Leap Forward (1958–1961) and the Cultural Revolution (1966–1976) were obviously within the basic ideal of Maoism. Indeed, surges of mass campaigns became the daily life in the early Communist China. The Chinese people were tightly organized and everyone belonged to some mass organizations arranged by the party, whereas the Government exercised the national policy under the control of the party. Apart from the doctrine of mass movement, the CCP also believed that in order to successfully transform the Chinese people from feudalism to a new style of life, a psychological programme of brainwashing should be developed and implemented. The brainwashing programme was, in fact, a process of psychological coercion that environmental conditioning could alter an individual’s will and remould one’s character. Therefore, whilst brainwashing was used to convert enemies and extract confessions, it was also applied to indoctrinate party cadres and transform intellectuals so that they could serve the party. Through the continuous process of mass organization, secret police, mass communications media and indoctrination, the Chinese Communist Government was successful in controlling and remoulding Chinese society and its people to an extent which was totally unknown in the history of the nation. Nonetheless, one of the striking incidents of the mass organization was represented by the Great Leap Forward (1958–1961). The Great Leap Forward, Chinese industrialization, postulated by Mao as essential, was an unambiguous social invention on a grand scale, which unfortunately failed on the same grand scale. As Chow described in China’s Economic Transformation, ‘Mao did not understand economics and was extremely skilful in mobilizing the masses. He thought economic objectives could be achieved in the same way as political objectives and revolutions, simply by rallying mass support.’26 Nevertheless, while Mao resonated with Schumacher in favour of development based on the appropriate technologies and labour abundance, he objected to the capital-intensive investment theory of Stalin. Mao’s production strategy was to improve the quality of production technology employed by the greatest number of direct producers. As a result, the focus on the Great Leap Forward was to invest in human development as well as labour-intensive technology since Mao believed that the abundance of labour in China was an advantage. The initial results of the Great Leap Forward appeared promising but proved to be short-lived. The Great Leap Forward was, in fact, the demonstration of a single-minded pursuit of unachievable and unattainable targets in industry and agriculture. The increase in output was soon followed by a decline to below the production levels before the Great Leap Forward period. Direct producers started to learn that hard work was not necessarily rewarded accordingly and productivity slumped. 1959 became a critical year for the politics of economic development of the New China. The results of the Great Leap and the communes were devastating. It was proven that while the indigenous production

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methods had entailed an enormous waste of materials, the high cost of operation could only yield low-quality products. Furthermore, three years of natural disaster from 1959– 1961 further exacerbated the already critical social and economic situation. The Great Leap Forward failed and an estimated 30 million Chinese died during this period. This negatively impacted on Mao’s leadership. Some senior party members who were more pragmatic and less idealistic than Mao started to question and challenge Mao’s hasty approach to socialist transformation. Although there was no open opposition against Mao, some senior party members decided to subtly block or divert the implementation of Mao’s policies. This split in ideology ultimately led to the outbreak of the most damaging, social, economic, political and cultural upheaval of the Cultural Revolution. The Cultural Revolution, started by Mao, aimed to re-establish the supremacy of his authority. The Cultural Revolution can be seen as a second round of China’s transformation with more penetrating and thorough thought-remoulding efforts than in the 1950s. The Cultural Revolution attacked all old virtues including old thought, old customs and habits as well as old culture. It aimed at eliminating all old mental attitudes and behaviours in order to create a new society of men who were devoted to class struggle, since Mao believed that transformation can only be attained through this. However, the methods applied in transforming China were particularly drastic. Red Guards invaded factories and workshops and attacked intellectuals and their families. Schools were closed down and the economy collapsed, and the Chinese people were suppressed through social and political uncertainty.

8.4.3 The new economic and social era (from 1978 to present) After the death of Mao on 9 September 1976, Deng Xiaoping seized power. He decided to reopen the door of China and began the economic reform of the country in 1978. The aftermath of the Cultural Revolution reflected the importance of strengthening the economic development of China. The Chinese leadership started to reform its sluggish, inefficient, Soviet-style centrally planned economy. A peculiar Chinese-characterized socialist economy (中国特色社会主义经济) was born. Under this economic regime, the number of joint ventures, both foreign-owned and local Chinese privately owned corporations rapidly increased and, at the same time, there was massive privatization of the under- or non-performing State-owned enterprises. From the communes to privatization, the Chinese people had to experience another drastic change in a period of just 20 years. Since the economic reform began in 1978, although China has made impressive economic growth, the society has suffered from a widening disparity of wealth. As stated in CIA – The World Factbook (2007, Economy overview section), ‘Measured on a purchasing power parity (PPP) basis, China in 2006 stood as the second-largest economy in the world after the US, although in per capita terms the country is still lower middle-income and 130 million Chinese fall below international poverty lines.’27 While the Gini coefficient of China in 2002 was 0.44 as reported by Central Intelligence Agency (CIA), it is estimated by different economists that the wealth disparity of China has reached 0.50 of the Gini coefficient index. Moreover, the renowned Chinese economist Hu Angang implicitly states that the urban unemployment rate of China has been rising. Those who have already been through the catastrophic Cultural Revolution are now suffering from rising unemployment resulting from the current economic

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downturn and this leads to further challenges. In addition to the financial strain, the psychological damage is likely to trigger further social instability. Moreover, the pressing issues of corruption, bribery, absence of ethical conduct and deteriorating social order are critical problems to be overcome if stability and sustainability are to be attained.

8.5 Conclusion From this recollection of the last 160 years of Chinese history, it can be seen that since the Opium War, the country and its people have been perplexed by the question of how to successfully transform China, or more specifically, how to transform the country’s economic strength to that of western developed countries. From the T’ung-chi period of restoring the traditional order of Confucianism to the total abandonment of the old customs and thoughts of the Cultural Revolution, Chinese society has continuously engaged in the struggle of traditionalism versus modernization. However, in spite of the conservative reformer Zhang Zhidong or the radical reformer Kang Youwei, the idealistic Mao Zedong or the pragmatic Deng Xiaoping, there has not been any knowledge base established which is firmly rooted in traditional Chinese philosophy and which also incorporates western rationale and methods. In the past 160 years, the Chinese authorities have only been able to learn quantitatively measured western methods at the expense of understanding and applying their own more qualitatively based philosophies. Moreover, the application of western methods in many cases has eclipsed indigenous Chinese spirit. Chinese polities have been unable to strike a balance and, therefore, the Chinese people have, in fact, been living on a swinging pendulum. It is appropriate to say that there has not yet been a successful socio-economic and socio-political transformation of China. In The Last Stand of Chinese Conservatism, Wright states: The World’s experience since history began has shown, that although colonies may be transplanted from a parent stock, civilization itself cannot be transferred wholesale from one people to another, either by the sword or by Treaties. It is something that must grow in the soil where it is to take root, and from small beginnings. It must adapt itself to the climate and soil and all its surroundings; and in turn, as years give it strength, it modifies them also; and so, by mutual and reciprocal action, they form, sooner or later, one consistent and harmonious whole.28

If one was to interpret Alcock’s statement from a Chinese perspective, a transformation of China which adopts western rationale must also be rooted in Chinese indigenous philosophy and cultural values while applying the western methods or tools. However, the indigenous Chinese philosophy and concepts have already been eroded in Chinese modern history. A revival of traditional Chinese philosophy is, therefore, both significant and necessary for the future development of the country and its people. Currently, there are critical and pressing challenges for the Chinese Communist Government which include, but are not limited to, rising unemployment, massive and deeply ingrained scale of corruption as well as a serious misuse of resources and assets. In view of the problem of corruption of Chinese economic reform, the following is stated:

114 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a Past economic reform of the state sector in China consisted mainly of privatization, of agriculture and of small and medium-sized state enterprises, leaving large enterprises in the control of the state. Current reform consists of making state-owned enterprises and banks more efficient and making them function like private enterprises, and gradual privatization of some large state enterprises. Bureaucrats managing state assets and the selling of assets take advantage of such power to benefit themselves, including embezzlement of public funds and taking bribes from citizens needing their help, as can be found in state enterprises, state-owned commercial banks and in government projects. Reducing the size of the government sector is the basic solution to the corruption problem in China, while attention should be paid in the privatization process, which can involve corruption.29

While China has now gained full access to the World Trade Organization (WTO) in the hope of strengthening its ability to maintain strong economic growth, in turn, this creates additional pressure on the hybrid system of firm political control and the emerging importance of market influence. The banking and financial industry of China clearly reflects this phenomenon. In consideration of the 1988 Basel Agreement which requires banks to have a capital adequacy ratio of not less than 8 per cent, the four main commercial banks controlled by the Chinese Government, which accounted for 53 per cent of total bank assets in 2002, had well below the capital adequacy ratio requirement. Since total bad loans acquired by the Chinese Government-owned assetsbased companies could not be fully absorbed into the total of non-performing loans (NPL), other solutions were made which included inviting foreign financial institutions to become strategic shareholders of the Chinese commercial banks as well as to formally list the banks. By 2007, with the exception of the Agricultural Bank of China, the other three Chinese main commercial banks (the Bank of China, China Construction Bank Corporation (CCBC) and the Industrial and Commercial Bank of China) had become publicly listed companies. It is hoped that through the acquisitions of bad loans, foreign investments and stocks listings, the Chinese commercial banks will become compatible and competitive. With the reduction in CCBC shares owned by Bank of America, UBS (United Bank of Switzerland) and RBS (Royal Bank of Scotland) also sold their respective 1.33 per cent and 4.3 per cent stakes in Bank of China after the three-year lock-up period. Although investments of other leading banks in the major Chinese commercial banks are still believed to be on a longer-term basis, the question is whether these Chinese banks will merely become the cash machines of their foreign partners or will they be able to incorporate western financial rationale and embed it into indigenous Chinese philosophy? Or, will they only adopt western pragmatic and utilitarian practices without embracing the original Chinese orientation of holism, balance and harmony? In respect of the volatility of Chinese stock markets of late and the availability of an increasing number of financial instruments and investment channels, although China is believed to be better off than its western counterparts in the present global recession, it does not necessarily mean that the country will be unaffected by any future financial crisis. In fact, China is already experiencing slower growth and increasing unemployment as a result of the present global economic recession, and, if a financial crisis occurs in China, will the country be able to deal with such turmoil? Or will a sufficiently powerful alternative financial system emerge to counter-balance masculine–yang financial domination and bring about better social and economic equilibrium?

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Endnotes 1 2

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press. Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

3

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

4

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

5

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

6

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press.

7

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

8

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press.

9

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press.

10

Fung, Y.L. 1983. A History of Chinese Philosophy, vol. 1, translated by D. Bodde. Princeton, NJ: Princeton University Press.

11

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press.

12

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

13

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

14

Fairbank, J.K. 1969. Trade and Diplomacy on the China Cost. Stanford, CA: Stanford University Press.

15

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press.

16

De Bary, W.T., Chen, W.T. and Tan, C. 1964. Sources of Chinese Tradition, vol. 2. New York, NY: Columbia University Press.

17 18

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press. Bianco, L. 1971. Origins of the Chinese Revolution, 1915–1949, translated by M. Bell. Stanford, CA: Stanford University Press.

19

Hsü, I.C.Y. 1975. The Rise of Modern China. Hong Kong: Oxford University Press.

20

Chow, T.T. 1967. The May Fourth Movement. Stanford, CA: Stanford University Press.

21

Chow, T.T. 1967. The May Fourth Movement. Stanford, CA: Stanford University Press.

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Chow, T.T. 1967. The May Fourth Movement. Stanford, CA: Stanford University Press.

23

Shenk, D.W. 1999. Global Gods, 2nd edition. Scottdale, PA: Herald Press.

24

Meisner, M. 1997. Li Ta-Chao and the Origins of Chinese Marxism. New York, NY: Atheneum.

25

Meisner, M. 1997. Li Ta-Chao and the Origins of Chinese Marxism. New York, NY: Atheneum.

26

Chow, G.C. 2007. China’s Economic Transformation, 2nd edition. Malden, MA: Blackwell.

27

CIA – The World Factbook 2007. China [Online 12 July] Available at: http://www.cia.gov/library/ publications/the-world-factbook/geos/ch.html#Econ [accessed: 12 July 2007].

28

Wright, M.C. 1957. The Last Stand of Chinese Conservatism. Stanford, CA: Stanford University Press.

29

Chow, G.C. 2007. China’s Economic Transformation, 2nd edition. Malden, MA: Blackwell.

chapter

9

Narrative, Philosophy and Application: Banking and Finance in China

Moderation is the name for what does not go to excess or fall short. Harmony is what is ordinary. Zhu Xi

9.1 Introduction The previous chapter provided an overview of the socio-economic and socio-political background of the past 160 years of Chinese modern history. This particular period of time also identified the rise and fall of the traditional Chinese financial houses of Qianzhuang (钱庄), Zhangju (帐局) and Piaohao (票号). This chapter aims to apply the modern history of China as the backdrop to the derivation of an interdisciplinary study of the financial industry in China. Moreover, as mentioned in Chapter 8, this same period signifies the transformation of finance in China from the original foundation of money exchange to the receipt of deposits and the offer of credit by the mid-19th century. Such a transformation also stimulated the original self-sufficient agrarian economy of China in becoming a society comprising of agriculture, commerce and industry. However, in view of the insignificance of the study of banking and finance in traditional Chinese education, there is an obvious disconnection between the indigenous Chinese schools of thought and finance. If the 160 years of societal turmoil and cultural struggles (which in fact covers the same period of the rise and fall of the traditional Chinese financial houses) is taken into account, it is totally explicable why there is no profoundly established indigenous Chinese financial philosophy or theory. With regard to the disconnection and the limited amount of available literature on Chinese banking and finance, the approach of current general study comes either from a purely historical perspective generated by and for historians, or from the quantitative analytical formulae applied by the economists. Since finance holds a core position in all other socio-economic subsystems, these adopted approaches can neither fulfil the complexity of understanding nor the development of the industry. This book, therefore, is making a bold attempt to apply an interdisciplinary study of the economics, sociology, history, philosophy and psychology involved in creating an underlying knowledge of the Chinese financial industry.

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9.2 The Original Chinese Financial Industry As previously mentioned, China has a long history in finance and financial services. Although having said that, the word bank (yinhang) or the term banking (yinhang yeh) is not an indigenous Chinese term. China did not have its own bank until 1897, 52 years after the first foreign bank was established in the country in 1845. The then financial industry in China was instead monopolized by the British, French and German banks, with the international remittance business being totally under foreign control. Nonetheless, in order to attain systematic understanding, it is appropriate to divide the Chinese financial industry into four categories. They are 1) Qianzhuang – traditional financial houses, 2) Zhangju – traditional Chinese commercial finance houses, 3) Piaohao – draft banks and 4) Yinhang – banks. Through the narrative storytelling of the four different categories of the Chinese financial industry, understanding is hopefully derived which uncovers, discovers and recovers the philosophical and cultural roots of Chinese banking and finance, taking into account the country’s radically changing socio-economic and socio-political circumstances.

9.2.1 The early function and later development of Qianzhuang Qianzhuang already existed in the early Qing Dynasty (1644–1911) and its original function was to offer a currency exchange service which was required by both merchants and the common people. The capital size of the original Qianzhuang was generally small and it was always a locally rooted establishment for facilitating currency exchange in its local area. Following the development of trade activities during the mid-18th century, in particular after the Opium War, some of the Qianzhuang had transformed themselves to accept deposits and offer credit for trading of goods while some of them even offered high interest-bearing money to the Qing Government officials, Manchurian soldiers and common people. This, in fact, is the earliest record of Chinese personal lending. No record can be traced relating to the criteria Qianzhuang applied for the assessment of a borrower’s creditworthiness. Nevertheless, it is appropriate to assume from their generally small capital size as well as proximity to their customers, that they were likely to extend credit only to a small community where people mostly knew each other. Such an assumption comes from indications relating to Piaohao (draft bank), a more advanced form of Chinese financial institution, established quite some time later, which also had no record of collateral pledges for lending. Their criteria for lending were based on relationship, integrity, reputation of the borrowers and good faith. Traditional Confucian societies valued ‘the qualities of self-discipline, integrity, hard work, and loyalty’1 as good ethics. Therefore, it is safe to assume that the principles of operation of Qianzhuang would not be more sophisticated. Again, from the lending extended to the government officials and Manchurian solders by Qianzhuang, it is safe to assume that under normal circumstances, the borrowers would repay since they could not afford the bad reputation resulting from defaults. From such an assumption, it can be further explained that the credit system of the then Chinese society was organized on a cultural values of integrity, loyalty and good faith. The period of prosperity of Qianzhuang was from the late 1860s to the early Republic of China. As a result of the social and economic changes after the Opium War, increasing

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trade activities occurred in the Chinese entrepôts such as Guangzhou and Shanghai. Those Qianzhuang with larger capital shifted their original function of currency exchange to receive deposits from merchants and then to issue money orders to facilitate trading activities between China and the west. The money order facility of Qianzhuang marked the beginning of the extension of Chinese financial products to foreign entities, which implicitly indicated an underlying fundamental change that Qianzhuang were no longer just offering credit to the people in the same local community they knew well. At the same time, foreign banks started to establish their operations in Shanghai and had developed a kind of correspondent banking with Qianzhuang. In view of the generally small capital size of Qianzhuang, foreign banks took this opportunity to start extending short-term loans (a similar concept to interbank lending in modern times) to Qianzhuang. With the increasing amount of short-term loans offered to Qianzhuang, Qianzhuang ultimately became controlled by the foreign banks. Although there is no record of exactly when the total closure of Qianzhuang occurred, the strong cash reliance of Qianzhuang on foreign banks did contribute significantly to the final collapse of the Qianzhuang. In addition to the serious shortage of capital, the already critical situation further deteriorated with the withdrawal of lending offered by Piaohao which caused the closures of the two leading Qianzhuang resulting from significant losses relating to speculation. The shortage of capital began in Shanghai, which was caused by the financial crisis of the Chinese tea merchants there as a result of increasing foreign competition. The financial crisis in 1883–1884 that started in Shanghai spilled over into the entire country with even the renowned traditional Chinese merchant Hu Xueyan (胡雪岩) going into bankruptcy. A run on the banks resulted and those who could not successfully exchange the money orders issued by Qianzhuang for cash fell into destitution. Furthermore, this financial crisis, which began in Shanghai, led to the collapse of over 100 Qianzhuang in Beijing. It is recorded in the diary of Weng that Beijing was ‘in total desolation and the people were in distress, social disturbances might likely occur (街市萧条, 小民愁苦, 恐酿事端也) («翁文恭公日记»)’.2 In view of the interdisciplinary findings, the collapse of Qianzhuang was embedded in the historical period of continuous foreign aggression and domestic rebellion. From the economic perspective, as a result of the forced opening-up of the Chinese ports, the country had benefited from the diversification of its economy and, therefore, the traditional financial industry also prospered. However, while China had transformed from a self-sufficiency-based agrarian economy to embrace the development of industry and commerce, foreign commercial competition remained a critical factor until the outbreak of the First World War. This situation lasted until ‘the Western Powers became preoccupied with military production. From that moment Chinese national industry and commerce obtained a breathing space and an opportunity to grow, owing to the lowered excess of imports’.3 Nevertheless, in view of the potential and high returns of Qianzhuang, investments were made by a mixture of investors who came from different social classes, which included foreign banks, the hongs and the Chinese merchants. The original structure of Chinese society with the imperial and military groups on one side and the landed gentry on the other, now found an increasing group of ‘new merchants, industrialists, and urban workers arose along with the growth of new cities’.4 From the philosophical point of view, the Chinese people had engaged in a very long period of struggle between traditional Confucian order and western modernization. The failure of the T’ung-chih Restoration

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in 1874 further perplexed the Chinese officials and people with the question of how to effectively and successfully transform and modernize the country’s economic, social and political structures. Needless to say, the psychological impact on the Chinese people was drastic given the radical socio-economic and cultural change involved. Foreign aggression and domestic rebellion could only give rise to further insecurity.

9.2.2 Zhangju – the traditional Chinese commercial finance houses Unlike Qianzhuang which were mostly situated at the entrepôts, Zhangju were mostly located in the north of China, such as Beijing, Tianjin and Shanxi. Xiangfayong (祥发 永), the first Zhangju, was incorporated in 1736 and was owned by a Shanxi capitalist. In fact, Zhangju initiated deposit and loan facilities. While Shangxi capitalists fostered the development of both Zhangju and Piaohao, these Chinese bankers (中国银行家) were thus labelled as Jinshang (晋商). The heyday of Jinshang was during the Ming (1368–1644) and Qing (1644–1911) Dynasties. It is important to point out that the Jinshang were the heads of the ten leading Chinese commercial factions. The fundamental business philosophy of Jinshang, which was rooted in integrity and honesty, had been influential in the traditional Chinese business paradigm. If incorporating integrity and honesty in the five tenets chosen in this book, there is an implication that the philosophy of holism and wholeness can be applied as a powerful tool in bringing about success and prosperity. Nevertheless, if taking a closer look at the business scope of Zhangju, besides accepting deposits from the officials and financing businesses, they also extended credit to local officials, in particular to those who were newly appointed. It is custom and practice in Chinese bureaucratic circles that newly appointed officials spend an enormous amount to maintain good guanxi (关系) with supervisors as well as colleagues. As a matter of fact, this practice gave rise to corruption because newly appointed officials had to repay their debts which were incurred on such spending sprees. Establishing and maintaining good guanxi has always been a crucial element of networking and survival in Chinese societies, however, to maintain good guanxi by not committing bribery and favouritism has always been a critical challenge to this Chinese cultural tradition. Nonetheless, the Qing Government had tried to curb Zhangju lending to government officials but without success. It is, in fact, intriguing to consider the closely-knit relationship between government officials and finance. It is particularly relevant to the Confucian social structure and as described in The Handbook of Chinese Psychology: Through most of Chinese history, individuals have been afforded little security by the traditional Chinese state, which was ruled by a distant and thinly scattered political elite unwilling or unable to maintain order through the rule of law. Instead, order was maintained by forcing people to learn their prescribed roles through Confucian education and family socialization, and by enforcing proper role behaviour by threat of punishment.5

In view of this phenomenon, ‘The kin in-group provided the “first, last, and only” source of security in traditional China.’6 It is, therefore, understandable that nepotism was the golden Chinese method in resolving the issue of trust. It is also explicable that, provoked by the underlying insecurity, newly appointed officials were thrilled to be accepted and included in the already established kin in-group. This phenomenon is still very much alive China today.

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9.2.3 Piaohao – the draft banks Piaohao were thought to have come into existence in the early 1820s. While they accepted deposits and granted loans, they also provided bank drafts in order to resolve the problem of the Shanxi merchants who had to transport physical cash to facilitate trade. Since the operation of Piaohao offered the complete banking business of deposit, loan and bank draft, they are classified as the earliest banks or the earliest local banks of China. As mentioned before, as with Zhangju, Piaohao were also owned by the Shangxi merchants. Piaohao were mostly located in the northern areas of China where Zhangju were not actively operating. Given that Piaohao had a generally larger capital size, they had been facilitating the development of Qianzhuang. Although the great prosperity of Piaohao occurred in the late Qing Dynasty, as a result of the increasing competition of the foreign banks, socio-political turmoil and the occurrence of financial crises in the late 1800s and early 1900s, there were only four Piaohao left by the end of 1921. It is also worth noting that the close relationship between Piaohao and the Qing Government had, in fact, enabled them to grow and develop but, at the same time, contributed to their failure when the Qing Government collapsed.

9.3 The Original Local Chinese Bankers Shanxi merchants were business leaders for over 500 years and had a significant influence on the development of the Chinese banking and financial industry in modern history. Bearing this in mind, it is relevant to reveal the business philosophy and cultural roots of these merchants in order to uncover and acquire a deeper knowledge.

9.3.1 Shanxi, from poverty to the leading financial power First of all, in order to understand the roots of the Shanxi merchants, the Jinshang, it is essential to develop an understanding of their business philosophy and cultural behaviour. Shanxi (literally, west of mountain) is named after its location in the west of the Taihang mountain range. It was situated in the centre of the Qing’s domain. However, due to its harsh environment and ecological conditions, the lack of agricultural resources propelled its inhabitants to leave home to seek a better living. Although the central location of Shanxi facilitated their travel, the Chinese tradition discouraged the idea of leaving home. Moreover, since the traditional Chinese culture demeaned commerce and business, and, in view of the large number of Shanxi people who were engaged in different kinds of trade, it is appropriate to surmise that the livelihoods of the Shanxi people were extremely difficult and unsatisfactory. For generations, the Shanxi merchants explored opportunities for trade, first in Mongolia and then in Russia. Many of them died from such hardship but, nevertheless, a significant number of them became hugely successful. As a result of the substantial accumulation of wealth, some of the Shanxi merchants started to get involved in finance. From the establishment of the Zhangju and Piaohao to their disappearance, the Chinese financial industry was dominated by the Shanxi merchants for close to 200 years. Based on the economic structure of the then Shanxi, it is also appropriate to describe the Jinshang as capitalistic and their society as mobile rather contrasting with the traditional Confucian way of stability.

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9.3.2 The Shanxi capitalists The capitalist character of the Shanxi merchants energized their success in trade and the prosperity of their trading activities naturally demanded a solution to the physical transportation of large amounts of heavily weighted coins. Ri Sheng Chang Piaohao (日 升昌票号), founded by Shanxi merchant Lei Lvtai (雷履泰), was the first to offer a money draft or bank draft as the alternative to hard cash. Ri Sheng Chang (日升昌) is, therefore, named as the rural grandfather of modern Chinese banks (中国现代银行的乡下祖父). The availability of credit and money drafts made trade more convenient and efficient. In the following 100 years, a good number of Shanxi merchants established other Piaohao to the extent that, at one time, they controlled the finances of the Qing Dynasty. Integrity and honesty remained as the core business philosophies of the Shanxi merchants. It is worth noting that integrity, honesty and faith were the basic elements for evaluating people in the then feudal society since it was beyond the law and its enforcement. The Piaohao were, therefore, very selective in choosing their staff and required them to have high integrity and prestige since the shareholders were usually investors who were not involved in the daily running of the business. Taking into consideration the fact that the owners relied on the accountants (帐房) to manage the operations, it implies that a mutually trusting relationship between the owners and accountants needed to be obtained. In Inside Chinese Business, it is stated that ‘These strong family leaders form the core of the business organization. Around them trusted family members or longterm friends serve as close advisers and supply the family head with much of his or her information.’7 It is, therefore, logical to assume that Lei Lvtai and the other owners of Piaohao were among the strong family leaders. This approach is actually rooted in the Confucian theory of the Rectification of Names (正名). While the Rectification of Names is considered to be of utmost importance, the only way to restore and keep order is to practise such. This doctrine implies that a strong family leader would be able to keep the good order required for a business organization. Besides, it is interesting to find from the available data that, except for Qianzhuang which mostly engaged in facilitating trade activities, both Zhangju and Piaohao were in fact heavily engaged in working with bureaucrats. The bureaucrats’ link with businesses has been a typical Chinese phenomenon and may well be implicitly explained by the following: ‘Harmony within hierarchy’ is probably the phrase most commonly used to characterize a wider range of social behaviour in Confucian societies. Chinese tend to be very sensitive to their hierarchical position in social structures and will behave in ways designed to display, enhance, and protect both the image and the reality of this position. To Westerners, these mianzienhacing behaviours may appear ostentatious (expensive cars) or irrational (for example, the Taiwan baby salamander craze of 1989, in which rare amphibians were smuggled from China as a status symbol). Empirical research has demonstrated the extent to which Chinese use considerations of hierarchy in making socially evaluative judgements.8

In retrospect, among the traditional Chinese social strata of bureaucrat (士), farmer (农), worker (工) and merchant (商), merchants were ranked the lowest. Given that the Chinese traditional financial houses and local banks were all privately owned by the merchants, and, taking into account the sensitivity of Chinese to their hierarchical position in social

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structures, the endeavour of the merchants to connect with the bureaucrats in order to enhance and protect mianzi (face) (面子) is understandable. For the Chinese people, mianzi, in fact, is more important than financial returns and they believe that as long as they have the necessary mianzi, financial rewards will be secured. Nevertheless, the link between bureaucrats and merchants has been connected to the long-established Chinese phenomenon of buying and selling official positions (买官卖官) which inevitably brings with it corruption and bribery. It is, therefore, appropriate to guess that the traditional Chinese financiers were very accustomed to dealing with bureaucracy and in order to maintain a good social network, they were very likely engaged in corruption and bribery as a result. Furthermore, it is justifiable to say that although the traditional Chinese financiers practised the Confucian social ethics of integrity and honesty, they ignored the cosmological importance of balance and harmony rooted in the philosophy of Yin and Yang as well as the Five Elements. This statement is made taking into account the absence of records of Chinese financiers financing the disadvantaged. In spite of the social disturbances and political turmoil of this particular period of history, Chinese financiers were very much focusing on financing trade activities, and thereafter government and bureaucrats. Therefore, it is appropriate to describe traditional Chinese finance as focused on a hierarchy which works best within a masculine–yang system rather than embracing the egalitarian that works best in a feminine–yin model. Nevertheless, since family has always been the cornerstone and major concern of the Chinese people, it is fair to assume that the strong family leaders did take care of the disadvantaged within the family and the clan. This Confucian family hierarchy has surely prompted the Chinese to take care of their own families but it has, however, at the same time, also restrained them from embracing the holistic nature of society.

9.3.3 The interdisciplinary explanation In view of the socio-economic and socio-political changes, disturbances and turmoil of China since the outbreak of the Opium War – when the traditional Chinese financial houses of Qianzhuang, Zhangju as well as Piaohao went from prosperity to collapse – and, in order to postulate an easier understanding of the Chinese banking and finance in the context of such a complex social, economic and political background, an interdisciplinary explanation is drawn accordingly. From an economic perspective, China had emerged from the long-established Confucian agrarian structure to the early stage of capitalism. In response to this changing economic structure, the feudal tradition of not leaving one’s home did, in fact, move the Chinese society to espouse the mobility of labour. Furthermore, since the then Chinese society had become semi-colonized, the insecurity originally caused by distant authoritarian rule was further provoked by western aggression. As a result, the Chinese people became antiforeign and fiercely patriotic and protective of their culture. Nevertheless, regarding the traditional Chinese financiers who adopted the Confucian philosophy of integrity as their business principle, it is appropriate to conclude that integrity and faith were the basic criteria for assessing and justifying credit in the Chinese society of this time since law and the enforcement of law were unreliable if not impossible. Taking into account the fundamental importance of banking and finance within the entire socio-economic system, the adoption of an interdisciplinary approach to study the

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same becomes very important. Using the above points, Figure 9.1 seeks to represent and illustrate, from an interdisciplinary perspective, the socio-economic and socio-political environment of China between the late nineteenth to mid-20th century wherein the traditional Chinese financial industry was grounded.

Society: from Confucian stability* to colonial mobility

Economy:

History: a Chinese cyclical dynasty

Philosophy:

development, from agrarian economy to

complicated by the

Confucian social

the manifestation of

insecurity of the Qing

ethics rather than the

capitalism

administration

cosmological belief

Psychology: deepening insecurity caused by distant authoritarian rule and western aggression

Figure 9.1 An interdisciplinary interpretation of the socio-economic and socio-political environment of China from the late 19th to mid-20th century Note: * Confucian stability refers to values such as clanship and filial piety.

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9.4 The Modern Chinese Financial Crises 9.4.1 The recurrent financial crises of China As discussed at the beginning of this chapter, in spite of the Piaohao, which were the local Chinese banks, the actual banking business of our present society was imported to China after the outbreak of the Opium War. The earliest banks established in China were all British, and to a lesser extent, French and German-owned. The first Chinese-owned bank was founded on 27 May 1897, 52 years after the initial establishment of the foreign banks in China. Therefore, for many years, foreign banks monopolized the Chinese financial market, in particular in the areas of deposit taking, international remittance and issuing bank notes. Foreign banks also offered short-term lending to Qianzhuang. It is important to note that even within the relatively short period from 1866 to 1949, a few major financial crises occurred in China. On top of the socio-political turmoil, the financial crises triggered further pressure on the country and a deepening sense of insecurity was felt by its people. While the country was in the midst of socio-economic and sociopolitical struggles, the number of Chinese-owned banks had increased to 170 by 1934. While the 1883–1884 financial crisis was initially caused by the shortage of money within the Chinese economy, the situation further deteriorated when the foreign banks refused to loan to Qianzhuang. Although the run on the banks which occurred in 1921 was triggered by the news spread by foreign banks regarding the liquidity problems of the two biggest Government-owned banks, the Bank of China and the Bank of Communication, the beginning of the crisis was, in fact, triggered by the inauguration of the stock exchange in Shanghai. Following the inauguration, many merchants began to speculate in commodities trading and the market boomed, attracting even higher levels of speculation. By mid-1921, there were all kinds of exchanges established and the craze for speculation became uncontrollable. The severe drain on liquidity ultimately led to the collapse of commodity and stock prices and over 100 exchanges disappeared. The socioeconomic devastation caused by the 1921 financial crisis is well imaginable. The ultimate collapse of the Republic of China was, to a large extent, caused by the gold crisis in 1947. The 1947 gold crisis was actually the only one of its kind in Chinese history and its outbreak was triggered by the enormous sale of gold carried out by the Kuomintang Government in early 1947. The enormous cost of war led to increasing note issues and inflation was inevitable. In order to curb the severe inflation in China after the Second World War, T.V. Song, the then Minister of Finance, made the decision to sell the country’s gold reserves in March 1946. Since China had over 9 million tael of gold at that time, Song believed that inflation could be curbed well before the gold was totally sold out. The opening-up of the foreign exchange market took place on 4 March 1946 and the then central bank of China began to sell its gold on 8 March. However, the speculators took this opportunity to acquire gold and by February 1947, the Government had no more gold to sell. High inflation made the economic position worse, and resulted in post-war Chinese society being caught in a period of distress and insecurity. The high inflation disorientated and discouraged the Chinese people and the intellectuals blamed the Government for its mismanagement. The Chinese people, having endured years of turmoil, wars, internal rebellions and external aggression, ran out of patience with the Kuomintang Government. They longed for peace and wanted to be liberated from suffering and insecurity. However,

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the exhausted nation embroiled in the Civil War which lasted from 1945 to 1949. Led by Mao Zedong, who was an expert in stimulating and exploiting mass discontent, the Chinese Communist Party (CCP) finally took over power and the control of China in 1949. Sadly, Mao applied his version of communism to replace Confucianism as the foundation of political and social philosophy. This, in fact, led to a disconnection of the Chinese people from their cultural tradition. The resulting disconnection implied a loss of cultural images. According to Lessem and Schieffer, cultural images ‘are key sources of creativity and innovation. They are the source of transformation’.9 Moreover, as stated by Shenk, ‘In two decades of the communist revolution, China was in the throes of a profound identity crisis.’10 The identity crisis became a major hurdle in respect of the country’s social and economic transformation.

9.4.2 The present Chinese banking and finance system By early 1949, there were a total of 1,032 financial institutions, comprised of national banks and Qianzhuang. The successful revolution of the Communist Party in 1949 endorsed the beginning of New China. While the new Chinese Communist Government took over the banks from the last authority, it started to build up a new banking and financial system which was ‘a system dominated by the banking sector and a banking sector dominated by the government’.11 However, during the Cultural Revolution, a halt was called to the Chinese banking and financial industry. In spite of the stagnant growth, the following point was made in How China Grows: ‘The most remarkable thing about China’s financial system is that in just 20 years it has grown from practically nothing to a size, relative to gross domestic product (GDP), comparable to that of the United States.’12 Despite the rapid growth and development of the system, the domination of the Government was the major cause of the staggering levels of non-performing loans (NPLs) of the Chinese banks. As Thoma writes in ‘A great big banking gamble’: Sadly the banks have been disastrous middlemen, lending on government instruction without a view to their profits. They have poured money into wasteful infrastructure projects and kept broke state-owned enterprises (SOEs) afloat. Not only this created huge non-performing for the banks themselves, but also because China’s investment is so unproductive, it has to shovel ever more money into its economy to maintain its current growth.13

By the end of 2001, ‘official estimates of the share of non-performing loans of the total loans of the four state banks stood at more than 30 per cent’.14 More importantly, the four State banks still hold a significant percentage of the total bank assets today. The structure of the present banking system of China is illustrated in China: To Float or Not to Float (D) by Alfaro and Di Tella. They state that: The Chinese banking system comprised five categories of banks. Four state banks – Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China (BOC) – accounted for 53 per cent of total bank assets.15

The above statement is supported by what is written in China’s Banking and Financial Markets: The Internal Research Report of the Chinese Government: ‘By the end of 2005, the

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total assets of the four state-owned commercial banks reached 19,657.97 billion yuan, a growth of 16.1% over 2004, and accounted for 52.5% of the total assets of all banking institutions.’16 In addition, there are three policy banks and Alfaro and DiTella continue by saying that: Created in 1994 to take over the policy-lending role of China’s state banks, three policy banks – China Development Bank, Export–Import Bank of China and Agricultural Development Bank of China – had a 14 per cent share of assets. The remainder of China’s banking sector included 12 joint-stock commercial banks with mixed and private ownership accounting for 15 per cent of total bank assets, 112 urban commercial banks for 5 per cent, 34,000 rural credit cooperatives for 10 per cent, and 60 foreign banks for 2 per cent (although their share in major commercial areas such as Shanghai and Beijing was closer to 12 per cent).17

The Government-dominated banking and financial system is not only under threat from the NPLs but also from corruption and unqualified personnel, in addition to the struggle between power and integrity which is bringing about further pressure. As pointed out by Thoma: ‘Since 1998, Beijing has injected over US$260 billion into its banks and allowed the Big Four to shift their bad loans to the separate state-backed asset companies.’18 In addition to the above-mentioned problems of the Chinese banking sector, while the Chinese banks are required to comply with the 8 per cent capital adequacy ratio of the Basel Agreement, a condition of the country’s full access to the WTO, increasing foreign competition is anticipated. The assistance offered by Beijing, the sale of minority shares to the foreign financial institutions and the respective initial public offerings (IPO) were believed to be solutions to maintain the capital adequacy ratio, to improve corporate governance and business transparency as well as the efficiency and competitiveness of the Chinese commercial banks. Furthermore, in addition to these banking problems, the recent volatility in Chinese stock markets also poses financial challenges. It is also worth mentioning that the overheating of the bull market of the 1990s resulted in a sharp and prolonged decline in 2001. Furthermore, the 1990s ‘dramatic rise in stock market prices was not only the product of investor exuberance. Commercial banks also played a major part in driving the market up’.19 In other words, the view of the Chinese Government as the major player in the Chinese stock markets is quite valid since the Chinese financial system is dominated by the banking sector and the banking sector is, in turn, dominated by the Chinese Government. It is also appropriate to say that the Chinese Government plays a significant role in contributing to social and economic disturbances or devastation caused by a stock market crash or financial crisis. The stock market, the indigenous western financial tool, has been adopted by the Communist Chinese Government. However, ‘The current state of China’s stock market reflects the misguided strategy the government took in initiating it, which was to create an alternative mechanism for raising funds for state-owned and state-controlled enterprises.’20 Taking into consideration the recurrent financial crises and crashes of the last four centuries as well as the widening wealth disparity triggered by the masculine– yang-dominated western banking and financial systems, the question to ask is how will Chinese financial systems foster stability and sustainability if the reliance on foreign financial tools and instruments continues?

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9.5 Conclusion By mid-2007, the three State banks, Bank of China, CCBC and Industrial and Commercial Bank of China, had already listed their shares on the Hong Kong and/or the New York stock exchanges. However, in view of the financial crises caused by financial deregulation, the increasing openness in China’s financial industry and the deregulation of its financial markets are, indeed, raising the alarm. The sub-prime mortgage system has since raised significant criticisms of financial deregulation. Taking into consideration the socio-economic and socio-political background during which the Chinese banking and financial industry experienced its prosperity and downfall, the radical social and economic changes of the country are obviously inappropriate for fostering a genuine understanding and knowledge of finance. Nevertheless, in respect of the challenge faced by the Chinese financial industry, there is an emerging need for creating that cognitive knowledge with the Chinese philosophical spirit at its core overlaid with western financial rationale. While the historical struggle in adopting traditionalism or modernization as the core of development still remains unresolved, it is neither out of reach nor unachievable to attain a solution. Although the concept of Zhong Ti Xi Yong (中体西用) is rather familiar to the Chinese people, it is recommended that instead of just adopting the application of Confucianism as promulgated within the concept of Zhong Ti Xi Yong, the other schools of Chinese philosophy, in particular the Chinese cosmological orientation of nature, balance and harmony should also be considered. Nevertheless, it is unreasonable to blame the application of Confucianism as the cause of failure of Zhong Ti Xi Yong since the most critical challenge of this concept is to successfully incorporate and blend the mixture of Chinese philosophy with western methods, whereas previously failure has resulted where one overshadows and dominates the other. Chinese people today are, by and large, disconnected from traditional Confucian social ethics since the original disillusionment with Confucianism was further engendered during the Cultural Revolution. The pragmatic orientation of the economic reform since has further divorced the Chinese people from their traditional cultural values. However, in view of the utilitarian and potentially unstable approaches adopted by the western financial interests, the rediscovery and revival of the Chinese philosophical spirit should be considered essential to the future development of the industry. Since the stability of banking and finance is the major cause of stability of all other socio-economic subsystems, the consideration and application of Chinese philosophy to the financial systems are of utmost importance with regard to the future development of the country. Later, in Chapter 12, I will introduce a Chinese-contextualized financial model rooted in original Chinese philosophy but reflecting the western financial and commercial rationale.

Endnotes 1

Shenk, D.W. 1999. Global Gods, 2nd edition. Scottdale, PA: Herald Press.

2

Ma, Z.L. 1997. 中国金融史话 [The Historical Stories of the Chinese Finance], edited by S.S. Cai. Hefei, China: Huangshan.

N a r r a t i v e , P h i l o s o p h y a n d A p p l i c a t i o n 129 3

Chow, T.T. 1967. The May Fourth Movement. Stanford, CA: Stanford University Press.

4

Chow, T.T. 1967. The May Fourth Movement. Stanford, CA: Stanford University Press..

5

Gabrenya, W.K. and Hwang, K.K. 1996. Chinese Social Interaction: Harmony and Hierarchy on the Good Earth, in The Handbook of Chinese Psychology, edited by M.H. Bond. New York, NY: Oxford University Press.

6

Gabrenya, W.K. and Hwang, K.K. 1996. Chinese Social Interaction: Harmony and Hierarchy on the Good Earth, in The Handbook of Chinese Psychology, edited by M.H. Bond. New York, NY: Oxford University Press.

7

Chen, M.J. 2001. Inside Chinese Business. Boston, MA: Harvard Business School Press.

8

Gabrenya, W.K. and Hwang, K.K. 1996. Chinese Social Interaction: Harmony and Hierarchy on the Good Earth, in The Handbook of Chinese Psychology, edited by M.H. Bond. New York, NY: Oxford University Press.

9

Lessem, R. and Schieffer, A. 2009. Culture and Transformation. Farnham, UK: Ashgate.

10

Shenk, D.W. 1999. Global Gods, 2nd edition. Scottdale, PA: Herald Press.

11

Riedel, J., Jin, J. and Gao, J. 2007. How China Grows. Princeton, NJ: Princeton University Press.

12

Riedel, J., Jin, J. and Gao, J. 2007. How China Grows. Princeton, NJ: Princeton University Press.

13

Thoma, M. 2005. A great big banking gamble. The Economist, 29 October.

14

Alfaro, L. and Di Tella, R. 2006. China: To Float or Not To Float? (D). Boston, MA: Harvard Business School.

15

Alfaro, L. and Di Tella, R. 2006. China: To Float or Not To Float? (D). Boston, MA: Harvard Business School.

16

Zeng, G. 2007. The Banking Industry, in China’s Banking and Financial Markets: The Internal Research Report of the Chinese Government, edited by L. Yang and R.L. Kuhn. Singapore: John Wiley and Sons (Asia), 69–95.

17

Alfaro, L. and Di Tella, R. 2006. China: To Float or Not To Float? (D). Boston, MA: Harvard Business School.

18

Thoma, M. 2005. A great big banking gamble. The Economist, 29 October.

19

Riedel, J., Jin, J. and Gao, J. 2007. How China Grows. Princeton, NJ: Princeton University Press.

20

Riedel, J., Jin, J. and Gao, J. 2007. How China Grows. Princeton, NJ: Princeton University Press.

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10 China Construction

chapter

Bank Corporation: From Critical Consciousness to Balance and Harmony

We turn our pain into narrative so we can bear it; we turn our ecstasy into narrative so we can prolong it … We tell our stories to live. John Shea

10.1 Introduction This book examines three case studies, one encompassing a masculine archetype of commercial banking set in the China Construction Bank Corporation (CCBC) and two feminine-oriented cases: Grameen Bank and Catalyst Foundation. This chapter is a Chinese-contextualized case study of CCBC. It is important to take a closer look at the underlying orientation of the conventional Chinese commercial banks in order to develop a deeper understanding of the Chinese financial industry. The application of critical theory is seen as an essential component of studying finance so that an interdisciplinary knowledge base underlying the Chinese financial industry can be created in order to build a Finance-in-Society Model (FISM) taking into account both Chinese philosophy and western financial rationale. Let us examine the case of CCBC, a masculine-characterized commercial bank, rooted in the local Chinese context and representing a typical example of the transformation undertaken by the Chinese banks in recent years. A reflective–active approach has been adopted in studying the case of CCBC. The application of a combined discourse and narrative method is to tell, transcribe and analyze the recent transformation of the Chinese State-owned banks building the case of CCBC into this background of change. The second ingredient is the actual investigation, which was carried out through the adoption of the combined method of dialectic and discourse analysis during a management course designed and delivered by the author to 31 senior executives of CCBC in late August 2006. From the dialectical exchange and the oral discourse, an underlying knowledge of the present philosophy and business concept of Chinese bankers has been established. More importantly, the disengagement of Chinese bankers from the Chinese cultural tradition has been identified. Although China has adopted an open door economic policy for 30 years, the country is still very much an authoritarian state and since many of the participating students were

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also members of the Chinese Communist Party (CCP), and also as a result of the Chinese Government’s significant shareholding in CCBC, any written or spoken discourse of the bankers’ frustration and disappointment with the present state of their financial industry would have been impossible. The students would be very cautious and tremendously reluctant to make such disclosures, particularly in a recorded form. Freely expressing their opinions and inner feelings would be very difficult for them. As a result, the validity of this case has to rely on the interpretation of the discourse and dialogues experienced by the investigator. Nevertheless, the reason for choosing CCBC as the focus of this case study is because it ‘was the first of China’s State banks to secure foreign strategic investment’.1 Moreover, it is also the first of the Chinese communist-inaugurated State banks to have secured the status of a listed company. Given its original role as treasurer to the CCP Government, it then evolved first into a State-owned commercial bank and thereafter into a Chinese–foreign co-owned and publicly listed bank. In fact, this illustrates the rapid transformation of the Chinese financial system over the last 55 years under the control of the CCP Government and it is appropriate to place this transformation of CCBC into the wider context of China’s reformation of its originally socially oriented economic structure into the current profitoriented one. Given this background, it is essential to build a deeper understanding of the underlying consequences of this rapid economic transition using the case of CCBC. The CCBC case takes a reflective–active approach whereas the other case, Catalyst Foundation, is active–reflective-driven. The CCBC case represents a typical example and provides a better understanding of the current state of conventional banking in China, whilst the case of Catalyst Foundation operates within the quite different FISM of this research. This latter model is built on a new financial knowledge base where Chinese philosophy and western financial rationale are integrated. Critical theory is the core methodology of this research with feminism applied as a secondary methodology. This approach has been applied consistently across this book and its three case studies – CCBC, Grameen Bank and Catalyst Foundation. Since Catalyst Foundation works within the participatory action research, PAR methodology has also been adopted as a supplement to critical theory and feminism.

10.2 How to Derive the Knowledge 10.2.1 The methodology adopted Critical theory Taking into account Lietaer and Brunnhuber’s position that the monetary/financial system is the foundation of the sustainable development of all socio-economic subsystems, the challenge of this case lies in the ability to foster a conscious awareness of the negative effects on mankind caused by the instability of the financial system. In this case study, critical theory is the core methodology with its interdisciplinary and critical approach being applied to study and review the development of CCBC. In view of the disconnection from the original Chinese values demonstrated at CCBC, the study of the increasing challenges of CCBC resulting from China’s full accession to the World Trade Organization (WTO) from 10 December 2006 becomes important.

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Feminism Feminism has been applied alongside critical theory to further raise an awareness of the suppressed Yin elements within masculine–yang-dominated banking and financial systems. Since banking and finance is at the core of all other socio-economic subsystems, it is profoundly important for this industry to embrace and respect feminine–yin characteristics if a holistic and harmonious relationship between finance and society is to be enabled.

10.2.2 The method applied A combined discourse and narrative method is used to tell, transcribe and analyze the story of CCBC as the background of this case story. A dialectic method is also adopted to create a deeper understanding of the core challenges of CCBC through dialogues and discussions with the group of 31 senior executives, in the hope of raising their conscious awareness of the pressing and negative effects on humankind caused by the unstable practices and unsustainable behaviour of the financial industry. Furthermore, from such critical consciousness, it was hoped to create new knowledge relevant to the future development and sustainability of CCBC itself.

10.3 Historical Development 27 October 2005 was the date when the public listing of CCBC shares began. This same day also marked the initial success of the Chinese Government in the shareholding reform of the four leading Chinese State commercial banks. In view of the staggering non-performing loans (NPLs) and the compliance with WTO requirements, the Chinese Communist Government was compelled to bail out the State banks. In ‘A great big banking gamble’, Thoma states: Since 1998, Beijing has injected more than US$260 billion into its banks via straight handouts and by allowing the Big Four to shift dud loans into separate state-backed companies. This is about twice what South Korea spent to restructure its banks after the 1997–98 Asian Crisis and about what America needed to bail out its savings and loans industry. Mindful of the long paralysis of Japan’s indebted financial system, China is pumping in funds before a financial meltdown.2

In addition to these bailouts, another strategy adopted en route to recapitalization was the restructuring of the shareholding of the Chinese State commercial banks: ‘In January 2004, China decided to use Bank of China and CCBC as pilot banks in shareholder reform.’3 CCBC was restructured from a 100 per cent State-owned commercial bank into a foreign–Chinese joint venture co-owned by the Bank of America, Temasek Holdings and the Chinese Government. The initial public offering (IPO) of CCBC in October 2005 successfully raised a total of HK$8 billion from the sale of 12 per cent of its shares. The Chinese Government remains the major shareholder of the venture. It can be clearly seen from the above that there were three major steps taken by the Chinese Government in restructuring the State-owned commercial banks. These

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three steps were the Government’s bailout, foreign co-ownership and an initial public share offering. Except for the Agricultural Bank of China, the other three banks have successfully completed the process of banking reform. In addition to the importance of recapitalization, it is also considered that foreign participation and public listing will further strengthen the compatibility and competitiveness of the Chinese State commercial banks. Another key factor is that these banks are now facing increased competition as a result of the opening up of financial markets of China from 10 December 2006. The restructuring of the Chinese banks was, therefore, regarded as both crucial and critical. In China: To Float or Not to Float? (D), Alfaro and Di Tella state: Foreign strategic investment provides catalyst to China’s banking reforms. With mutual commitment and a proper deal structure, foreign partners can add real long-term value to Chinese banks, especially in credit policies, product expertise, risk control and corporate governance. In return, they can leverage Chinese banks’ extensive branch networks and customer bases to offer services in the world’s fastest growing economy.4

From the perspective of foreign financial institutions, the opening-up of the Chinese financial markets offers attractive and vast opportunities to capitalize on the unexploited consumer finance, asset management and credit card sectors of the industry. Furthermore, it is believed that there will be an increasing demand for forward and swap transactions as well as cash management. More importantly, in respect of the opportunities made available to foreign financial institutions, will they bring about sustainability and stability to the Chinese society and people? And will China be committed to bring about a better balanced and behaved financial environment to the country and the world at large? Unfortunately, on top of the sub-prime mortgage crisis, the huge trading volume of the Shanghai Stock Exchange in 2009, which was the third largest after New York Stock Exchange and Nasdaq, is not giving much confidence in the prospect of sustainability. It is, indeed, a frustrating fact that, since the period of Kipper- und Wipperzeit (1619– 1922), financial crises or near crises have become regular events for society at large, from a monetary crisis caused by a widespread debasement of metallic coins at the outbreak of the Thirty Years War, to the recent sub-prime mortgage financial turmoil. The profitoriented masculine–yang-dominated financial markets have regularly demonstrated an affinity for disturbing and interrupting the stability of wider social and economic systems. In other words, whenever speculation takes place, short-termism tends to overshadow long-term orientation. Whenever short-termism takes hold, the interdisciplinary socioeconomic network will be disturbed and sustainable development will be interrupted if not prevented. Given China today is such a pragmatic and money-oriented society, will the country be able to develop towards financial stability? From 100 per cent State-owned to public listing, the Chinese commercial banks are moving from a politically dominated to a quasi-market dominated environment in the hope that foreign participation, listing and marketization will instil in them better governance and stronger competitiveness. However, as a result of this change, the core issue of maintaining and enhancing socio-economic stability and sustainability is displaced to the bottom of the agenda. The hegemony of the masculine–yang characteristics of commercial banking and financial systems has, in fact, become a form of economic totalitarianism. As Marcuse states in One-Dimensional Man, ‘For “totalitarian” is not only a terroristic political coordination of society, but also a non-terroristic economic–technical

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coordination which operates through the manipulation of needs by vested interests’.5 In the light of the spread of these respective financial instruments and tools, it is perhaps appropriate to say that the more sophisticated the financial system has become, the more financial crises have resulted.

10.4 Life as Transformation – The Transformation of the Chinese State-Owned Commercial Banks In China: To Float or Not to Float? (D), Alfaro and Di Tella refer to the following comment made by Fred Hu, Managing Director of Goldman Sachs: Not too long ago, the China Construction Bank was besieged by scandals that further shook confidence in China’s troubled banking system. It is nothing short of stunning, therefore, that just six months later, the bank pulled off an $8 billion initial public offering at a hefty price.6

The CCBC was incorporated in China in October 1954 under the administration of the Chinese Communist Party and it was the third largest bank of the country. In comparison with the other major State banks, CCBC had been focusing on corporate lending rather than retail banking with 3.2 million corporate deposit accounts and relationships with 97 per cent of top corporations in China. By the end of 2002, the NPLs of CCBC stood at around 18 per cent of its total loans with the recapitalization of CCBC being an expensive exercise for the Chinese Government as such costs reached US$71 billion between 1998 and 2005. After the recapitalization exercise, the ratio of NPLs of CCBC was down to less than 5 per cent. In June 2005, Bank of America invested US$2.5 billion to initially acquire a 9 per cent stake in CCBC. Bank of America subsequently increased its stake to about 17 per cent before reducing its shareholding in CCBC to approximately 11 per cent in January 2009. In addition, a further 5.1 per cent stake of CCBC was sold to Temasek in July 2005 (Temasek Holdings is the investment arm of the Singapore Government and is 100 per cent owned by its Ministry of Finance). Subsequent to these foreign acquisitions, CCBC was successfully listed on the Hong Kong Stock Exchange in October 2005. However, it is ironic that soon after the successful listing of CCBC, it was announced that its former director, Zhang Enzhao, had been sentenced to 15 years imprisonment for corruption. Nevertheless, the following illustrates the different transitional stages of CCBC in the 53 years since its establishment in 1954. These four stages are: 1. The First Stage: October 1954–December 1978 The treasury of the Chinese Government financing infrastructure projects of the country. 2. The Second Stage: 1979–1993 A State-owned bank acting as the treasury and offering commercial lending services. 3. The Third Stage: From 1994–2005 A State-owned commercial bank.

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4. June 2005–Present A publicly listed commercial bank with combined Chinese State and foreign ownership with the Chinese Government as major shareholder. The following statement relating to CCBC from China’s Banking and Financial Markets: The Internal Research Report of the Chinese Government is worthy of note: In 2005, the Bank’s income from its core business grew by 20.4 billion yuan over the previous year, with a growth in business profit of 17 billion yuan. Similar to the case with Industrial Commerical Bank of China (ICBC), it enjoyed a rapid growth in investment returns, which rose to 38.5 billion yuan, 12 billion yuan more than 2004, with a growth rate of 45 per cent. In addition, its net interest income increased by approximately 8.4 billion yuan. Net income from intermediate business equalled that of the previous year. As with ICBC, the Bank’s net interest income declined from 67 per cent to 63 per cent. Net income from intermediate business also dropped by 1 percentage point to 8 per cent. The percentage of investment returns arose from 25 per cent to 30 per cent.7

The rapid growth in its investment returns in comparison to the zero growth of its intermediate business demonstrates a fundamental shift away from CCBC’s original intermediary role of corporate lending. Such a shift may well indicate the Bank’s exposure to potential risks resulting from inappropriate investments. As banking and finance are considered to impact on the stability of all other socioeconomic subsystems, the transformation of CCBC and the other State commercial banks has actually lifted the veil on the fundamental change of direction of the Communist Chinese Government from its traditional identity with its community and society to a place where corporate entities are fully immersed in profits and markets. Communist China, a country which had tried to adopt a holistic–communal approach, has now become dominated by the pragmatic economic values of earnings growth and market performance. China, a socialist country, as a result of the global dominance of free trade and marketization, has increasingly been adopting the capitalist path of the West. No matter whether under the control of the feudal dynasties, or at the early stage of capitalism during the Republic of China, or under today’s Communist leadership, the original Chinese cosmological philosophy of Yin and Yang or the interdisciplinary and interdependent Five Elements, have not yet manifested themselves in Chinese banking and financial systems. Although integrity and honesty were at the heart of the culture of traditional Chinese financiers, the holistic orientation of the Chinese cosmology has long been forgotten and ignored. Balanced harmony in the Confucian sense means prosperity can be an outcome if such equilibrium is achieved. At the same time, in Taoist thought, ‘harmony is the product of wu-wei, which means “yielding”’.8 However, such a harmonized state is not going to be fostered unless the balance of Yin and Yang is attained and the intersubjectivity of the Five Elements is also fulfilled. If balance and harmony are not attained, then finance will remain our master ‘when it should be our servant’.9 As a result, we are not consuming finance but being consumed by finance instead.

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10.5 From Dogmatic Training to Conscious Learning While I was planning to approach CCBC in Shanghai, an opportunity arose when Dalian University of Technology (DUT) called me in late May 2006 regarding the possibility of staging a tailor-made course for a group of 31 senior executives of CCBC located in Urumqi, Xinjiang. Since I had been teaching banking and finance as part of the fulltime MBA programme at DUT over the last few years, and, in view of my investment banking background, the university invited me to deliver this course relating to the development of CCBC’s future competitiveness. Since this research seeks to establish an interdisciplinary knowledge base of the Chinese banking and financial industry in order to build a model of Finance-in-Society, I viewed this as an excellent opportunity for the exploration of the underlying story of the Chinese banks. I, therefore, purposely structured the course to focus on raising critical consciousness of the Bank’s senior executives to the risks of the masculine–yang-driven model of finance in the light of the future development of China. The management course of banking and finance took place from 29–31 August 2006 at the MBA centre of DUT. I had the absolute freedom to design and select the appropriate literature for conducting the 2½-day intensive course. I decided to conduct the course in Mandarin Chinese to avoid a language barrier although the presentation documents were written in English. Instead of applying the normal general Chinese teacher–student nondialectical subject and object relation, I decided to adopt a ‘subject–subject relation with an external object’10 as a way of teaching. While subject–object relations are considered by Paulo Freire to engender an absence of communication, subject–subject dialectic between investigators (as subjects) and their pupils (also as subjects rather than objects) would involve a more equal communicative relationship: ‘Communications between Subjects about the object is established by means of intersubjectivity.’11 However, references made to objective conditions are necessary if cognitive knowledge is to be created. The subject–subject communicative method was, therefore, adopted with the objective of uncovering the hidden story of the Chinese commercial banks underneath the skin of the marketization of the Chinese financial industry. More importantly, the course was designed in the hope of liberating the Chinese bankers from their innate cultural silence while encouraging them to critically reflect on the recurrent financial crises and crashes experienced and suffered by humankind. Alarmingly, action taken without critical reflection can be radical and disastrous. Before the course took place, I had gathered some information on the background of the senior executives involved. This revealed that among the 31 senior executives, there were eight branch managers and the remaining group came from the credit, marketing and personal finance departments respectively. Taking into consideration the fact that they were mostly in their mid-30s to 40s, they were either at the stage of ending the age 30 transition or had reached the mid-life transition. I was, therefore, convinced that the programme had to be qualitatively designed and the content should focus on raising the critical awareness of these Chinese bankers of the negative effects brought on humankind as a result of materialistic and profit-oriented banking and finance. These Chinese bankers had reached or were soon to reach a very critical stage of their life and as described in Managing in Four Worlds:

138 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a For the great majority of people this is a period of great struggle within the self and within the external world. The mid-life transition, for individuals as for organizations, is a time of moderate or severe crisis. You question nearly every aspect of your lives and feel that you cannot go on as before.12

Besides trying to raise the critical consciousness level of these 31 Chinese bankers, the course was also designed to uncover and recover the elements of traditional Chinese philosophy from the perspective of finance and society. The course was structured in a way that would bring about an awareness of the necessity of creating a FISM rooted in the Chinese context, a model which integrates Chinese philosophical spirit with Western rationale.

10.5.1 29 August 2006 – raising consciousness and conscience The first day’s morning session began at 08:30. I arrived at the reserved multimedia classroom 20 minutes before the session to get the PowerPoint presentation ready. At 08:15, the student bankers gradually entered into the room. They greeted me with lao shi zao (good morning, teacher) and I said good morning too. The bankers were very punctual and all of them had arrived in class five minutes before 08:30. They were silent and patiently waited for me to start the class. They were, in fact, similar to my other Chinese MBA students who preferred to be reactive rather than proactive. It usually took a few classes to overcome the initial shyness and distance. Nonetheless, it is likely that this was also a reflection of the Chinese cultural silence. However, since it was just a very short course, I reflected that if the successful application of a subject–subject dialectical relationship was to be attained, I had to act quickly to help them to emerge from cultural silence to become ‘conscious makers of their own culture’.13 Once they succeeded in emerging from silence and monologue, they would become active participants in creating history. Therefore, in order to move away from the usual classroom teacher–student relationship of silence, I started the first session with my personal introduction and then followed by their respectively brief individual introductions. This session of personal introduction was helpful in building bridges between us. The actual programme began mid-morning. I had prepared three PowerPoint presentations for discussion and knowledge creation. The first one presented was ‘The Strategic Competitiveness of Chinese Banking and Finance – a Finance-in-Society Model with Chinese Philosophical Spirit and Western Rationale’. The presentation began with the aim of making these student bankers feel at ease and achieve conscientização. Goulet describes Freire as someone ‘who never tires of looking for new forms of critical consciousness and unearthing new links between oppression in a variety of settings and the liberating effects of conscientização’.14 Raising the critical consciousness of these Chinese bankers was brought about through the illustration of the recurrent financial crises and manias led by speculation and the kind of negative effects that resulted on humankind. The Chinese bankers were caught by surprise with such discourse. Duan, a manager in mortgage and personal finance, expressed the view that she did know of the Mexican Crisis and the Asian Financial Crisis which happened in the 1980s and 1990s, but she could not have been expected to know that the first financial crisis happened hundreds of years ago. In the midst of surprise and astonishment, the morning session came to a break for lunch.

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I was invited to join the class for lunch and this is a typical Chinese way of establishing good guanxi (关系) through meals. A good guanxi in the Chinese term means a good network of relationships. Chen in Inside Chinese Business states that: In the Chinese business context, relationships are a form of social capital, owned by businesspeople and associated with the companies they run. Whereas in the West a successful businessperson is spoken of as ‘wealthy’, in the Chinese context he or she is described as ‘well connected’. This phenomenon led the Economists to describe guanxi as the ‘the chief asset’ of most Chinese companies.15

However, in many cases, guanxi develops into favouritism and nepotism, which contrasts with fairness and equality. I was seated between Duan and Liu. Liu was one of the eight branch managers. In order to continue working on facilitating a successful relation between two subjects rather than a subject and an object, I decided to follow instead of lead the conversation during lunch. It was interesting to find their conversations were mostly about children, holidays and entertainment. The present political or social challenges and related economic or environmental threats were not discussed. Their total engagement in uncritical dialogue and disconnection from critical reality were probably a reflection of the kind of indoctrination. In Education for Critical Consciousness, Freire states: For as the people emerge into a state of awareness, they discover that the elite regard them with contempt; in reaction, they tend whenever possible to respond aggressively. The elite, in turn, frightened at the threat to the legitimacy of their power, attempt by force or by paternalism to silence and domesticate the masses, they try to impede the process of popular emergence.16

The second session began right after the lunch break and the student bankers demonstrated a great deal of enthusiasm. I continued to present the PowerPoint document which further illustrated that since the change of the traditional role of banking and finance from facilitating trade to enabling speculation, financial crises, crashes and panics have become regular events. Therefore, while the financial markets have become more developed and sophisticated, more financial manias have been a result. Unfortunately, given the absence of critical consciousness of these effects, the volatile and hegemonic bull–bear financial cycles are accepted, by and large, by both bankers and humankind as reflective of the very nature of finance. Li Wenjun, a manager in international business, commented that it was becoming harder and harder for banks to remain only as intermediaries since the traditional lending business could not generate high enough profits. Therefore, banks have to provide dynamic financial products and services to maximize their profits. I then asked the class whether banks should maximize or optimize their profits and the students remained silent. In addition to the aim of raising critical consciousness of the student bankers to the instability of global finance, the course was also designed to discover, uncover and recover the indigenous Chinese philosophy from the perspective of finance. I pointed out to them that the business philosophy of the earliest Chinese financiers was actually rooted in Confucian social ethics since the then feudal society either lacked law or effective enforcement of the law. As a result, integrity, honesty and loyalty of individuals became core elements of judging personal credibility. Taking into account the holistic value of

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the Chinese cosmological concept, it would be justifiable to adopt an interdisciplinary approach to establish the relationship between finance and society given the role of banking and finance in establishing stability in all socio-economic subsystems. In Inside Chinese Business, it states: Indeed, the ‘holistic’ and long-term time perspectives we have discussed so far are crucial underpinnings for another important element of the Chinese worldview; embracing paradox. As the yin and yang image reflects, the Chinese see opposites containing within them the seed of other and together forming a dynamic unity.17

I reminded the student bankers that the holistic view of the Chinese is, in fact, at the root of everything and, therefore, at the root of the manifestation of everything. I then shared with them the view of the Yin–Yang vocabulary of Taoists which never separates polarities whilst the present banking and financial industry, with its masculine–yang characteristics, has widened the wealth disparity of humanity as a whole. With our global finance increasingly dominated by mega-sized financial institutions, the analytically hard and target-achieving model of competitiveness and expansion has become the core consideration of the industry. Nevertheless, the subject of competitiveness generated a lot of argument. Shang Wen, one of the three female branch managers, complained bitterly about the present competitive financial environment. She expressed with frustration the present crossdistrict competition within the same bank. She said, ‘This is absolutely crazy nowadays. Competition is everywhere and we compete not only with other banks but also with our colleagues. Other branches of our bank located in different districts come to our district and try to steal our market. This is not working and is not going to work!’ The western mindset of open and direct competition is fundamentally different from the conventional Chinese culture of indirect competition. Indirect competition in traditional Chinese value is winning without fighting. Goals would be achieved through capitalizing on unattended opportunities whereas visibility should be kept low or, in a sense, remain low profile. It is awfully important to understand the strategic mindset of an opponent since such an understanding is likely to turn into an opportunity for converting a potentially damaging rivalry to a mutually beneficial relationship. The above explanation explicitly encompasses the all-embracing concept of Dao. Dao embraces the wholeness that includes one’s friends and even one’s enemies since, through its practice, Dao is able to transform an enemy into a friend. While the western concept of direct competition is driven by scarcity, the original Chinese orientation of indirect competition is embedded in the theory of co-creation of enough. Following the economic reform of the country, the Chinese banks are now adopting the western value of direct competition, which is completely disconnected from the Dao concept of indirect competition. Such disconnection has certainly led to a loss of identity. The general dissatisfaction with the present environment of direct competition brought the first day of the course to a close. The forceful ‘head-to-head combat’18 was certainly disturbing to the Chinese bankers. The first day was, on the whole, successful in raising critical consciousness and conscience of the students. They left the classroom questioning what had really gone wrong with the present banking and financial systems.

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10.5.2 30 August 2006 – integration rather than adaptation The second day of the course was aimed at knowledge generation derived from drawing the attention of the bankers to the change of role of the international banks from their original intermediators to facilitators of financial speculation. The morning session of the second day was spent studying the case of Citibank, its history and the strategies it adopted for its development in China, to provide an opportunity for the student bankers to uncover and discover their own potential in respect of comparative advantage and competition. Similar to Citibank, Bank of America has also been tapping into the financial industry of China since the country has the world’s fastest growing economy. Bank of America has a shareholding of 11 per cent in CCBC. In view of China’s full access to the WTO, foreign banks have been expecting the country to deregulate its financial market which will, in turn, lead to increasing opportunities and demands for financial services and products such as forward and swap transactions and derivative trading. In comparison with the inexperienced Chinese commercial banks, foreign banks are certainly at an advantage in creating and trading the various kinds of complicated financial instruments. However, if taking into consideration the recurrent financial crises and crashes resulting from the change of role from the intermediary function of banks of accepting deposits and granting loans to facilitate trade to become facilitators of more speculative financial investment, the decision made by the Chinese Government to deregulate and gradually liberate its financial market may not be that wise. Moreover, while the Chinese Government allows its commercial banks to engage in activities beyond its core deposit and loan business as a means of becoming competitive, it has, in fact, exposed its banks to increasing financial risks. As one of the main Chinese commercial banks, CCBC is not an exception in view of its increasing involvement in different financial instruments and products, despite the fact that most of their staff are total strangers to such products and practice. As on the first day, the morning session ended at noon. I was again invited to join the student bankers for lunch. I was seated with Chen, the branch manager of Zuanshi Cheng Branch. Chen was in his mid-40s and quite open-minded. His view of China’s full entry into the WTO was fascinating. He said that with the opening-up of China’s financial industry, the monopolization of the State banks would have come to the end. However, he continued to speak with frustration: ‘We are already fighting hard for survival and we are going to lose our jobs after the full opening-up.’ His opinion did arouse my concern with the high possibility of insecurity for the Chinese people resulting from the rapid rate of structural economic change. The likelihood is high that job insecurity and financial oppression will trigger a short-term orientation and when such short-termism becomes dominant, the interdisciplinary or intersubjective socio-economic network will very likely be disturbed with sustainable human development inhibited as a result. That afternoon a discourse was planned with the student bankers concerning the competitiveness and comparative advantages of CCBC in relation to increasing challenges from abroad and, more importantly, the impact on these bankers resulting from the changing role of the Bank. The afternoon session was both intriguing and alarming. Zhao Huidong, the branch manager of Gangtie Branch, expressed his frustration with the reality of finance in today’s China. He voiced that the growth of the corporate sector was already saturated and the competition was fierce. He really did not know how to achieve

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continuous strong growth. His colleague, Li Yan, the branch manager of Ningxia Wan, endorsed Zhao’s view. She was rather annoyed that they had no choice but to adapt to the new financial environment. Li further expressed that she knew only too well that derivatives and swaps were high-risk financial products. However, because the traditional intermediate business could not generate high-enough profits and with her subordinates under high pressure to attain handsome financial returns, they had to pursue and engage their better-off Chinese clients in these different financial products. I then asked the student bankers whether, in relation to increasing foreign competition and saturated growth of the corporate sector as well as their lack of knowledge and experience in the financial products, they could consider setting up a department which would focus on building up and strengthening a communal economy which would benefit both business and society. So, instead of just offering loans to establish such a communal economy, the bank might even consider offering business and technological know-how. Or, instead of just adapting to the current changing financial environment, the student bankers might try to integrate themselves into transforming the financial industry of China. It is worth noting that most Chinese bankers of this generation have no previous experience or have minimal training in modern financial instruments as a result of the long enclosed banking and financial industry of the country. Besides the stock market slump, they have not yet encountered any significant financial or economic catastrophe. However, with the country’s increasing exposure to global finance, growing challenges and competition are to be expected. Any loss of local identity will soon disrupt the Chinese cosmological harmony and balance. A social and economic crisis is justifiably anticipated.

10.5.3 31 August 2006 – profit maximization or profit optimization? This course was held less than two months after Professor Mohammad Yunus was announced as winner of the 2006 Nobel Peace Prize. I took the liberty of introducing microfinance and a few leading initiatives in this field, including Grameen Bank and Accion, to the 31 students during the course. I also tried to position microfinance in a Chinese context in the hope of local knowledge creation. However, China seemed to be the only developing country which had no legalized microfinance institutions. Having said that, there are a number of microcredit companies in China although ‘the legal status of microfinance firms remained uncertain, as the China Banking Regulatory Commission (CBRC) was still holding back on issuing them the necessary finance business license for handling loan transactions’.19 While these microcredit companies are allowed to offer loans, they are restricted from deposit services. In A New Dawn for Microfinance in China, Yang and Chen state: If the micro-credit company begins providing deposit services, its nature would have changed, and the regulations deployed would need to be changed too. Recently, the China Banking Regulatory Commission (CBRC) has issued a decree to regulate the operation of micro-credit companies, restricting deposit services.20

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Besides, these microcredit companies also demand collateral against any borrowing and, therefore, they cannot be classified as microfinance institutions as generally expected. As Muhammad Yunus writes in his book entitled Creating a World Without Poverty: Social Business and the Future of Capitalism, ‘Microcredit is supposed to describe loans offered with no collateral to support income-generating businesses aimed at lifting the poor out of poverty.’21 For most of the student bankers, it was the very first time they had learnt of Grameen and the extent of microfinance activities from a global perspective. The aim of the introduction of microfinance and the different initiatives manifested from such a concept was to raise the awareness of the students that finance was not necessarily just a privilege of the rich but it could also take care of the poor. The merit and mechanism of microfinance and the prospect of lending to the poor were also introduced. I spent the first 1½ hours on the introduction to microfinance and the different microcredit initiatives around the world. I also took the opportunity to briefly introduce the concept behind Catalyst Foundation, detailed in Chapter 12, which is indeed firmly rooted in a Chinese context while at the same time adopting the financial and business rationale of the West. The final 1½ hours were conducted through discourse and dialogues of exploring microfinance possibilities within CCBC. For me, it was very important to engage the student bankers in dialogues regarding the potential and difficulties of lending to the poor in China. In Education for Critical Consciousness, Freire emphasizes that: Dialogue in any situation (whether it involves scientific and technical knowledge, or experiential knowledge) demands the problematic confrontation of that very knowledge in its unquestionable relationship with the concrete reality in which it is engendered, and on which it acts, in order to better understand, explain and transform that reality.22

In order to empower the Chinese bankers to generate better understanding of the reality, the dialectical exchange was particularly important. Before I could initiate the dialogue, I was instead asked by Yuan Wenli, an assistant manager in marketing, why I had spent so much time on introducing microfinance rather than covering the details and techniques of derivatives. How and why was microfinance related to their competitiveness? He was puzzled since he was expecting to learn a lot about the modern financial products in this course as he thought those products were the key to their success. Dong Jun, branch manager of Mingyuan Branch, expressed the view that he did not expect to learn how to operate the different derivative products but he did want to derive strategies from the course for the better development of his branch. The other branch manager Zhao agreed with Dong. The discourse of financing the poor was then challenged by Duan, who mentioned that small loans were once granted to the farmers in her area. However, instead of spending the money on agriculture as the farmers had promised, they used the money to buy sheep. Duan viewed this incident as a sign of the dishonesty of the farmers. I then explained to her and the class that instead of just giving small loans to the farmers, it might be worth supporting the farmers with know-how in order to feasibly and effectively optimize the small loans granted. In the midst of dialogues and discussions, the end of the course arrived. A few of the branch managers had expressed their concern regarding the wealth disparity of the country as well as their worry about the critical imbalance in the situation of North-west

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China. Both Liu and Zhao, branch managers of Zhongshan Lu Branch and Gangtie Branch respectively, promised to explore the possibility of offering microfinance. They realized the importance of creating a dynamic and balanced–harmonious economy as the fundamental element of long-term competitiveness and sustainability of finance.

10.6 Conclusion I could see that the 2½-day course had been quite a struggle for the Chinese bankers since the teaching method applied in the course was very different from that to which they were used. The common practice of Chinese education is embedded in a teacher and student or, in other words, a subject–object relationship where knowledge is, by and large, fed by the teachers. In the words of Freire, ‘Education thus becomes an act of depositing, in which the students are the depositories and the teacher is the depositor.’23 Freire describes this as ‘the banking concept of education,’24 since knowledge is deposited in those who are considered to know nothing by those who are viewed as knowledgeable. The banking concept of education, however, does represent a ‘characteristic of the ideology of oppression, negates education and knowledge as processes of inquiry’.25 However, given the birth of a new society needs to be effected from a critical education, it would need critical attitudes to emerge from naïve consciousness. The course was, therefore, structured very differently from pragmatic problem-solving orientation rooted in the quantitative measures regime generally used in financial education. The course, however, engaged the student bankers instead in self-reflection of what roles they should play in taking responsibility for what they were doing and what direction Chinese financiers should take in the light of growth and its sustainability. The application of dialectic and oral discourse enabled the revelation of the underlying problems of the technocratic dominance of banking and finance as well as the naïve and oppressive belief in bigger is better. The student bankers were engaged in a state of awareness and they believed in the importance of the manifestation of local Chinese identity and cultural synthesis of banking and finance. The characteristics of massification26 and the lack of identity in the Chinese financial industry are surely leading to increasing competition and challenge. They expressed the view that they were willing to investigate and explore different ways or models of integrating finance more closely with society. Nevertheless, raising critical consciousness in the Chinese people of the disconnection of present financial systems from Chinese cultural tradition is an ongoing process. It is also a long-term challenge for this researcher (the author) in continuing to instil Chinese bankers with an awareness of the importance of stability in respect of financial operations, given its role at the centre of the entire socio-economic system. More explicitly, there is an urgent need for a fresh philosophy of understanding, structuring and operating finance which provides a better chance of bringing about social and economic equilibrium.

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Endnotes 1

Alfaro, L. and Di Tella, R. 2006. China: To Float or Not To Float? (D). Boston, MA: Harvard Business School.

2

Thoma, M. 2005. A great big banking gamble. The Economist, 29 October.

3

Alfaro, L. and Di Tella, R. 2006. China: To Float or Not To Float? (D). Boston, MA: Harvard Business School.

4

Alfaro, L. and Di Tella, R. 2006. China: To Float or Not To Float? (D). Boston, MA: Harvard Business School.

5

Marcuse, H. 2002. One-Dimensional Man. London, UK: Routledge Classics.

6

Alfaro, L. and Di Tella, R. 2006. China: To Float or Not To Float? (D). Boston, MA: Harvard Business School.

7

Zeng, G. 2007. The Banking Industry, in China’s Banking and Financial Markets: The Internal Research Report of the Chinese Government, edited by L. Yang and R.L. Kuhn. Singapore: John Wiley and Sons (Asia).

8

Chen, M.J. 2001. Inside Chinese Business. Boston, MA: Harvard Business School Press.

9

Budd, C.H. 2003. The Metamorphosis of Capitalism. Canterbury, UK: Associate Economics Institute.

10

Morrow, R.A. and Torres, C.A. 2002. Reading Freire and Habermas. New York, NY: Teachers College Press.

11

Morrow, R.A. and Torres, C.A. 2002. Reading Freire and Habermas. New York, NY: Teachers College Press.

12 13

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell. Freire, P. 2005. Education for Critical Consciousness, revised edition. Translated by M.B. Ramos. London, UK: Continuum.

14

Freire, P. 2005. Education for Critical Consciousness, revised edition. Translated by M.B. Ramos. London, UK: Continuum.

15 16

Chen, M.J. 2001. Inside Chinese Business. Boston, MA: Harvard Business School Press. Freire, P. 2005. Education for Critical Consciousness, revised edition. Translated by M.B. Ramos. London, UK: Continuum.

17

Chen, M.J. 2001. Inside Chinese Business. Boston, MA: Harvard Business School Press.

146 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a 18 19

Chen, M.J. 2001. Inside Chinese Business. Boston, MA: Harvard Business School Press. Yang, G. and Chen, Z. 2008. A New Dawn for Microfinance in China, Part 1. [Online]. Available at: http://www.eeo.com.cn/ens/feature/2008/08/15/100488.html [accessed: 15 August 2008].

20

Yang, G. and Chen, Z. 2008. A New Dawn for Microfinance in China, Part 1. [Online]. Available at: http://www.eeo.com.cn/ens/feature/2008/08/15/100488.html [accessed: 15 August 2008].

21

Yunus, M. 2007. Creating a World Without Poverty: Social Business and the Future of Capitalism. New York, NY: PublicAffairs.

22

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

23

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

24

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

25

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

26

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

chapter

11 The Grameen Bank: Life as a Story and as a Journey

Biologically, physically, we are not so different from each other; historically, as narratives – we are each of us unique. Olive Sacks

11.1 Introduction This chapter examines the case study of the Grameen Bank (Grameen). Although it is not Chinese-contextualized, the story of Grameen has been purposefully chosen to reflect a global context of finance which empowers women and humanity. This case story is developed as a contrast to the China Construction Bank Corporation (CCBC) case. While CCBC is a masculine archetype of conventional banking, Grameen (the Rural Bank for the Poor) and Catalyst Foundation operate a more feminine model of finance. Grameen is generally recognized as offering a successful alternative Bangladeshi financial model to the western financial stereotype where masculine–yang characteristics of finance are a dominant feature. Although Grameen is rooted in Bangladesh rather than China, in view of the fact that finance works in a global paradigm and given this book is established in both a global and a local Chinese context, Grameen, therefore, becomes an invaluable learning base for the establishment as well as development of the Finance-in-Society Model (FISM). While a combination of critical theory and feminism is applied in the case of studying Grameen, a narrative storytelling method rather than dialectic is adopted. As my proposed meeting with Professor Yunus was cancelled on account of his busy schedule and the resulting impossibility of establishing a relationship based on direct dialogue with either Yunus or his disadvantaged Bangladeshi women, the method of narrative storytelling has been adopted in this case to interpret the life story of Muhammad Yunus as well as the development of Grameen. As a result, the case study of Grameen is studied from a reflective perspective. The story of Grameen is followed, in Chapter 12, by the case study of Catalyst Foundation. As with CCBC, Catalyst Foundation is also rooted in China and it is active– reflective-driven. While CCBC represents a masculine archetypal example and provides a better understanding of conventional banking in China at present, the case of Catalyst Foundation operates according to the FISM of this book. This latter model is built on a new financial knowledge base where Chinese philosophy and western financial rationale are integrated. Both critical theory and feminism are applied to study the Grameen case.

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The case study of Grameen sets the scene as the first of the two feminine archetypes of finance covered in this book. Although Grameen is rooted in Bangladesh instead of China, it offers a unique and invaluable insight into the study of finance offered to the poor. The announcement of Professor Muhammad Yunus and Grameen as recipients of the 2006 Nobel Peace Prize drew the attention of a wide cross-section of many people across the world to this successful example of providing finance to the poor. When Professor Yunus made his first loan of US$27 to 42 stool makers living in a tiny village in 1976, traditional bankers believed him to be totally out of his mind, since those bankers firmly believed that the poor had neither the creditworthiness nor the ability to repay debt. This initial act of lending to the poor by Yunus endorsed the beginning of his long battle against poverty as well as his challenge to the orientation of traditional commercial banks of offering loans to the rich alone. More importantly, the Nobel Peace Prize awarded to Professor Yunus and Grameen demonstrates the recognition of an alternative financial model despite the financial industry being largely dominated by the harsh and masculine–yang force of pragmatism, materialism and profitmaximization. Although Grameen is not rooted in a Chinese context, the decision made to choose it as one of the three case studies in this book is driven by its success in raising critical consciousness of the pragmatic behaviour and practice of conventional financial institutions. Moreover, it has also set the backdrop in a global context in relation to an alternative financial model instilled into the feminine–yin characteristics of caring, nurturing and feeling. Nevertheless, the conventional financial institutions have proved to be very efficient regarding wealth creation but, at the same time, continue to exclude and ignore the benefit of the poor. While the overarching objective of conventional financial institutions is to maximize profit growth, Grameen’s objective is instead to bring financial services to the poor, in particular to women and the poorest members of society, in order to help them in their fight against poverty. A report from Harvard’s Hauser Center describes the action research of Muhammad Yunus as follows: Yunus tested the hypothesis that accountability to peers might replace collateral as an incentive for poor borrowers to repay small loans, and helped create the practice innovations for a microcredit movement that now serves millions of borrowers around the world.1

The above, in fact, demonstrates that on the one hand, Grameen is firmly embedded in the local context of Bengal, but on the other hand, it has actually worked against traditional Bengali culture. While remaining locally contextualized, Grameen has, nevertheless, successfully incorporated western financial rationale in bringing about a whole new culture of banking for the poor. Thus, Grameen offers a significant and unique example which is relevant to the orientation of this book in that it seeks to establish an interdisciplinary knowledge base for Chinese banking and finance in order to build, within the Chinese context, a FISM which integrates traditional Chinese philosophy with western financial rationale. However, given Bangladesh and China have tremendous historical, social, economic and political differences, it is inappropriate simply to replicate the model of Grameen in China since the different regions of China have quite different cultural roots, though the cultural, social and economic characteristics of Bangladesh do serve as a valuable

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reference point for establishing the FISM. Having said that, a critical challenge for China is establishing which kind of philosophy will equip the country for nurturing its people, including the majority and minority ethnic groups.

11.2 How to Derive Knowledge 11.2.1 The methodology adopted Critical theory The totalitarian approach of profit-maximization adopted by international financial institutions has caused substantial financial and economic turmoil that has led to widening wealth disparity worldwide. Yunus, in his book entitled Creating a World Without Poverty: Social Business and the Future of Capitalism says, ‘Ninety-four percent of world income goes to 40 percent of the people, while the other 60 percent must live on only 6 percent of world income. Half of the world lives on two dollars a day or less, while almost a billion people live on less than one dollar a day.’2 Since attaining sustainable development of humankind is the ultimate goal of social and economic transformation, the fostering of critical consciousness in view of the current economic and social disparities between human beings becomes a pressing issue. Beliefs and values aimed at achieving better equality are therefore essential. Marcuse in One-Dimensional Man states: Uncritical thinking derives its beliefs, norms and values from existing thought and social practices, while critical thought seeks alternative modes of thought and behaviour from which it creates a standpoint of critique.3

Such a critical standpoint requires developing what Marcuse calls ‘negative thinking’ which ‘negates’ existing forms of thought and reality from the perspective of higher possibilities. Muhammad Yunus has continually ignored the dominant single-dimensional approach of conventional banking where credit is only made available to those who can afford it, with the poor losing their individuality, freedom and ability to control their own destiny as a result. The establishment of Grameen offers an alternative financial model which embraces the needs and benefits of the poor. Furthermore, the successful operation of Grameen has demonstrated that radical social change and human emancipation are indeed possible. In such a context, critical theory, in fact, plays a significant part in raising consciousness of the destitution of the poor and liberates beliefs and values from the orthodoxy of financial practice. From such liberation, human emancipation can be achieved.

Feminism Feminism, the feminist methodology, is also applied in this case study to demonstrate how phenomenological approaches can be used to understand the needs of disadvantaged Bengali women better. Feminists have argued that the traditional theories of knowledge

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only represent the masculine voice and that history is often written from the masculine point of view: ‘In Renaissance Europe, it meant domestication of the bourgeois wife and escalation of witchcraft persecution, which crossed class lines. And the Revolution expressly excluded women from its liberty, equality, and fraternity.’4 In traditional Bengali culture, women are not viewed as creditworthy. Through the control of financial accessibility, Bangladeshi husbands control the destiny of their wives as well. In view of the masculine nature of finance, feminism has been applied in this case to study and further understand the Grameen model, which obviously poses a challenge to the orthodox masculine–yang dominance of financial practice. Feminism is also adopted to identify and interpret the changes in the lives of the oppressed Bangladeshi women who have been empowered with the help of Grameen. Harding’s Feminism and Methodology makes the following point: The questions an oppressed group wants answered are rarely requests for so-called pure truth. Instead, they are queries about how to change its conditions; how its world is shaped by forces beyond it; how to win over, defeat, or neutralize those forces arrayed against its emancipation, growth, or development; and so forth.5

11.2.2 The method applied Narrative has been adopted as the method of studying the Grameen case although dialectic is the fundamental method of critical theory. Dialectic is grounded in an exchange of dialogues which aims to raise critical consciousness as well as to unfold history. In the case of Grameen, a face-to-face encounter with Yunus and the poor Bangladeshi women would be necessary to establish a relationship based on dialogue. However, since a meeting with Yunus and the disadvantaged Bangladeshi women was unable to take place, a narrative storytelling method was instead chosen. Narrative is both interdisciplinary and qualitative in character. It involves relating experiences rather than just referring to the language used. Narrative analysis entails interpretation and representation. The following comment is made in Handbook of Qualitative Research (1994) relating to narrative analysis: To a striking extent, narrative analysis is rather loosely formulated, almost intuitive, using terms defined by the analyst (see Riessman, 1993). Narrative analysis typically takes the perspective of the teller, rather than that of the society, as in Propp’s and Lévi-Strauss’s models. If one defines narrative as a story with a beginning, middle, and end that reveals someone’s experiences, narratives take many forms, are told in many settings, before many audiences, and with various degrees of connection to actual events or persons. Thus themes, principal metaphors, definitions of narrative, defining structures of stories (beginning, middle, and end), and conclusions are often defined poetically and artistically and are quite content bound.6

Narrative analysis has been applied in this case to tell the life story and experiences of Muhammad Yunus, who has been the key driving force of Grameen and has established the cognitive knowledge base of the bank. It is then used to tell, interpret and analyze the story of Grameen in order to uncover and discover the philosophy behind its orientation. In Ordinary Wisdom: Biographical Aging and the Journey of Life, Randall and Kenyon state, ‘A life is inseparable from the story of a life. Central to the transformation of life into

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life story and of raw events into experienceable episodes, we would propose, is narrative intelligence.’7 The narrative life story of Muhammad Yunus provides an underlying understanding of the history, society and culture of Bangladesh.

11.3 Historical Development 11.3.1 Bangladesh – from colonization to independence Bangladesh lies to the east of India in the Southern Hemisphere. Before the independence of the People’s Republic of Bangladesh from West Pakistan in December 1971, the country and its people went through a period of political turmoil. Bangladesh was originally called East Bengal and the country has a long history of political struggles. East Bengal was under British rule from 1757–1947 and became part of British India. In 1947, East Bengal and West Pakistan separated from India and formed the new country of Pakistan. East Bengal was renamed East Pakistan in 1955. From the perspective of the Four Worlds of Lessem, since the Bengali society is situated in the east–south location, its culture is therefore rooted in both eastern-holism and southern-humanism. While the eastern holistic orientation is particularly contextual, the southern value is genuinely humanistic. The holistic and humanistic characteristics of the Bengalis are identifiable in the life story of Muhammad Yunus and are also implicitly demonstrated through the political struggles and revolutions of the country. Historian R.C. Dutt notes that: The people of Bengal had been used to tyranny, but had never lived under an oppression so far reaching in its effects, extending to every village market and every manufacturer’s loom. They had been used to arbitrary acts from men in power, but had never suffered from a system which touched their trades, their occupations, their lives so closely. The springs of their industry were stopped, the sources of their wealth dried up. The plunder of Bengal directly contributed to the industrial revolution in England. The capital amassed in Bengal was invested in the nascent British industries. Lack of capital and fall of demand, on the other hand, resulted in deindustrialization in the Bangladesh region. The muslin industry virtually disappeared in the wake of the British rule.8

From its medieval glory and affluence, Bengal entered a destructive period under British control. For the Bengali Muslims, British rule represented a period of oppression since preference was given to the Hindu middle class. Furthermore, the dictatorial agricultural policies adopted and the semi-feudal land system drained the wealth of Bengal and damaged its social fabric. The previously suppressed rivalry between Hindus and Muslims became intensified following the changeover to Muslim rule. The British presence provided some relief to the minority Hindus but was seen as catastrophic by the Muslims. Muslims expressed their resistance and frustration through riots and rebellions. The economic exploitation by the British provoked an intense reaction against their sovereignty in Bengal and throughout the subcontinent. The resistance to British power led to the birth of an independent Pakistan in 1947. However, although Pakistan was constituted as one country, its eastern and western areas were two separate entities with different cultures, economies and societies. More importantly, historical, religious

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and inter-communal conflict and confrontation impacted on critical Hindu–Muslim relations. The distinctive humanistic and holistic characteristics of the Bengalis are clearly reflected in the following statement: ‘The Bengali love affair with their language involves a passionate ritual that produces emotional experiences seldom found in other parts of the world.’9 Unfortunately, the Pakistan Government adopted Urdu, an Indic language, to be its national language. The Bengalis, on the other hand, were both passionate and emotional about their own language and had decided that it was time for them to defend and reinstate their linguistic and cultural identity. Three million lives were sacrificed to secure the independence of Bangladesh in 1971, with the country left devastated as a result.

11.3.2 The independence of Bangladesh Although Bangladesh successfully secured its independence in 1971, its people continued to suffer from political turmoil and suppression. They lived under martial law, with army coups and political struggles in the subsequent years. There was no parliamentary democracy until the resignation of the military dictator General Ershad in 1991. The first female Prime Minister of Bangladesh, Begum Khaleda Zia, then reinforced and institutionalized democracy within the Parliamentary system. The centuries of political repression and oppression had led to the constant threat of losing national identity. Such a threat manifested itself in the dominance of masculine– yang forces. In the light of this psychological disturbance, revolutionary struggles and actions for freedom and liberation had, by and large, replaced the path of evolution. The independence of Bangladesh had failed to bring true liberation and freedom to the Bangladeshis and, to a large extent, resulted in the creation of many revolutionary leaders, previously exploited and oppressed men, who became dictators once they seized power. As described by Paulo Freire in his book entitled Pedagogy of the Oppressed: The struggle for humanization, for the emancipation of labour, for the overcoming of alienation, for the affirmation of men and women as persons would be meaningless. This struggle is possible only because dehumanization, although a concrete historical fact, is not a given destiny but the result of an unjust order that engenders violence in the oppressors, which in turn dehumanizes the oppressed.10

The forceful masculine–yang-dominated approach of doing, having, competing and controlling was, in itself, more likely to promote riot, resistance and struggle. Referring to Laozi, all things in the world come from nothing while being comes from non-being. As a result, in the absence of the feminine–yin complementary approach of being, caring, cooperating and loving, peace and sustainability are unlikely to be attained: ‘Therefore let there always be non-being so we may see their subtlety, and let there always be being so we may see their outcome’.11 Implicitly, a balance between masculine–yang and feminine–yin force is essential if stability and sustainability are to be attained.

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11.4 Life as Transformation 11.4.1 His early formative life Muhammad Yunus is an indigenous and nationalist Bengali. He was born in June 1940, seven years before the birth of Pakistan. Although Yunus grew up in the midst of his country’s political struggles and turmoil, his childhood was, in fact, filled with the love and care of his parents and siblings. While Yunus describes his father as soft-hearted, he views his mother as a strong and decisive woman who was full of compassion and kindness. Her great sympathy for the poor and disadvantaged had strongly influenced Yunus. Muhammad Yunus expresses his love for his mother and the memory of her stories and songs passionately. More importantly, while her concern and care for the poor had led him to discover his interest in socio-economic reform, the feminine love of caring and the nurturing nature of his mother had raised his consciousness of the destitution and powerlessness of the disadvantaged women of Bangladesh. However, it was unfortunate that Yunus’ loving and caring mother suffered from mental illness for 33 years. His father, a soft-hearted man, had tried every possible way to find a cure for his wife. His nobleness was clearly reflected in his loyalty and kindness to her throughout their 52 years of marriage. Muhammad Yunus’ loyalty shows through his life devoted to the empowerment of the poor and the disadvantaged.

11.4.2 Early adult life structure The early adulthood of Muhammad Yunus was both fulfilling and challenging. His holistic and caring characteristics encouraged him to become a teacher. He taught economics in his old college from 1961 to 1965. At the same time, while he was working as a teacher, his entrepreneurial and innovative spirit drove him to establish his first business project in packaging, which provided his first encounter with the traditional commercial banks. His first loan from a commercial bank was repaid before the due date since his father was reluctant and nervous to borrow from a bank. His first exposure to commercial banking although brief, seemed satisfactory.

11.4.3 The transition to age 30 Yunus lived in the United States of America from 1965 to 1972, allowing him to develop beyond his indigenous eastern-southern roots of values to embrace the exogenous western-northern techniques. It was during this period that he first experienced the Western subject–subject approach to education instead of the eastern subject–object way of teaching and learning of Bangladesh. Students in Bangladesh are generally reserved and will not dare to call professors by their first names. This cultural aspect of Bangladesh is indeed very similar to China, since both of these countries have long adopted the subject– object approach of education. As a result, critical thinking is, by and large, submerged. Although resident in America, the distance never prevented him from maintaining his connection with his roots in Bangladesh. While he appreciated the American culture of eating hamburgers, potato chips and ketchup, he missed elements of his own culture such as his mother’s spicy cooking. While his American experience opened a window

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on a different view of the world, he never forgot his own identity. It is understandable then that, as a patriotic Bengali, Yunus made the decision to return home in 1972 to participate in rebuilding a devastated Bangladesh after its hard fight for independence; when he reached his age 30 transition, he decided to commit himself to rebuilding his country: ‘At the age transition ends (28–33), you move towards major new choices or recommit yourself to existing ones.’12 Freeing the Bangladeshis from poverty was essential if the country was to be rebuilt. As an economist, Yunus was passionate about finding a solution to his country’s enduring famine. In his book Banker to the Poor, he says the following: Analyses of the causes of poverty focus largely on why some countries are poor rather than on why certain segments of the population live below the poverty line. Socially conscious economists stress the absence of ‘entitlements’ of the poor. What I did not know yet about hunger, but would find out over the next twenty-two years, was that brilliant theorists of economics do not find it worthwhile to spend time discussing issues of poverty and hunger.13

Yunus criticized the economists who thought that the problem of poverty would be resolved if the overall economic prosperity increased. They never really looked into the cause and development of poverty and hunger. Poverty, therefore, continues. The passion for alleviating poverty led Yunus to his first micro-level initiative, which was to help the villagers of Jobra to grow more food. As the navigator of this initiative, Yunus brought together the academic world and the village. He was very much involved in the project and had gained support from his students as well as other university teachers. He viewed hands-on and person-to-person experience as both important and valuable. As a result of this experience, his attention then focused on destitute women. They were either hired as cheap day labourers to carry out mindless work or they became beggars. These women were the poorest of the poor. They were mostly widowed, divorced or abandoned with children to support. While international development programmes largely focus on farmers and landowners, Muhammad Yunus remains passionately committed to the absolute poor – destitute women and children – those whom the definition of poor ignores. In view of his passion for helping the poor, probably inherited from his mother, in 1976, Muhammad Yunus began visiting the poorest households in the hope of finding out what kind of help he could offer. Since Jobra’s population comprised of three parts – Muslim, Hindu and Buddhist – in order to help the female villagers to feel at ease, and so that he could get to know their inner suffering, he was accompanied by either his student, Barua, a native of the Buddhist section, or his colleague, Professor Latifee, who happened to know most of the families there. Subject–subject dialogues were required to reduce the fear and feeling of inferiority of the female villagers. The subject–subject dialogues do not involve note taking; sincere communication and attentive hearing are required. Sufiya Begum, an extremely poor Bangladeshi woman, was exploited by a moneylender and earned only two cents a day. Begum lived a life which Freire described as adaptation instead of integration. In his book entitled Education for Critical Consciousness, Freire writes: Integration with one’s context, as distinguished from adaptation, is a distinctively human activity. Integration results from the capacity to adapt oneself to reality plus the critical capacity to make choices and to transform that reality. To the extent that man loses his ability to make choices and is subjected to the choices of others, to the extent that his decisions are no longer

T h e G r a m e e n B a n k : L i f e a s a S t o r y a n d a s a J o u r n e y 155 his own because they result from external prescriptions, he is no longer integrated. Rather, he has adapted. He has ‘adjusted’. Unpliant men, with a revolutionary spirit, are often term as ‘maladjusted’.14

While an integrated person is person as a subject, the adaptive person is person as an object. Adaptation is the behaviour resulting from self-defence and adaptation happens if a person is unable or incapable of changing reality. Humanity will not be attained from adaptation since adaptation is an outcome of dehumanization. Only when humankind can overcome oppressions and the factors which make them accommodate or adjust, full humanity will not be achieved. In the same way, Yunus says of Sufiya Begum, ‘Her children were condemned to live a life of penny, of hand-to-mouth survival, just as she had lived it before them, and as her parents did before her.’15 Poverty, therefore, becomes an inheritance and a curse on the family. There is no light at the end of this life tunnel. After visiting Begum, Muhammad Yunus was wondering whether he should just give Sufiya the money she needed. However, such an idea would not solve the root cause of the problem. For Yunus, the root cause of the problem remains that poor people are heavily exploited by their creditors while such creditors are protected by law. In many cases, a formal document such as a bawnanama establishes the right of the creditor. According to the bawnanama, the creditor usually refuses to accept any partial payment of the loan. After the expiration of a certain period, it also allows the creditor to buy the land at a predetermined price. As a result, the poor become poorer and the rich become richer. At the end of his age 30 transition, Yunus decided to commit himself to helping hard-working poor people. He firmly believes that the poor are not poor because they are stupid or lazy. They are, in fact, hard-working and their poverty emanates from the financial institutions in Bangladesh which conspire against them.

11.4.4 Mid-life transition Muhammad Yunus clearly understood that the poverty of the disadvantaged women could not be eliminated by his emotional response and he began to work on a long-term solution. He would need an institutional solution which the poor people could rely on. He decided to approach the local bank manager and asked his bank to extend loans to the poor. Back then, his naïve idea of approaching the local bank manager to lend to the poor was soon to become unrealistic. When he visited the branch manager of the local Janata Bank to request loans for the poor people in Jobra, the branch manager thought that he was out of his mind. Firstly, the complicated information system of banking is antiilliterate. This could make it demeaning for the poor to go to a bank. Secondly, apart from the complex form-filling process, all loans have to be collateral-backed. It is totally justifiable to say that our present financial and credit systems are designed only for the benefit of the privileged with the destitute largely excluded. Because it is impossible for them to secure credit, the poor become poorer. Widening wealth disparity is paving the way to socio-economic disturbance and the devastation of deprivation. The masculine–yang dominance of the present banking and financial industry, on the one hand, encourages and enforces competition and, on the other, is solely performance

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and profit-oriented. Such an approach has led to the widening wealth disparity between the rich and the poor. If socio-economic harmony and human sustainability are to be attained, a feminine–yin nurturing approach of humanity/social-oriented banking and finance will be required as counter-balancing forces. In Lifting the Veil, Shepherd states, ‘As in other masculine realms such as business and law, feminine qualities have been devalued and repressed in western science.’16 However, feminine characteristics and behaviour are both repressed and suppressed in our present financial systems because finance is seen to be a male science. In the case of Bangladesh, while there was no way that the commercial banks would lend to the poor without collateral, Muhammad Yunus nevertheless believed that the poor would repay their loan if they were given a fair chance to do so: ‘The poorest of the poor work twelve hours a day. They need to sell and earn income to eat. They have every reason to pay you back, just to take another loan and live another day! That is the best security you can have – their life.’17 Yunus, at that time, had faith in the fact that if the destitute people were given the access to credit, they would definitely cherish this only opportunity and would surely honour repayment. However, the bank remained resolutely orthodox and unwilling to be flexible. Yunus, however, knew how important a small loan could be in changing the life of a poor person. So, he volunteered to act as the guarantor of the loans extended to the poor. After six months of back and forth application processing, finally in December 1976, 10,000 taka (US$300) was granted as a loan to the poor of Jobra. From then on, Muhammad Yunus has devoted himself wholeheartedly to lifting the destitute women of Bangladesh and their families out of poverty.

11.5 The Rural Bank for the Poor 11.5.1 The transformational stage of internalizing knowledge Referring to Managing in Four Worlds, internalizing knowledge ‘through self-in-action, involving ongoing experimentation, assumes almost religious proportions’.18 The early formation of Grameen was, in fact, built on an ongoing experiment to lend to poor and destitute Bangladeshi women. Although Grameen was only approved by the Bangladeshi Government as a fullyfledged independent bank in late September 1983, the initial rural micro-lending by Muhammad Yunus could be dated back to January 1977 after he had successfully secured a loan for the poor from the Janata Bank in December 1976. This initial act of micro-lending to the poor was a real challenge for Yunus; the project was at a formative stage and he had no experience of running a bank, let alone a bank for the poor. Yunus decided to move away from the preference for large periodic lump sum repayments, a feature of traditional commercial banking, and established an entirely different replayment structure. He chose to institute a daily repayment programme in the hope of overcoming the psychological barrier of parting with large amounts of money. Moreover, Grameen remains grounded firmly in a local context and requires that each group of applicants comes from similar social and economic backgrounds. Instead of managing the borrowers, Grameen encourages them to help and support one another.

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Instead of relying solely on the bank to approve and recover the loans, Yunus believes in an intergroup and intragroup initiative. The intergroup motivation develops the selfreliance of the individual borrowers within the group since the group approves the loan request of each member. As a result, the group has assumed moral responsibility for such a loan. Therefore, if any of the members has problem in repaying the loan, the group will extend help collectively. In addition to the 1 taka-a-day mechanism of repayment for a loan of 365 taka, Grameen is also grounded in the culture of reaching out to their current and prospective borrowers. Instead of requiring clients to knock on their doors to gain credit or services as the conventional commercial banks do, Grameen adopts the culture of going to the villages and visiting their borrowers regularly. This approach is particularly important in changing the lives of oppressed women villagers in Bangladesh since, throughout their entire lives, they are told that they are no good and a liability to their families. As a result, an oppressed woman can only live as an object with her life controlled by others, including her father and husband. She has no identity since she has been nothing to her family other than an additional mouth to feed. Given that hunger and poverty are more of a problem for women than men, it is women who suffer more intensively. Therefore, Grameen considers the female borrowers to be the most important and Muhammad Yunus well understands that once these oppressed women are given a chance, they will cherish this and will definitely pay back the loan. Grameen, in a sense, extends to the oppressed Bangladeshi women the only chance in their lives to receive a great sum of money. They will try their best not to let Grameen down. When the feminine–yin caring and nurturing nature has an opportunity to flourish, the aims of more balanced socio-economic development is likely to be achieved as the Yin–Yang complementary forces assert themselves. As stated by Yunus in Banker to the Poor: If the goals of economic development include improving the general standard of living, reducing poverty, creating dignified employment opportunities, and reducing inequality, then it is natural to work through women. Not only do women constitute the majority of the poor, the underemployed, and the economically and socially disadvantaged, but they more readily and successfully improve the welfare of both children and men. Studies comparing how male borrowers use their loans versus female borrowers, consistently show this to be the case.19

11.5.2 The transformational stage of combining knowledge During the next stage of combining knowledge, the challenge remained for Yunus to ensure the ongoing lending to long-oppressed village women could be achieved. As far as Yunus, as the key driving force and leader of lending to the poor, was concerned, ‘It is impossible to describe or define what is meant by the right personal competencies until the nature of the task has been defined, and the organization designed and constructed to enable the work to be done.’20 Lending to poor and destitute women villagers was a very difficult task; it was strongly opposed by their husbands who wanted to keep the loans for themselves. Besides, the male religious leaders were also suspicious of what Grameen was doing and the moneylenders, who had been oppressing the village women for years, felt threatened by Yunus’s actions. It was not just the moneylenders who objected; civil servants and banking professionals viewed that it made no sense to extend loans to

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women when so many men were jobless and penniless. This, in fact, demonstrates the extent to which masculine force suppresses the feminine energy. The above clearly illustrates that, in general, women are treated as dependants of men. Since feminine behaviour is always thought to be weak and passive, women must, therefore, be protected and supported by men in order to survive. Women are of less importance in Bangladeshi society. Their important and powerful nurturing and caring characteristics have been repressed and downplayed by men for centuries in order to pander to the deep insecurity of men, the oppressors. As Freire writes in Pedagogy of the Oppressed: In order to have the continued opportunity to express their ‘generosity’, the oppressors must perpetuate injustice as well. An unjust social order is the permanent fount of this ‘generosity’, which is nourished by death, despair, and poverty. That is why the dispensers of false generosity become desperate at the slightest threat to its source.21

To ensure and reinforce the dependence of women, traditions, customs and religious practices established by the authorities, in most cases contrived and directed by men, strictly control the behaviour of women. Sadly, these oppressive disciplines allow women very little flexibility and prevent them from being emancipated. Therefore, within the conservative culture of Bangladesh, relationships between women and men are very formal. A man talking directly to a village woman will probably scare her off. As a result, one has to be very tactful when communicating with disadvantaged Bangladeshi women. Not suprisingly, the long-oppressed women villagers found it hard to believe that Grameen would offer loans to them and that they could have access to money. For the women villagers of Bangladesh, money was something that only their husbands handled and some of them even asked Muhammad Yunus to give the loans to their husbands instead. The women villagers thought of all sorts of reasons to reject the loans offered by Yunus. Some of them mentioned that money was of no use to them and some also admitted that they did not know how to handle money. For Paulo Freire, an oppressed man is scared of freedom since he tends to internalize the image of the oppressor and is adapted to the oppression. Though helping the oppressed women to overcome their fear became the greatest challenge for Muhammad Yunus, he was totally convinced that unless the women were financially independent, they would continue in their dehumanized way of life. Since the overwhelmingly masculine–yang behaviour governs the approach of banking and finance, money and cash naturally fall into this domain. Because traditional theories and epistemologies of banking and finance have been largely established by men, it is hardly surprising that banking, finance and money are adopting these masculine–yang characteristics in practice: ‘Feminist researchers have argued that traditional theories have been used in ways that make it difficult to understand women’s experiences and that portray men’s behaviours as “human,” as opposed to gendered’.22

11.5.3 The transformational stage of externalizing knowledge It was on a trip to the Bangladesh capital of Dhaka in October 1977 that Yunus came across an opportunity that radically changed his efforst to bring credit to the poor villagers of Jobra. An unplanned meeting with Mr A.M. Anisuzzaman – who had once

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attacked Yunus and the academics, criticizing them for hiding in their ivory towers and not engaging with society – helped Yunus to transform his rural micro-lending project into a branch of one of the largest national banks of Bangladesh. This new branch was named Grameen, a truly rural bank for the poor. On 6 June 1979, Yunus became officially employed by the Grameen Bank Project in the District of Tangail. Unlike those working for the conventional banks, who wear glamorous suits and spend numerous hours in luxurious offices and at sumptuous dinners, the workers of Grameen have to work and stay in distant rural villages. This has been the culture of Grameen since its foundation. The new Grameen Bank was even located in a very rough and dangerous district; the countryside of the Tangail District was littered with arms and ammunition left over from the War of Liberation. Yunus and his colleagues came across dead bodies in every village they visited. They had to worry about the safety of their branch managers who worked and lived by themselves in distant villages. In addition to these serious difficulties and challenges, Yunus and his team had to confront the resentment of staff at the traditional banks; they were supposed to cooperate but refused to since they were not convinced by the financial model of Grameen. On one occasion, the situation became so bad that an officer of Grameen pointed his gun at the manager of a local commercial bank and threatened to kill him if he refused to make funds available to Grameen’s borrowers. From the initial group of 42 stool markers to whom Yunus loaned US$27 from his own pocket to the 500 Jobra members Grameen had in 1979, membership of Grameen had grown to 28,000 by November 1982. Such a jump was the result of the hard work and dedication of the workers and managers of Grameen. The dedication and commitment of its young employees are one of the main reasons for Grameen’s success. Yunus describes the young employees, who are not influenced by previous work experience, as highly motivated by what they learn at Grameen. Once their training is over, they will be in charge of a branch of their own. The employee will be responsible not only for selecting the location of the future office but also for writing reports on the local historical, cultural and socio-economic circumstances, as well as assessments of the level of poverty of that particular area. Instead of training the young workers how to manage the poor, Grameen gives them the ability to appreciate the unexplored potential of the destitute. Instead of feeding their young employees large amounts of reading material, Grameen expects them to learn about life from the villagers. They are required to develop a critical mind and to find ways to improve and integrate themselves. A dialectical approach must also be adopted to stop the young employees from being submerged in the culture of silence, and to emerge as conscious makers of their own culture. Grameen, therefore, encourages spirited debates since innovation needs to be incubated and developed through tolerance and curiosity. Muhammad Yunus makes the point that, ‘to succeed in Bangladesh, in many ways we have had to struggle against our culture’.23 From time to time, the traditional culture of oppression and exclusion of women is challenged by Grameen, which offers a counterculture that values and appreciates women and their contribution to social and economic development. Grameen, acting as the catalyst through its offers of small loans to the poor women villagers, allows them to appreciate their respective abilities and helps them to realize and actualize their potential. Through the access to credit, destitute women villagers are able to become independent and to free themselves from domination. It is essential to empower the destitute with the ability to be self-emancipated and self-

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reflective. Whilst Paulo Freire states that ‘As long as the oppressed remain unaware of the causes of their condition, they fatalistically “accept” their exploitation,’24 Habermas argues that ‘If emancipation from domination is to remain a project of humanity, it is essential to counter this tendency to reaffirm the necessity of self-reflection for selfunderstanding.’25 By this stage, both Yunus and his colleagues at Grameen had successfully created the learning systems to enable lending to the poor of Bangladesh. For Senge, the learning systems contain five new disciplines: ‘These embrace so-called “personal mastery”, the development of “mental models”, the evolving of “shared values”, and the exercise of “team learning”, all in conjunction with “system thinking” in itself.’26 These five interrelated disciplines integrate as a coherent body of theory and practice and any great theory must be supported by the power of practice if positive changes are to be effected and sustained.

11.5.4 The transformational stage of socializing knowledge ‘Time and time again this unfortunate feature of Bangladesh society and politics has helped Grameen overcome otherwise impossible bureaucratic hurdles.’27 With the help of Mr Syeduzzaman, a friend of Grameen, who was Secretary of the Finance Ministry, the Bangladeshi President endorsed the birth of Grameen in late September 1983. It was then no longer a branch of a national bank but was instead jointly owned by the Government and its borrowers. However, Yunus felt he had been betrayed because Grameen was not 60 per cent and 40 per cent owned by its borrowers and the Government respectively, as had been originally proposed. It was approved with a Government ownership of 60 per cent instead. Nevertheless, independence was both essential and crucial to the growth and development of Grameen. Fortunately, the shareholding structure of Grameen was changed to 75 per cent owned by the borrowers and 25 per cent owned by the Government in 1985. Having said that, Muhammad Yunus was still uncomfortable with the organizational arrangement since he kept worrying that as the managing director of Grameen, he could be replaced at any time by this Government or any future government. Grameen might then plunge into a crisis. As a result of Yunus’s continuous lobbying, a managing director of Grameen now has to be appointed by the board of directors instead of by the Government. From the first US$27 loan extended to the 42 poor women villagers, Gramen has increased its borrowers to around 6.6 million people today, and the total loan amount extended has reached approximately US$5.7 billion. It has less than 2 per cent bad debts, outperforming all other commercial banks. Over the last 20 years, the Grameen idea has been replicated by different poverty alleviation projects throughout the world, with pilot projects in Malaysia and the Philippines taking the lead. In addition to Malaysia and the Philippines, Grameen-replicated programmes were also launched in India, Nepal, Vietnam, and Latin America, as well as Africa. Women remain the backbone of its membership. The replicated programmes have transformed Yunus’s personal influence from Bangladesh to a global level and communication is no longer just between Grameen and its borrowers in Bangladesh. It now extends to the intricate relationships between Grameen and operators of the Grameen-replicated programmes and their borrowers too.

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With regards to China, although Grameen has not launched direct microfinance programmes in the country, its associate organization, Grameen Foundation USA, is a partner with the Funding for the Poor Cooperative (FPC), supporting and enabling microfinance activities in China since 2001. FPC, a local Chinese initiative founded by Dr Du Xiaoshan in 1994, is one of the oldest and largest micro-finance organizations in the country. According to Dr Du Xiaoshan, economist and founder of FPC, ‘It was the first time we had done a real project. Practice is so much more difficult than theory. The Grameen model is very easy to understand, but very difficult to make real.’28 Instead of trying to gain permission from the Chinese Government to establish a micro-finance institution, Professor Du and his colleagues received informal Government approval in 1994 to test the Grameen model as an action research experiment. Three of the poorest rural villages were chosen for the experiment. However, unlike Grameen, which is a registered bank, FPC remains as an unregistered financial operation up to today. As a result of its unofficial status, FPC is not allowed to take deposits. Moreover, since its loan capital comes from foreign higher-cost sources, FPC must demand higher interest rates. These two major issues remain obstacles to the sustainability of FPC. In spite of the success of Grameen in Bangladesh and other countries, the Grameen model implemented in China through the cooperation of Grameen Foundation USA and FPC has, so far, made an insignificant impact on the country’s poverty. Nevertheless, it is worthwhile taking a closer look into the relationship between Grameen and the Grameen Foundation to see whether the Grameen model will successfully lift the Chinese poor out of poverty on a significant scale. According to Alex Counts, CEO of the Grameen Foundation (GF), ‘While Grameen Foundation and Grameen Bank are independent organizations and have no financial or institutional links, we share the bank’s spirit and values. In addition, Dr Yunus is a founding and current member of Grameen Foundation’s board of directors.’29 Moreover, in the same article, Counts says: GF uses a multi-step process in selecting MFI as partners, to ensure mission alignment and commitment to GF strategic objectives including a focus on poverty and lending to women. Tailored technical assistance packages build up the partner’s strengths in order to maximize potential. Throughout the partnership, GF continually evaluates the MFI’s performance in portfolio growth and quality, efficiency, profitability, and asset liability management, and tracks progress against established goals in each partner MFI’s business plan. The GF program manager also visits several times a year to meet with the MFI staff and to visit clients.

In view of Count’s statement, it is appropriate to assume that the values of GF are, by and large, rooted in western pragmatism and northern rationalism. If evaluation, as indicated by Counts, is based on quantitative analyses rather than qualitative enhancement, the chance of its success in conscious awareness and people empowerment certainly looks slim. On the other hand, Grameen, described by Brown as an action research project, has its success built on people empowerment. Moreover, Grameen is firmly embedded in its own history and culture rather than the western financial analytical orientation. Since both Bangladesh and China share the eastern holistic value, if GF wants to be a significant contributor in lifting China out of poverty, it has to root its microfinance activities in the local Chinese context and its respective communities. Therefore, unless the original Chinese philosophy and cultural tradition are revived, it is unlikely to be enough to successfully empower the oppressed and disadvantaged. As a result, the original

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‘good’ thought of offering micro-finance may run the risk of becoming false charity and manipulation. Manipulation is, in fact, another dimension of anti-dialogical action and an instrument of conquest. Through manipulation, the dominant elites mould the masses to submit to their objectives. The more immature and unconscious the masses are, the more easily they can be manipulated by those in power.

11.6 Conclusion Although the Grameen projects have been successfully replicated in many different parts of the world, Muhammad Yunus thinks that the hard work of Grameen is only just beginning to scratch the surface of the world’s poverty, even though Grameen had already reached the target of lifting 100 million families out of poverty by the end of 2006. The new goal for Grameen is to expand its services so that 175 million families around the world will have access to micro-finance by 2015. Muhammad Yunus further emphasizes that poverty is not created by the poor. Poverty is, in fact, an outcome of the structures of society as well as the policies adopted by society. Therefore, a structural change is unavoidable if poverty is to be alleviated. The dominance of pragmatic and utilitarian financial and business practices should be counter-balanced by a holistic and humanistic orientation. Profit maximization, the core orientation of conventional banking and financial institutions, should be reconsidered and restructured to become profit optimization that, in turn, embraces social stability and sustainability alongside economic and business progress. In other words, the masculine– yang exclusive approach of profit maximization should incorporate the feminine–yin inclusive characteristic of profit optimization to create a more harmonious and balanced socio-economic environment, rekindling the hope of sustainability for humankind.

Endnotes 1

Reason, P. and Bradbury, H. 2006. Handbook of Action Research, revised edition. London: Sage.

2

Yunus, M. 2007. Creating a World Without Poverty: Social Business and the Future of Capitalism. New York, NY: PublicAffairs.

3 4

Marcuse, H. 2002. One-Dimensional Man. London, UK: Routledge Classics. Kelly-Gadlo, J. 1987. The Social Relation of the Sexes: Methodological Implications of Women’s History, in Feminism And Methodology, edited by S. Harding. Bloomington, IN: Indiana University Press.

5

Harding, S. 1987. Introduction: Is There a Feminist Method? in Feminism And Methodology, edited by S. Harding. Bloomington, IN: Indiana University Press.

6

Manning, P.K. and Cullum-Swan, B. 1994. Narrative, Content, and Semiotic Analysis, in Handbook of Qualitative Research, edited by N.K. Denzin and Y.S. Lincoln. Thousand Oaks, CA: Sage.

T h e G r a m e e n B a n k : L i f e a s a S t o r y a n d a s a J o u r n e y 163 7

Randall, W.L. and Kenyon, G.M. 2001. Ordinary Wisdom: Biographical Aging and the Journey of Life. Westport, CT: Praeger.

8 Bangladesh WWW Virtual Library 2007. [Online]. Available at: http://asnic.utexas.edu/asnic/ countries/bangla/bangladeshm.html [accessed: 3 February 2007]. 9

Bangladesh WWW Virtual Library 2007. [Online]. Available at: http://asnic.utexas.edu/asnic/ countries/bangla/bangladeshm.html [accessed: 3 February 2007].

10

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

11

Liu, J.L. 2006. An Introduction to Chinese Philosophy. Malden, MA: Blackwell.

12

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs.

13

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs.

14

Freire, P. 2005. Education for Critical Consciousness, revised edition. Translated by M.B. Ramos. London, UK: Continuum.

15

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs.

16

Shepherd, L.J. 1993. Lifting the Veil. Boston, MA: Shambhala Publications.

17

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs.

18

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell Publishers.

19

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs.

20

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell Publishers.

21

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

22

Brabeck, K. 2004. Testimonio: Bridging Feminist and Participatory Action Research Principles to Create New Spaces of Collectivity, in Traveling Companions: Feminism, Teaching, and Action Research, edited by M. Brydon-Miller et al. Westport, CT: Praeger.

23 24

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs. Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

25

Held, D. 1990. Introduction to Critical Theory. Cambridge, UK: Polity Press.

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Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell Publishers.

27

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs.

28

Duval, A. and Goodwin-Groen, R. 2004. Nurturing microfinance in a challenging environment: the Ford Foundation in China [Online]. Available at: http://www.cgap.org/direct/docs/case_studies/ FordChinaDraft_040504.pdf [accessed: 6 March 2007].

29

Counts, A. 2007. Forging microfinance ties in China: Grameen Foundation’s Alex Counts [Online]. Available

at:

http://www.chinacsr.com/2007/06/11/1408-forging-microfinance-ties-in-china-

grameen-foundation-alex-counts/print/ [accessed: 6 November 2007].

chapter

12 Catalyst Foundation: Participatory Action and Empowerment

They fought to regain their dignity and for their right to be part of a whole nation in which they would take their place as full citizens. Sithembiso Nyon

12.1 Introduction Catalyst Foundation is the last and the core case study of this book providing an application of critical theory to establish an interdisciplinary knowledge base underlying Chinese banking and finance in order to build a Finance-in-Society Model (FISM) with Chinese philosophy and western financial rationale. Catalyst Foundation, an active– reflective case, works within a local Chinese context and is rooted in a participatory action established to empower the disadvantaged, oppressed and unemployed women workers in the urban north-eastern region of China. The FISM of this book is at the heart of both the theoretical and practical knowledge base of Catalyst Foundation, although it is only a micro-scale operation within the FISM. In this chapter, the critical social and economic challenges of today’s China are identified and, through the FISM of Catalyst Foundation, social and economic transformation will hopefully be attained.

12.1.1 The social and economic challenges of China: the critical Xiagang (下岗) Phenomenon Xiagang is a special Chinese term which refers to the typical phenomenon of unemployment occurring in the People’s Republic of China. The xiagang labourers are referred to as those who, although employed by the Chinese State-owned enterprises (SOEs), are neither required to perform their duties nor are paid. Therefore, xiagang is a characteristic of unemployment specific to China and the xiagang workers live mostly in urban areas. Although the xiagang unemployment is a result of the country’s economic reform, it is also part of the aftermath of the failure of the country’s adoption of the Soviet centrally planned economic system. If taking into consideration that the application of Marxism– Leninism to the Chinese situation was, in fact, a disintegration of the local Chinese cultural core, the critical issue of xiagang, is far beyond a social and economic challenge. It also threatens the country’s possibility and ability to renew and transform. As a result, it poses serious challenges to the stability of the country and its further development.

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Although the total number of xiagang workers cannot be ascertained, it is estimated that from 1993 to the first half of 2003, there has been close to 70 million people in this predicament. The xiagang trend has continued to rise and the total number of xiagang workers is estimated to have exceeded 100 million in 2007. An immense number of workers were forced to terminate their service input as a result of the country emerging from its original planned economy to its present market economic structure. Women account for most of this vast number of Chinese xiagang workers and they are comparatively less educated than their male counterparts, although some of them are high school graduates. The xiagang women workers who were once financially independent have now become powerless. Unlike the peasants, most of the xiagang women are mainly resident in urban areas, and are also landless and own few, if any, assets. They are in many cases very poor, divorced or separated with dependent children. It is, in fact, crucial to differentiate between the really poor in the cities and the marginal farmers. The xiagang women are certainly the really poor.

12.1.2 Oppressed chinese feminism Although it is a general belief that Chinese culture has always been rooted in a strong patriarchal system, this is not the case since China also had an all-powerful Great Mother archetype. Nv Wa, from Chinese mythology, created all people out of clay: ‘She had also established the order of the universe by making the four directions of the compass, creating the order of the seasons and setting the stars and planets on their proper plans.’1 However, the feminine tradition of Nv Wa was overshadowed and replaced by the masculine-structured patriarchal feudal tradition. Since then, the identity of women has become demeaned with their voice suppressed in Chinese history. The feudal Chinese socio-political and socio-economic structures were always designed, operated and administered by scholar–officials who were men. Moreover, similar to Bangladesh, Chinese families and communities were also male-dominated. As mentioned before, except during the legendary period or the very brief period of female rule during China’s 5,000 years of history, Chinese women lived under the control and oppression of men as the country was always a society dominated by male power. Women were dependent on men. With regard to the Confucian social ethics, a woman ought to possess the quality of three obediences and four virtues (三从四德). The doctrine of three obediences and four virtues requires a woman to be obedient to her father before marriage; to her husband after marriage and to her son after the death of her husband. The doctrine restricted traditional Chinese women to the life purpose of serving their men. Moreover, women who had no son were made to feel guilty and viewed as sinful. Since women were dependants, they were excluded from access to finance. Their husbands could have as many concubines as they wished while their wives could only remain silent on the matter. Chinese society made them financially incapable of fighting against oppression and humiliation. It is, therefore, appropriate to make the observation that, from a Chinese philosophical point of view, the Yin force has long been suppressed by the dominance of the Yang. The dominant Yang force shows itself through every change of dynasty in Chinese history being a result of revolts and rebellions rather than a process of evolved development. Nonetheless, at the beginning of the present regime, there was a glimmer of hope that Chinese women could benefit from better equality. For the first 30 years under the

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administration of the Chinese Communist Party (CCP), like their husbands, Chinese women worked in the service of the SOEs. They were no longer viewed as liabilities but, instead, valued as assets for the first time in the country’s 5,000 years of history. Chinese women started to enjoy the same social status as men. Although the Big Leap Forward (1958–1961) and the Cultural Revolution (1966–1976) resulted in insufficient jobs, women workers were still able to secure permanent employment. In ‘Credibility trap: Japan today and China tomorrow’, Hiwaki and Tong state that ‘From 1949 to 1976 (the year of Mao’s death), equality and fairness prevailed among the people, although every Chinese was very poor during the period’.2 However, the communist employment for life system started to collapse from the beginning of the economic reform in 1978 and the xiagang situation became a serious problem from early 1990s. Three million workers were asked to become xiagang in 1993 and this number jumped to 12 million in 1997. Furthermore, as stated in the research report ‘WTO accession, rural labour migration and urban unemployment in China’,3 the estimated urban unemployment rate in 1999 had reached 9.3 per cent or 21.6 million if laid-off workers were taken into account. The distress caused by the financial pressures resulting from xiagang often leads to increased family tension. Abandonment, divorce and abuse have become barriers to family stability. The enormous flood of privatization of SOEs undertaken by the Chinese Central Government has provoked not only radical economic change but has also triggered underlying cultural, social and behavioural problems. It is quite correct to say that the Chinese Central Government’s decision on the massive privatization of the Chinese SOEs is, by and large, driven by the masculine–yang characteristics of competitiveness and rigidity, which has further suppressed the feminine nurturing and caring nature. While most of the xiagang or laid-off workers are living at a minimal subsistence level, the massive privatization programme has also distorted, if not destroyed, the traditional caring and harmonious Chinese family network, which has long served to maintain the stability of Chinese society: ‘In fact, in traditional Chinese culture, the family serves as the basis for and prototypical unit of all organizations – from social clubs to educational institutions to political parties.’4 Therefore, the huge number of disadvantaged xiagang female workers remains a critical challenge to the stability of Chinese society. More significantly, the abolition of lifelong employment resulting from this massive programme of privatization has destroyed the mutual trust between the people and the Government. While the rapid economic growth of China has reasserted the international status of the country, the present regime is forcing the achievement of strong and continuous growth in the hope of relieving the critical unemployment. In ‘Credibility trap: Japan today and China tomorrow’, Hiwaki and Tong state that: As such, China today is facing the growing instability, uncertainty and insecurity, with the narrowing range of choice for socioeconomic development. More concretely, China is suffering from a manifold societal uncertainty and disorder with the mounting number of drifting people without employment; the drastically skewed welfare benefits; the explosive disparity–animosity spiral among the diverse social constituents; public resentments and personal grudges against the rampant corruption of the government and the Communist Party; and the conflicting demarcations of areas, ethnics, and occupations. All these already have seriously damaged mutual trust among the social constituents and devastated the society’s centripetal force.5

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In view of this, any future occurrence of financial crises will only worsen an already critical situation. Triggered by this present financial and economic downturn, on the one hand, there is an alarming rate of unemployment of workers and, on the other, it is a lot more difficult for young graduates to seek full-time employment. The most pressing need of the Government is to develop alternative feminine–yin-based interdisciplinary socioeconomic models to empower the oppressed and to bring about a better quality, if not equality, of life to the population at large.

12.2 Deriving the Knowledge 12.2.1 The methodology adopted A combination of critical theory, feminism and participatory action research (PAR) has been adopted in the development of the FISM with Catalyst Foundation. The combined methodology aims to raise consciousness of the oppressed Chinese female workers in order to enable them to be self-reflective and to ‘reappropriate their traditionally silenced voice’.6 This is done in the hope that through their self-emancipation and transformation, their authentic commitment to socio-political and socio-economic movements is achieved. As Brabeck goes on to say in ‘Testimonio: Bridging Feminist and Participatory Action Research Principles to Create New Spaces of Collectivity’: ‘Important, too, is the subjectivity of practitioners who are expected to constantly engage in self-reflexivity and be critical of their own positions of power and privilege in relation to others when acting for social change’.7 Throughout the process of knowledge derivation, critical theory is adopted to establish an interdisciplinary knowledge base underlying the Chinese banking and financial industry, so that a Chinese-contextualized FISM integrating Chinese philosophy with western financial rationale may be built. The FISM of Catalyst Foundation has been established on this basis. Catalyst Foundation aims to empower disadvantaged Chinese women workers by acquiring the ability to develop self-reflection and self-knowledge in order to actualize their underlying potential as well as to create the power to bring about social and economic transformation: ‘The ultimate goal of feminist practice is to enhance the human condition and to create a more caring and just world for all.’8 Nevertheless, an authentic commitment of these Chinese women workers is essential to their social transformation since their indigenous knowledge and constructive experience are the core elements in effecting positive social change. Spanish philosopher José Ortega y Gasset is mentioned by Fals-Borda in Action and Knowledge: In the first place, learning to interact and organize with PAR is based on existential concept of experience proposed by the Spanish philosopher José Ortega y Gasset. Through the actual experience of something, we intuitively apprehend its essence; we feel, enjoy and understand it as reality, and we thereby place our own being in a wider, more fulfilling context. In PAR, such an experience, called vivencia in Spanish, is complemented by another: that of authentic commitment.9

Furthermore, self-emancipation is necessary for deriving an indigenous knowledge whereas emancipation requires one to be set free from hypostatized powers and distorted communication. The empowerment of self-emancipation is, in a sense, the core of

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knowledge development and ‘an emancipatory interest in the case of critical research – that is, an interest in emancipating people from determination by habit, custom, illusion and coercion which sometimes frame and constrain social and educational practice’.10 The ability to acquire the skill of self-emancipation determines whether the oppressed and disadvantaged women workers will ultimately liberate themselves from oppression. However, in people who are already dehumanized and oppressed, the process of their liberation must engage in self-emancipation. Through the process of self-emancipation, the oppressed can be set truly free from oppression. Nevertheless, PAR emphasizes the importance of a combination of academic knowledge and popular knowledge: ‘Therefore, academic knowledge combined with popular knowledge and wisdom may result in total scientific knowledge of a revolutionary nature which destroys the previous unjust class monopoly.’11 PAR also stimulates dialectic tensions between those who are external and those who are internal to the exploited class, since both of them must unite if social transformation is to be effected. Last but not least, the theory of PAR requires the establishment of a subject–subject dialectical relationship, a dialectical method inspired by Paulo Freire. A dialectical relationship is formed by two subjects whilst the subjects think together. The co-participation of the subjects in the act and process of thinking is communication.

12.2.2 The method applied Although action research is generally regarded as methodology, I also treat it as a method since it is intended to achieve outcomes resulting from both action and research. Reason and Bradbury state in Handbook of Action Research: We see a growing unease with ‘ivory tower’ scholarship which increasingly is seen as a waste of intellectual and financial resources. We also see an increased recognition of the importance of participation in fields as different as economic development and medicine, not least because participative processes are more impressive in terms of the results they produce.12

Action research, an experiential methodology, ‘must use qualitative, quantitative, and/or mixed-method techniques wherever and whenever the conditions and subject an AR team deals with require’.13 Nevertheless, the PAR process gives preference to qualitative understanding rather than quantitative analysis. The essence is operated by logic of the heart rather than the cold-headed analysis. The approach of PAR resonates well with the Chinese ancient philosophy which encompasses a spiritual orientation. Catalyst Foundation, which works within the approach of PAR, has adopted a combined method of subject–subject dialectic, oral and written discourse as well as narrative storytelling. Since action is embedded in both local context and external professional knowledge, ‘one way to understand the relationship between local knowledge and outside knowledge is to conceive of the connection between them as a dialectical one’.14 An understanding is gradually derived from challenging questions arising through friendly encounters between the local participants and outside professionals. Although having said that, the effective practice of PAR involves four particular levels of communication techniques in order to establish the countervailing power of people. The four techniques involved are collective research, critical recovery of history, valuing and applying folk culture, and the production and diffusion of new knowledge.

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First of all, collective research refers to the collection of information which, as a data source, must be systematized if an objective knowledge base is to be established. In Some Basic Ingredients, Fals-Borda states that objective knowledge of facts is gathered from: … meetings, socio-dramas, public assemblies, committees, fact-finding trips and so on. This collective and dialogical method not only produces data which may be immediately corrected or verified. It also provides a social validation of objective knowledge which cannot be achieved through other individual methods based on surveys or fieldwork.15

The second technique applied in PAR is the critical recovery of history. Raising and discovering a collective memory of the past has been proved to be essential to exploited groups as a stimulus to raise their critical consciousness and to acquire conscientization. Such collective memory is derived from folk heroes as well as data and facts which correct, complement or clarify official statements or academic reports written with other class interests or biases. According to Fals-Borda, the third technique of communication is the ability of valuing and applying folk culture. This technique recognizes the essentiality of establishing core values. The core values are established by cultural and ethnic elements. In the case of China, centuries of authoritarian administration have long suppressed the Chinese philosophical roots of imagination, creativity, nature, holism and humanity. In her book An Introduction to Chinese Philosophy, Liu states,‘Dao, takes on a moral connotation, as the right way for states of affairs in the human world to be.’16 However, Dao, as the highest moral principle for human beings has also long been submerged in the Chinese bureaucratic paradigm. Finally, the last technique of communication is the creation and diffusion of new knowledge – an integral part of PAR as a holistic and integral research process. Bearing in mind that PAR projects are always efforts of a combined group, it is necessary to incorporate such within a research project. There is no standard style or procedure required for effecting the PAR projects provided that new data and knowledge are systematized in accordance with the level of political conscience and the base groups’ ability for understanding messages in written, oral or visual forms in order to generate new knowledge.

12.3 Historical Development – North-East China Catalyst Foundation, a case study within the FISM, is rooted in China, developed in North-east China and aims to be further expanded into other regions of the country. The choice of North-east China as the development base of Catalyst Foundation is that, due to the historical, social and economic changes in the region, the area resonates well with the need to develop banking and financial systems for the modern Chinese world. On the one hand, both North-east China and Chinese banking and finance suffered from foreign aggression, occupation and domination throughout the last century. On the other hand, as a result of the economic reform, both the region and Chinese banking and financial systems have undergone fundamental changes as the country’s transition from planned to market economy has progressed.

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A new age arrived in China by 1600. It was when western European explorers, traders and missionaries first landed in the country and they brought with them a new civilization. The last Chinese dynasty, that of the Qing (1644–1911), was ruled by the Manchu people who originally came from the north-east region of China. This previously Manchu region now comprises of the provinces of Liaoning, Jilin and Heilongjiang. The Manchurians were historically the nomadic Jurched tribe and lived in an area north of Korea. Before the Manchurians occupied China, the Han Chinese had already settled in the east and north-east of Liaotung Province. The Manchurians became more and more influenced by the Han Chinese modes of living after the mid-16th century. However, this harmonious cross-cultural situation changed drastically after the Manchu people successfully conquered China. From the beginning of the Qing Dynasty, the Han people’s migration was restricted to the north-east region of the country. On the one hand, in order to reinforce and establish the Qing’s rule, the then regime had identified itself with the Han traditions and embraced Neo-Confucianism as a State philosophy whilst absorbing the Chinese into its bureaucracy to work alongside the Manchus in a diarchic order. But on the other hand, in the hope of preserving Manchu identity, strict orders were implemented. Manchu–Chinese intermarriage was prohibited and the original cultural diversity and harmony were significantly diminished. As a result of these strict policies, the region became sparsely populated and, as a result, a target for invasion and occupation by the Russians.

12.3.1 The Russian advance While the Qing Dynasty was busy reinforcing its control of the Chinese territory, the Russians took advantage of this and marched towards China across Siberia. Russian aggression in Manchuria began and ultimately led to the occupation of Manchuria in 1900. More importantly, this Russian aggression caused apprehension among the western powers and, in the east, Japan became particularly alarmed. Due to its geo-political importance and abundant natural resources, the north-east region of China had long been the target of foreign occupation, which led to decades of colonial exploitation. Its close proximity to both Japan and Russia made it a natural target for occupation. While China was challenged by internal political turmoil and rebellion, it was also confronted with external foreign aggression during the late 19th century and early 20th century. The last few decades of the 19th century in China saw a period in which the country experienced an accelerated level of foreign imperialistic encroachments. While from Canton to Shanghai and Peking, the European and American maritime powers gradually advanced their aggression, the Russian land power thrust southward from the Siberian–Manchurian border marked towards Peking. While the western powers sought commercial and economic interests and concessions, the Russians were keen on both territorial acquisitions and commercial benefits. Although peace was restored between the allied western powers and the Qing Dynasty by 1900, the occupation of Manchuria by the Russians remained unresolved. The Russians used the excuse of guarding the railway infrastructure to legitimize their military forces in Manchuria. Russia was in a position to exploit the north-east region of China aggressively.

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12.3.2 The Japanese aggression In the light of the geo-economic and geo-political importance of the north-east region of China, Japan felt it could no longer tolerate the occupation of the region by the Russians. Since Manchuria was renowned for its abundant agricultural and mineral resources, the control of Manchuria was considered essential to the alleviation of the crowded environment of Japan and its shortage of natural resources. Japan’s ambitious incursion into the region was triggered by the acquisition of Manchuria by the Russians. Moreover, since the Russians broke their promise to leave Manchuria in 1903, the outbreak of Russo–Japanese War (1904–1905) took place. The triumph of Japan in this war further fuelled its aggression against China which culminated in the devastating Sino–Japanese War (1937–1945). Even today, many Chinese people are still disturbed by the humiliation and harm brought upon them in this conflict. At the same time, North-east China once again became a multicultural region with its population including Manchurians, Chinese, Japanese, Koreans and Jews. Moreover, during the time Manchuria was colonized by Japan, the number of Japanese residents rose from the original 200,000 in the 1930s to 1 million in 1940. The puppet State of Manchukuo was established in 1932 following the Japanese invasion of Manchuria in 1931 and it was only returned to Chinese sovereignty in 1945. After decades of political turmoil and wars, the region finally had peace restored in 1945. With its abundant natural resources, the industrialization of the region, in particular the mining industry, started to manifest itself in the Qing Dynasty. Its industrial development though went through a period of abnormal expansion when it was colonized by Japan. Therefore, historically, it was natural for the CCP, upon its takeover of power, to make use of the north-east of China as its core heavy industrial base, with many SOEs located there. North-east China is still home to a large number of workers who used to work for the SOEs. It is not at all surprising that the massive privatization programme of the Communist Chinese Government had the most impact on this region. It is important to remember that although the original abundant natural resources of the region were, by and large, exploited, it is still the granary of the country. Therefore, its socio-economic sustainability and political stability are essential to the future of the country.

12.4 Life as Transformation 12.4.1 The transition to age 30 In the deep winter of January 1995, three years after my last trip to China, the opportunity arose to visit the land of my ancestors again. The trip brought me to Changchun, the provincial city of Jilin Province in the north-east of China. Changchun was, in fact, the capital city of the puppet government of Japan when Manchuria was under Japanese control. In comparison with the solemnity of Beijing, the flamboyance of Shanghai or the hectic Shenzhen, Changchun was in a way very quiet. I had mixed feelings about this fourth city of China I had visited. While I was not impressed by its primitiveness and harshness, there was a kind of indigenous innocence embedded in its backwardness. I can still clearly remember that very cold January when the entire city was covered by thick

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white snow while the tips of trees sparkled enticingly. Nevertheless, I did not expect at that time that I would have such a long relationship with the city. As mentioned before, Changchun was once the capital city of the puppet state of Japan and after the CCP took control of the country in 1949, it became the capital city of Jilin Province. In today’s Changchun, the Japanese infrastructure can still be seen. In 1995, due to my family’s historical connections with the country, I was nominated and selected as a member of the Changchun Chinese People’s Political Consultative Conference (CPPCC). Its primary functions are to conduct political consultation and implement democratic supervision, as well as to organize member parties, organizations and people from various ethnic groups to discuss and manage State affairs. In my opinion, helping needy people to improve their lives should be the primary goal of the CPPCC as there is no other matter of State deserving a higher level of priority than protecting the livelihoods of the people. Nonetheless, I had not expected that an initial visit to Changchun would ignite in me such a passion for helping the destitute and disadvantaged women there. Before I had a chance to get to know more about Changchun City and its people, I was nominated and selected as a member of the Jilin People’s Political Consultative Conference three years after my initial Changchun appointment. Although I had two annual opportunities to visit the city, these very short annual meetings did not help me to really understand the local people. More significantly, each of these meetings was held over an intensive four-day period and time spent outside of the meetings was packed with activities arranged by the local governments. For the past 13 years, the activities arranged had always included visits to factories, real estate developments or sightseeing tours. Not one single visit was organized to meet with the xiagang poor even though xiagang has been a critical social and economic issue. From 1999, I noticed that, from time to time, a group of 25 to 30 poor people gathered outside the conference hall when the annual meeting was being held. They tried to tell us about their state of desperation but their voices were repeatedly suppressed by the police. My political colleagues seemed neither to have noticed this phenomenon nor were interested in discussing these people’s poverty. At that time, I did not have much of a critical mind and the destitute people and their problems were rather distant from me. Without a personal mission and the necessary consciousness of how I should perform my political and social duties, I entered into the stage of my mid-life transition.

12.4.2 Mid-life transition It may well be a coincidence but the catastrophe of 9/11 happened when I had reached the stage of great struggle within both myself and the external world. Such a struggle intensified after I first met Dr Ronnie Lessem, my doctoral supervisor, in the summer of 2002. After our first meeting, I began to question almost every aspect of my life and how I should move forward. My decision to join the doctoral programme of Social and Economic Transformation had instilled in me the goal of actively finding the true meaning of my life. I was at the transitional stage to move away from the old thoughts and patterns of life to start the new period of life with new ideas and feelings. My reborn self has been broadening my consciousness relating to the widening wealth disparity and social and economic instability of our present world. I have come to the realization that the volatility of financial markets is one of the major underlying forces which has brought recurrent social and economic manias and catastrophes to mankind.

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In the case of China, while the aftermath of xiagang is a challenge to the economic sustainability and societal stability of the country, the alarming inequality of wealth and poverty all over the country is accelerating the hidden anger and social despair of the people. The xiagang phenomenon also reflects the disconnection of the social reality from the Chinese cultural tradition. Therefore, while it is important to raise the consciousness of the Chinese people regarding the instability of financial markets, the empowerment of disadvantaged people is just as important. Self-emancipation, a significant characteristic of critical theory, has driven my commitment to understand myself and the meaning of my life. From such an understanding, I have developed the commitment to understand the disadvantaged women workers in Changchun City and to find out the root cause of their poverty with the hope of helping them to understand and help themselves. The reasons for choosing Changchun to begin my study and understanding of Chinese urban poverty are: firstly, that I have established a strong understanding of the city; secondly, Changchun is one of the Chinese cities hardest hit as a result of the massive privatization of Chinese SOEs, and finally, the geographical location of Changchun makes it very sensitive in relation to the security of the whole nation. Since the residents of the city have suffered from decades of political suppression, the socio-economic stability of this city therefore means a lot to its future security.

12.5 Effecting Participatory Collective Action 12.5.1 Collective research Collective research is the first technique of PAR to collect and systematize information in order to derive objective knowledge. The initial step I took was to collect information relating to the urban poverty of Changchun City. Since I found very little information or data which truly and honestly reflected the reality of the poor, I decided to form my own understanding through dialogues with some local taxi drivers and different groups of unemployed women workers. Pretty much in line with my original expectation, I learnt that apart from the comparatively small number of disabled people, the poorest of the poor in Changchun City were the xiagang and laid-off workers. This is, in fact, a widespread phenomenon of poverty which affects a large proportion of the urban population of China. Due to its historical heavy industrial structure, Changchun has become one of the cities hardest hit by the xiagang policy. Since the economy of Changchun has been wholly State-owned, it is stale and lacking in dynamism. As a result, re-employment opportunities are very limited. Moreover, the long cold winters there further slow down the local economy. In addition to the scarcity of employment opportunities, since the xiagang workers were trained to be told what to do under the planned economy, self-employment has become very difficult. Taking into consideration the stagnant economic situation in Changchun, the xiagang workers have very limited opportunities to improve their living standards. In many cases, the tremendous financial pressure on the unemployed population has led to alcoholism, abuse, abandonment and divorce becoming commonplace. In addition to economic stress and financial pressure, the social phenomenon of failing families has further accelerated social instability. The disruption of the Chinese family network carries

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an underlying consequence thus posing a critical challenge to the Confucian theory of Wu Lun (五伦). Wu Lun is ‘the five cardinal relationships: the relations between ruler and minister, father and son, husband and wife, elder and younger brother, and older and younger friends’.17 Since historically the ritual order of the five cardinal relationships has been the core factor in ensuring the harmony of Chinese society, in a sense, the rise in broken families has upset the balanced and holistic social nature of China. Given this change in nature, the time has come for the long-oppressed Chinese feminine identity and characteristics to re-establish themselves and prosper in the hope of bringing about stability and sustainability once again. I decided, therefore, to focus on helping the xiagang women workers to help themselves because, if they become finally capable, they will then, in turn, be able to bring food home to feed their children and to send them to school. Through helping the disadvantaged women workers in this way, the feminine nature of caring and nurturing is going to impact favourably on the masculine–yangdominated Chinese society.

12.5.2 Critical recovery of history According to Fals-Borda, critical recovery of history is ‘an effort to discover selectively, through collective memory, those elements of the past which have proved useful in the defence of the interests of exploited classes and which may be applied to the present struggles to increase conscientization’.18 Conscientization is the liberating outcome attained through the continuous process of critical thinking which fosters critical consciousness of oppression. Critical consciousness is, in fact, the core driving force of cultural emancipation. Such critical consciousness brings with it contradictions in ways of understanding, behaving and valuing between yesterday and tomorrow. With an objective to enable disadvantaged women workers to liberate themselves from the various forms of oppression during the country’s current rapid transition, the effort to develop critical consciousness through a critical recovery of history becomes an unavoidable and irreplaceable element in driving social transformation. The historical recovery process can be implemented more easily through popular stories and oral traditions in the form of discussions and interviews with the older members of the community who possess good analytical memories. From January 2005 to November 2005, three fact-finding trips to Changchun were made. Based on the information gathered from literature and the data from oral discourses, the next step of my collective research was to initiate dialogues with some local government officials, academics and students in the hope of deriving a better understanding of the urban poverty of the city. In this case, the government officials and academics are older members of the community who have better analytical memories. With my objective of helping the most disadvantaged women workers, from the data and facts I collected, I considered that Kuancheng District had suffered very badly from the massive privatization of SOEs and could be fertile ground for my research. The district, with its historically heavy industrial structure, is currently accommodating almost half a million xiagang families. My next challenge was to see whether I could possibly organize and effect subject–subject dialogues with the disadvantaged women workers and indeed, whether I would be able to gain their trust to work with me. Furthermore, in view of the loss of mutual trust within Chinese society, whilst it would be difficult for a stranger to gain trust from the local Chinese people, the local

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government would also be suspicious of any direct dialogue with the disadvantaged women workers conducted by an outsider. From my experience, it would be easier to get in touch with the oppressed women if the local Kuangcheng Government were willing to make the initial contact. The reason I gave to the government officials for the interviews was to offer work opportunities to these unemployed women workers and this idea was welcomed by the local government. However, in the light of the authoritarian political structure of China, the underlying goal of empowering the oppressed women and raising their critical consciousness through self-reflection and self-emancipation was never disclosed to the officials. Nevertheless, based on the analysis derived from the collected and organized information and given the importance of stability of family and social networks within the Chinese cultural tradition, I gave the Government the following criteria in order to identify the poorest of the poor women workers in urban Changchun. Besides, these criteria are rooted in the original Chinese philosophy in the light of bringing about better balance and harmony. The criteria are prioritized as follows: i.

a xiagang or unemployed woman who is either a widow or a divorcee with young children to raise and/or old parent(s) to take care of; or ii. a xiagang or unemployed woman whose husband is also xiagang or unemployed with young children to raise and/or old parent(s) to take care of; and iii. a xiagang or unemployed woman who, although divorced or abused, is willing and determined to help other disadvantaged women once the living standard of her own family is improved; and iv. a xiagang or unemployed woman who is willing to commit to build a harmonious community.

12.5.3 Valuing local and folk culture My fourth visit to Changchun was made in late January 2006 when I had an opportunity to meet with a group of 25 women workers who were some of the poorest xiagang workers from the same community of Kuancheng District. I intended to encourage the women workers to tell their life stories and engage them through a series of community meetings out of which critical issues were to be identified. As Peter Reason states in Three Approaches to Participative Inquiry: Community meetings and events of various kinds are an important part of PAR, serving to identify issues, to reclaim a sense of community and emphasize the potential for liberation, to make sense of information collected, to reflect on progress of the project, to develop the ability of the community to continue the PAR and developmental process.19

However, since I was escorted by two government officials, under such a controlled atmosphere, the women workers tended to internalize rather than share their feelings. As a result, our conversations were limited to general questions and answers regarding their families and children. The women workers were particularly introverted and their voices seemed to be silenced in the presence of the two officials though, at the same time, the officials provided the only place where the women workers might gain enough confidence to participate. Every time they spoke, they glanced first at the two officials.

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Similar to Freire’s description, ‘They have a diffuse, magical belief in the invulnerability and power of the oppressor.’20 It was obvious to me that some private space was necessary for these women to develop a sense of participation. Such a space had to exclude the presence of the government officials since such an oppressive environment could never foster critical consciousness. Since participation is crucial to the development of consciousness, I recognized that any help extended to the disadvantaged women workers had to involve their authentic participation. Without genuine participation and continuous reflection, they would only remain oppressed. In the hope of facilitating the participation of the disadvantaged women workers, I had to work on generating sufficient interest in participation. The conversations with the 25 women workers had enabled me to see that a value shared by the group was to increase their income so that their children would be able to receive a better education. From such recognition, it was logical to consider that any method or way of enhancing their financial position would be most likely to secure their authentic participation. The realization and actualization of their indigenous potential would then become an important outcome of the process. During our meeting, some of the women workers expressed the view that they were interested in knitting and also that they had worked together before. I then raised the question of whether they would knit and sell their own products if credit were extended to them. However, nobody had any idea of what should be knitted if credit were provided. It is indeed sad to see that, on the one hand, the oppressed women would like to be able to improve their living standard but, on the other hand, they were caught in a tragic dilemma resulting from domination. They were caught in the underlying conflict between ejecting or not ejecting oppression; between speaking out or remaining silent; between attaining humanism or keeping alienation. From our dialogues, I soon realized that if helping the disadvantaged women workers in the north-east region were to be effective, it would need more than just the proffering of small loans. It had to be an authentic participatory involvement empowering them to regain their lost dignity through continuous self-reflection if an improvement in living standard were to result. Since such an improvement is likely to be actualized and realized from demand and the marketplace, wholehearted participation by the oppressed women becomes the core mechanism to reshape their future. In Introduction to Action Research, the following point is made: The conventional social sciences have no difficulty with the idea of expert social researchers, but they generally reject the idea that local people, untrained in the theories and methods of conventional social science, can make valuable contributions to both the form and the substance of a social research process. AR is based on the affirmation that all human beings have detailed, complex and valuable knowledge about their lives, environments, and goals.21

Therefore, the most important elements are to understand and respect the oppressed women workers’ choice to participate. Rather than treating them as objects and telling them what to do, giving them respect as subjects and trusting them with confidence are essential if they are to regain their dignity and attain conscientização.22 From their stories, knitting seemed to be the possible common ground to spark their interest and secure their participation. Our first meeting lasted for three hours.

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My fifth visit, made in March 2006, was again in the form of a community meeting with the same 25 women workers who had expressed their interest in knitting. In this meeting, I presented to them some samples of hand-knitted woollen scarves and hats. Eight out of the group of 25 women workers expressed the view that they would be interested in participating in knitting projects. Nevertheless, attaining their genuine participation was essential. At the same time, it was important to take into account the point made in Action and Participatory Research: A Case of Peasant Organization that: It is necessary to begin with an understanding of existing social groups and organizational structures in the local community and the economic rationality which guides the lives of the people of the community. Equally important is recognizing the distinctive character and collective experience of each community and thereby resisting the temptation to impose ideas or approaches that may have worked elsewhere.23

Therefore, securing a better understanding of the individual personal stories of the women workers and their family as well as community structures became an additional priority over and above their participative engagement in the project. However, although these disadvantaged women had expressed their interest in participation, they had internalized their suffering and did not want to reflect, express or share much about their respective stories of desperation and deprivation. They had adapted and adjusted to their exclusion from the country’s economic growth and prosperity. Exclusion is also out of line with Dao principles. From a traditional Chinese philosophical perspective, Dao produces oneness or wholeness. Wholeness produces duality and duality evolves into trinity whereas trinity evolves into infinity. The infinity supports the Yin and embraces the Yang in order to keep the balance. The destitution of these disadvantaged women workers and their lack of voice were the key reasons that had prompted my commitment to help them liberate themselves from political and economic oppression.

12.6 Catalyst Foundation – A Chinese-Contextualized Finance-in-Society Model Based on the collected information and taking into account my knowledge of the particular eight women workers, I started to look into what kind of projects might likely inspire their genuine commitment. In addition, I then began to construct the financial and business model which would possibly effect the FISM rooted in this particular Chinese context. After considering their talent and family obligations, the knitting projects appeared to be something which they would be interested in and good at as well. Legal matters and other consequences would then arise if helping the disadvantaged and oppressed women in China were to become a longer-term commitment rather than just a personal ad hoc passion. While it is impossible for a non-Chinese citizen to found a Chinese non-profit organization (NPO) or non-government organization (NGO), it nevertheless seems to be possible for a foreign-registered NPO or NGO to carry out activities in China as long as such a foreign-owned organization does not raise funds directly from Chinese citizens. Therefore, in the light of these circumstances, Catalyst Foundation was formed in the UK in March 2006. Catalyst Foundation, a UK company limited by guarantee –

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an alternative form of non-profit incorporation – has been established to empower and support disadvantaged and oppressed Chinese women. Since Catalyst Foundation works within the FISM and given that the FISM incorporates Chinese philosophy with western financial rationale, in addition to its interdisciplinary and interconnected characteristics linked to critical theory, it fits in with Chinese philosophical thought while, at the same time, operating within a feasible and rational financial system. Full-scale implementation of the FISM would require the commitment of local government, which is unlikely in the current political circumstances. Catalyst Foundation can, for the time being therefore, only operate within a minimal institutional structure. Nonetheless, in view of the interdisciplinary and interconnected orientation of the FISM, the board of Catalyst Foundation currently consists of social entrepreneurs, academics, business executives and students of business schools.

12.6.1 Catalyst Foundation – helping women help themselves With the FISM at the heart of Catalyst Foundation, although it is established as a NPO, it is, nevertheless, a business operation like any other with plans and products. Moreover, given that Catalyst Foundation is a participatory research project of the FISM, although it aims to empower disadvantaged and oppressed women, in doing so, it must ensure the women’s independence so that they will not ‘end up relying on an outside institution’.24 Having said this, Chinese philosophy and western financial rationale must be incorporated in operating Catalyst Foundation. Therefore, instead of offering a practical but rather impersonal method of vocational training, Catalyst Foundation adopts a more holistic approach to help the women workers to help themselves. This is, in fact, an interactive and interconnected process whereby the women workers are involved in projects that enable them to realize their talent while facilitating the improvement of each other’s livelihoods. From the perspective of the Five Elements, the FISM is the earth which occupies the central position of Catalyst Foundation while metal represents its business functions which are aimed to yield. Catalyst Foundation, therefore, is not a charity and does not rely on donation. It operates within a business plan approved by the board. On the one hand, it is required to be self-sufficient financially and on the other, it aims to bring about better harmony in the communities which it is involving in. Nonetheless, if harmony is to be attained, the business community can no longer just focus on purely pragmatic issues and material returns. Businesses, such as Catalyst Foundation, should have the objective of achieving a better social and economic balance. Moreover, while the wood spirit of the Five Elements is explained as being crooked, it is capable of straightening. The long-oppressed women workers, who have had a depressed and distorted life, are, hopefully, able to regain their identity through the process of empowerment. Through the FISM, the knitting projects that they are engaging in are not only strengthening their financial means, they are also supported in obtaining selfrealization and self-actualization in the hope of helping themselves and each other in the fight against poverty and obtaining a better quality of life for their respective families. Taking into account the collected information on urban poverty and the particular circumstances of the disadvantaged women workers of the region, through the assigned projects, the process of empowerment undertaken by Catalyst Foundation involves:

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i.

providing financial support and business know-how to enable the women workers to successfully participate in the respective knitting projects; ii. ensuring that our women workers are not exploited in any way by any of the assigned projects and they will be given equal opportunity; iii. generating and providing an open space for subject–subject discussions on the socio-economic issues or challenges of the community; iv. encouraging and facilitating the women workers to work at home so that their children are not excluded from the process of empowerment; v. helping the disadvantaged women workers to regain their long lost dignity and identity; vi. facilitating a continuous process of self-reflection and self-emancipation; vii. encouraging collaboration and the redevelopment of mutual trust; viii. assisting and supporting the women workers to work on building a balance and harmonious community and society as well; and ix. effecting social and economic transformation. It is hoped that these oppressed women, after regaining their financial independence and long-lost identity, will live with passion and enthusiasm. Like the fire sign of the Five Elements, they are to flame and ascend. The fire living within is a kind of feeling of rebirth that one is to experience resulting from empowerment. From the Chinese philosophical perspective, in addition to the spirit of harmony of the Five Elements, the Yin and Yang school of balance also plays an essential role. Fair and equal opportunities are very important to develop the commitment and devotion of the women. Therefore, achieving and maintaining a fair and balanced distribution of jobs is essential.

12.6.2 The mission and challenges of Catalyst Foundation While Catalyst Foundation aims to empower the disadvantaged women workers to fight against poverty, at a deeper level, its objective is to help the oppressed to construct new and critical knowledge of their own rather than just the dogmatic explanations and values imposed by the political regime. However, given the possibility of unnecessary political predicaments, our published mission statement is deliberately general. The mission statement of Catalyst Foundation is as follows: Disadvantaged women are hardly noticed in our busy world. Due to economic and societal changes, millions of women and their families are constantly suffering from tremendous financial and spiritual pressure. Most of them have less than US$2 to spend per day. Many of these women are divorced as well as abused. They have to take care of the elderly and support their children, alone. Their oppressed and desperate voices are striving to be heard; your support is crucial and greatly appreciated. Catalyst Foundation, a UK non-profit making organization, creates work opportunities and generates support for women in need, established within China and to be expanded worldwide. Each dollar you donate or spend purchasing the products these women make will not only generate income for these currently helpless women and their children, but will also help them to become independent as well as to regain their long lost identities!

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While we were in the process of establishing the first knitting projects supported by the American Women’s Club of Shanghai, I received bad news from Changchun. The eight women workers who had originally expressed their interest in knitting had rejected the first project we had generated. The reason provided by the women was that they were sceptical about Catalyst Foundation and whether they would be paid as promised. This was because they were once hired to knit collectively but were not paid. I had not expected the women workers to reject the project in this way, though it did demonstrate to me the lack of mutual trust within present Chinese society. As Hiwaki and Tong put it in ‘Credibility trap: Japan today and China tomorrow’: It is also self-evident that the lack of mutual trust between the employer and the employee, as well as between the producer and the consumer entails heavy personal, psychic, social and environmental costs as well as formidable and negative effects on the future vitality of the people and society concerned. There is also a long list of human relations that require mutual trust in many domains other than the economic one.25

Although I was very disappointed with the decision made by the eight women workers, I was not discouraged. While I was struggling with not knowing what to do with the promise we made to the American Women’s Club of Shanghai, I received a call from the wife of the Chairman of Kuancheng District People’s Political Consultative Conference. She told me that she would like to introduce me to some other disadvantaged women workers. She mentioned to me that there were four laid-off women workers who used to work with her in the same SOE. These four divorced women workers had less than US$1 to spend a day. So, in terms of international poverty standards, these women workers would be defined as very poor.

12.6.3 Poverty in Changchun As of 2007, the minimum urban living guarantee (最低城市生活保障) of Changchun City was Renminbi (RMB) 258.00 per person per month, which was equivalent to £16.70 (RMB 15.4491 to £1.00 on 27 April 2007). Nevertheless, those who were eligible for this minimum living subsistence were either a singleparent with a dependent child or someone unemployed whose spouse was also unemployed. Moreover, children were excluded from such an entitlement. Therefore, if both husband and wife of a family were unemployed with no income, the household would be granted RMB 516.00 by the local government. However, if the standard Chinese family size of three was taken into consideration, each family member would only be entitled to RMB 172.00 (£11.13) per month. Whilst the 2006 urban per capita annual disposable income of China was RMB 11,759.00, the rural per capita annual disposable income was RMB 3,587.00.26 This clearly demonstrates the huge wealth disparity between urban and rural China. While the urban per capita annual disposable income was close to six times the annual income of an individual family member of an urban xiagang family, the rural per capital annual disposable income was almost twice this level. This alarming disparity poses critical challenges to the sustainability and stability of the country. In the light of this, the identification of the real poor in urban China is essential. Muhammad Yunus describes the poorest of the poor as being those who cannot produce enough food to feed their families. The poorest of the poor are those with neither asset

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nor hope. In the case of China, when men reach the age of 55 and women reach the age of 50, they become eligible for the country’s retirement fund. However, as a result of the expanding population and in view of the high unemployment situation, it is difficult or even impossible for an unskilled or a less-educated middle-aged worker to secure a job. Given this situation, the most critical and distressing period for men is from 40 to 55, whereas for women it is from 35 to 50. However, in the West, this same period of life is normally the best time for self-development and career advancement. In China, the same age-related period marks the end of development for many people. Taking into consideration this Chinese phenomenon, I have identified the poorest of the urban poor as those xiagang and laid-off women workers of an age range from midthirties to early fifties. Catalyst Foundation, therefore, acts as the ‘agency of oppressed peoples, with the ultimate aim of people transforming their peripheral status and creating social change’.27 The four women workers introduced by the wife of the Chairman of the Kuancheng District People’s Political Consultative Conference are definitely typical of those to whom Catalyst Foundation would like to offer its help. The names of the four women workers are Zhao, Li, Liu and Xu. They are all in their mid to late forties and are divorced mothers. They are laid-off workers and have dependent children. I set off to Changchun again with the objective of understanding the life stories of these women workers. Since they were not introduced by the Government, my activities were no longer being scrutinized. I offered to visit them at their individual homes.

12.6.4 Li Yayan’s life story The coldness of winter had not quite left Changchun in mid-April 2006 when I paid the visit to the four newly introduced women workers. They were from the same community of Kuancheng District and their homes were located in some 40-year-old six-storey buildings which are covered with tiny cracks. Their apartments are of similar size and each of the tiny 150 square ft homes accommodates three to four persons. Among the four women workers, Li was the poorest and her life was full of disappointment and despair. She, now in her late forties, told me that she joined the SOE which she had worked for all her working life from the age of 22. As a result of its bankruptcy, her employment was terminated after 23 years of service. When I met Li at her home, she was alone and looked relaxed. She mentioned that she was happy to have the opportunity to participate in the knitting projects of Catalyst Foundation. ‘Thank you for seeing me,’ I said to Li. ‘Sorry that our flat is very small and old,’ Li said with concern. ‘Please don’t worry! I am glad to be here today,’ I answered. ‘Thank you for giving me the opportunity to participate in your knitting projects and I do appreciate it,’ she continued to say. ‘Catalyst Foundation is happy to be able to help. We are a non-profit organization aimed at helping disadvantaged women workers to regain their lost dignity through projects which improve their income,’ I said to Li.

C a t a l y s t F o u n d a t i o n : P a r t i c i p a t o r y A c t i o n a n d E m p o w e r m e n t 183 ‘How long have you been without work?’ I continued to ask. ‘For two years and life has been very difficult. I have a son and a daughter and we depend on the minimum living subsistence given by the Government,’ Li told me with frustration. I then asked her about the age of her son and why he did not have a job. ‘My son is 23 but since he does not have a college diploma, he can only secure temporary jobs once in a while. He sometimes can bring home a few hundred renminbi but most of the time he is penniless.’ ‘Did your son go to college?’ I asked. ‘Yes, but since we could not afford his final year tuition, the college refuses to give him the diploma until we pay in full,’ Li answered.

Li’s son’s case is not unique. I have come across similar cases where without paying in full, students are not able to get their diplomas. It is very discouraging to see that the education authority of socialist China has become such a pragmatic entity. In such cases this is socially irresponsible. It is a vicious cycle that the fewer qualifications a student has, the more difficult it is to find a good permanent job, and, if he or she cannot get a job, it will be even more difficult for the student to pay their outstanding tuition fees. Li and I did not take long to breach the initial distance between each other and she started to quietly tell me the story of her life. Li began, ‘In early 2004, I was laid-off by the State-owned company for which I had worked for over 20 years. I received no compensation from the company because it was bankrupt. Since then, I have been receiving the monthly minimum living subsistence of RMB 230.00 from the local government. At the age of 46, I am too old in today’s China to secure a permanent job. My son is 24 but, since he does not have a college degree, he can only find temporary jobs. My daughter is only 12 and she is required to take extra lessons after class from time to time. These lessons cost about RMB 350 every month which we can hardly afford. I feel very sorry about this and have no hope. I am worried that she is not able to pass her exams. We are under tremendous financial and psychological pressure. The minimum living guarantee of RMB 230.00 does not allow us the luxury of having fruit. Our normal diet consists mostly of rice, corn and preserved vegetables. Whenever the children yearn for meat, I can only afford to buy them sausages which cost around RMB 6.00 for 500 grams.’ Li paused for a while and I could see tears in her eyes. She then continued, ‘My mother, who is 70 years old, receives RMB 400.00 every month from the Government. My younger sister who owns a small fashion business in the south of China gives my mother money from time to time. In view of my appalling financial situation, without letting my sister and her husband know, my mother gives me financial help from time to time. She gives me RMB 100.00 once in a while. With this money, I can afford to buy my daughter some tomatoes since she loves them very much. My daughter is such a darling that she usually offers to share these treasures with me.’ Li then mentioned that she was divorced twice. Her son is from her first marriage and her daughter is from her second. Her first husband was imprisoned for ten years and

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they divorced while he was in prison. Unfortunately, her second marriage did not work out either. I was both grateful for and surprised at her willingness and openness to share her life story with me. It is particularly difficult for the Chinese to admit marriage failures since such a failure is viewed as a loss of mianzi (面子). Mianzi means face and a divorce is a loss of face within the Chinese culture. Mianzi is one of the most important Chinese cultural characteristics.28 For the Chinese, mianzi is as important as guanxi. I found out later that Li is only one of the many disadvantaged and oppressed women in China and many of them are living throughout the urban areas of the country. They are the victims of economic reform and are suffering from both financial and family distress. It is, however, essential to know that, in comparison with the villagers in the countryside, these urban unemployed women workers are educated and are used to having a career. They were once financially independent and lived as subjects. As a result of the massive privatization caused by the country’s economic reform, they are now made to become dependants. They have been excluded from the benefits of the country’s impressive economic growth. They are no longer in control of their lives and can only live as objects. This is described by Freire as a form of adaptation rather than integration. While adaptation is a weak form of self-defence it is, in fact, an animal behaviour since it is a symptom of the dehumanization of a human being.29 When I asked Li about her goal in life, she answered: ‘I don’t know. I am not sure. I only know that I will be very happy and fulfilled if I can make RMB 1,000 per month.’ I then asked her whether her ex-husbands offered any financial help to the children. ‘No, they are both jobless,’ she said. The massive privatization has obviously changed both the economic and societal structures of China. The stability of women, which is the core to the stability of a society, is being seriously challenged. The most negative impact on these women is likely to be psychological since as a result of the loss of financial independence, they have, by and large, lost their dignity and identity. They have become insecure and they have faith neither in their government nor in their future. While the despairing and desperate voices of these oppressed women are striving to be heard, it is also unfortunate to see that the independence of Chinese women has occurred only very briefly in the country’s long history.

12.6.5 Poverty in Dalian While I was engaged in working with our newly recruited women workers based in Changchun, I had the opportunity to bring Catalyst Foundation to Dalian. Dalian is a coastal city in Liaoning Province of North-east China. I had actually spent almost a year in Dalian in 2003 before leaving for Beijing. Since then, I have been teaching the banking and finance modules of the full-time MBA programme of Dalian University of Technology and have had the opportunity to visit Dalian a few times annually. In May 2006, through Helen Liu, one of my local students, I had studied and learnt about poverty in the city. Helen and I then identified a few xiagang women from one community who, through Catalyst Foundation, we wanted to help. Unlike Changchun, which is a capital city, Dalian is instead one of the many other cities of Liaoning Province. Since it is not a provincial capital city, the minimum living subsistence of Dalian is lower than that offered in Changchun. The monthly minimum living subsistence of Dalian was RMB 320.00 per household and in the light of the Chinese standard family size of three, each family member was entitled to a monthly guarantee of RMB 106.66. If, taking into

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consideration the 2006 per capita annual disposable income of RMB 11,759.00 in urban areas and RMB 3,587 in rural areas of China,30 the urban disposable income level was over nine times and rural disposable income was close to three times the annual income of an individual family member of a xiagang urban household of Dalian City. I understood from my student that she went to visit the CCP Secretary of a local community of Dalian City and, from their conversation, she found out that among the 6,000 registered households in that community, there were over 1,000 laid-off workers and 30 per cent of them had been living in abject poverty. I then decided to visit some of the disadvantaged women there. Accompanied by Helen Liu, I went to visit Yu in an afternoon in late May 2006. Yu, a 49-year-old woman, lives in a 15 square metre apartment, with her husband and their 20-year-old daughter. In order to let Yu feel that we were all equal subjects and in order to avoid putting her under any unnecessary pressure, I stopped Helen from taking notes or recording our conversation. Instead, I asked Helen to listen to Yu’s story with her heart. After I introduced Catalyst Foundation, Yu gradually started to tell her sad life story: ‘The SOE for which I worked for over 20 years went bankrupt and I lost my job,’ Yu said. ‘How about your husband? Is he employed?’ I asked concernedly. ‘He used to be a chef but he is now xiagang. He is already in his late fifties and it is impossible for him to find a job,’ Yu answered. ‘What do you do to make a living?’ I said. ‘I am working as a domestic helper temporarily and life has become so difficult,’ she started to weep. ‘How much do you earn as a domestic helper?’ I asked Yu. ‘RMB 500.00 per month and because I can make RMB 500.00, we do not qualify for the minimum living guarantee entitlement granted by the Government,’ she said sadly. ‘This apartment belongs to one of our relatives and we borrow it from them. We have leased our own home in order to receive a monthly rent of RMB 400.00,’ Yu continued to say. ‘Does it mean that the three of you live on a monthly income of RMB 900.00?’ I asked Yu. ‘Yes. But RMB 102.00 is paid monthly as the contribution to my retirement fund while my husband has to pay RMB 280.00. It is extremely difficult to survive these days. A lot more difficult than in the old days,’ Yu said tearfully. ‘Do you actually prefer the old days when the country was under the planned economy?’ I asked Yu.

186 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a ‘I don’t know much about the planned or market economy. I only know that we all had jobs in the old days and we could survive a lot more easily. Today, many of our relatives and friends are laid-off and we feel very insecure,’ Yu complained. ‘Why don’t you do something to change this critical situation?’ I asked Yu. ‘How can we change it? We are just ordinary people and we have no power or money to change anything,’ Yu answered. ‘How about your daughter? Is she working?’ ‘No, she is still at college. Her tuition is covered by the Government due to our poor situation but the accommodation and other expenses are not included,’ Yu answered. ‘In the old days when everyone was poor, people were kind and honest. The massive privatization of SOEs has led to our poverty. We now experience the huge disparity of wealth every day and this is not fair to our children,’ Yu said. ‘The reason we are here today is to try to understand what and how we can be of help. We will be happy to help you to help yourself to improve your living standard if you are interested in participating in our different knitting projects,’ I proposed to Yu. ‘Yes, of course. Thank you and we really need the money.’ ‘Would you be willing and happy to help other disadvantaged women workers once your financial situation is improved?’ ‘Definitely. I know that there are a lot of disadvantaged women workers out there who are living a demeaning and undignified life,’ Yu said.

12.6.6 Production and diffusion of new knowledge From the respective life stories of the disadvantaged Chinese women workers and through dialogues built on a subject–subject relation between us, these oppressed women have brought to political consciousness the fact that poor people are not born poor. They are, in many cases, victims of the social and economic changes advocated by the respective governments. Their consciousness has prompted them to realize that they have to integrate with, rather than to adapt to the reality. Through the different knitting projects initiated by Catalyst Foundation and organized by the women workers themselves, they have also reckoned that they can create their communities as a space for mutuality and freedom. Since PAR strives to end the monopoly of written words, the new level of political conscience and understanding acquired by these oppressed women workers is assembled through their life stories, self-emancipation and self-reflection, dialogues and critical thinking. PAR, therefore, acts as a form of resistance to authoritarianism and control. PAR nurtures a democratic knowledge base of equality, compassion, commitment, independence and liberation from oppressive forces.

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From the original seven women workers, we now have over 20 women workers as members. Through continuous self-reflection and self-emancipation, they have realized and actualized their underlying potential. They are no longer discouraged. They have demonstrated authentic participation in the entire process of the different knitting projects, from organizing and recruiting the respective women workers, sourcing raw materials to the delivery of the finished products handmade by themselves. They also organize regular group meetings and through discussion and consensus, they have made positive changes to their lives and those of their children. More importantly, they have been transforming their communities and societies both economically and socially. Regarding Catalyst Foundation, besides facilitating its members to sell their goods at flea markets and bazaars, it has also devoted itself to reaching out to more disadvantaged women workers and, at the same time, working on the involvement of future business leaders as catalysts. Since early 2007, Catalyst Foundation has established a long-term relationship with the Social Venture Club of China Europe International Business School (CEIBS). Catalyst Foundation provides a platform for the MBA students of CEIBS to develop and practise corporate socially responsible activities. Through working with Catalyst Foundation, CEIBS is able to bring to the business world more socially conscious leaders. Most importantly, in the hope of engaging their commitment in Catalyst Foundation, the young business leaders are empowered with consciousness and conscientization which help to liberate them from the masculine–yang domination of finance and business. Today, the products handmade by our women workers are no longer just presented at flea markets and bazaars. Catalyst Foundation and its women members have now ventured out into the wider commercial world. We have entered into an agreement with Wobabybasics, a Canadian baby wear company, and because this Canadian baby wear company has a mission to incorporate business and philanthropy, Catalyst Foundation is providing it with sourcing and manufacturing support. While the goods made by the women workers of Catalyst Foundation for Wobabybasics were initially sold within China, by March 2009, the products produced began to export to the USA and Canada. This development enables Catalyst Foundation to expand and engage more disadvantaged Chinese women workers in the adoption of the FISM. The development of Catalyst Foundation has undoubtedly demonstrated the feasibility and possibility of achieving better socio-economic equilibrium through an interdisciplinary and holistic financial model. Catalyst Foundation, rooted in the FISM which integrates Chinese philosophy with western financial rationale, is hoping to set an example of a new paradigm of finance and business. However, since there are still an incalculable number of disadvantaged and oppressed women in China, it is actually just the beginning of a very long journey!

12.7 Conclusion In the light of the life stories of the disadvantaged and oppressed women members of Catalyst Foundation, a new understanding and knowledge of the economic reform of China has been developed. Given that the CCP Government has been promoting the country’s successful growth domestic product (GDP) growth, a large part of the Chinese population has actually been excluded from its new prosperity. Although the CCP Government allowed exploitation of environmental and human resources over the past three decades in exchange for economic applause, the country’s rapid GDP growth is

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actually slowing down as a result of the present global economic recession. Moreover, economic development which is only defined by GDP growth can be extremely misleading since it distorts the country’s real socio-economic situation. Economic development should not just be a matter of achieving GDP growth but should also include improving the general standard of living, reducing poverty and wealth gap, creating dignified employed opportunities and narrowing inequality. The stories of both Li and Yu represent a widespread phenomenon in the country. As Muhammad Yunus states, ‘Poverty is not created by the poor. It is created by the structures of society and the policies pursued by society.’31 With reference to Figure 3.1, in Chapter 3, the masculine–yang-dominated topography of conventional banking and finance has demonstrated that although the financial systems are at the foundation of stability of the entire socio-economic network, such systems are, indeed, disconnected from the original Chinese philosophy and its cultural tradition. Throughout the development of Catalyst Foundation, the women workers, who used to live in the innocent and utilitarian spheres of living, have grown to realize and understand that they are members of a society and they are responsible not just for themselves or their respective families. They are parts that constitute the society at large. In view of the Chinese spheres of living, the women workers have developed from the stage of doing what their instinct or their custom leads them to do; or from the stage of doing things for self-benefit to become self-conscious and do things which benefit other members of their community. The new knowledge produced and diffused by the PAR project of Catalyst Foundation is that once genuine interest and authentic participation are attained, self-reflection and self-emancipation come naturally. Through such self-reflection, initiatives and selfappreciation are proliferated. The powerful process of self-emancipation has led to the creation of new knowledge. Tilakaratna states the following: Grassroots experiences from many developing countries have demonstrated that the spirit of self-reliance, which often lies dormant in people who live in poverty and deprivation, can be activated by appropriate stimulation using sensitized agents. With such stimulation, the people concerned tend to take collective initiatives – creative and assertive actions – to improve their socio-economic-cultural status.32

Through working within the FISM, the women workers of Catalyst Foundation are able to create a level of critical thinking about their life situations, in particular the economic– social–cultural challenges which propel their poverty. As a result of the liberation of the women workers of Catalyst Foundation, management becomes the most minor element of the entire process of development and production. In the West, we always believe wholeheartedly that good management is the key to success. However, we treat those we believe we are managing as objects because we think and believe that they know less than we do. Therefore, if we view and treat those we work with as subjects, we will no longer need to manage them. Catalyst Foundation’s women workers have demonstrated their ability to establish a non-hierarchical structure in organizing their coordination and cooperation. They share the same mission and goal of Catalyst Foundation in helping themselves rather than being organized into ‘externally determined structures to serve goals set by outsiders’.33 Catalyst Foundation believes that every oppressed and disadvantaged woman is capable

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and, if given appropriate opportunities, she will be able to realize her potential and will commit herself to developing and doing the holistic best for her own benefit. When this happens, the person will no longer need to be managed since her self-generated passion and drive are a lot more powerful and self-sustaining. Furthermore, as a result of attaining their consciousness, the women workers take an active approach in undertaking self-review and from the assessment of their degree of participation, successes and failures, they obtain new knowledge of organizing themselves as well as making future plans for helping themselves. It is also important to note that the operation of Catalyst Foundation is based on the traditional Chinese spirit of trust and, therefore, we do not use contracts. Our women members honour their promises of their own free will without being bound by law. They know that if they fail to honour what they have promised, they may risk losing future opportunities. Therefore, in order not to fail their families and themselves, our women workers well understand that their ability of and commitment to self-review and self-assessment are essential parts of the process. It is, in fact, the Confucian ethics which value the individual qualities of self-discipline, integrity, diligence and loyalty. Catalyst Foundation has successfully empowered a number of oppressed Chinese women workers with the ability to regain their lost dignity. A number of them have been able to live above the international poverty line of US$2 per day. While the financial independence of the women workers has helped to strengthen the presently fragile society of China, their moral rectitude also helps to establish higher social values. Although Catalyst Foundation is still in its early days, our women workers have demonstrated their endeavour in the creation of a more equal and harmonious socio-economic environment. More importantly, they have also built conscious awareness of their disconnection from their indigenous culture and, as a result, their cooperative efforts and handmade products reflect the Chinese spirit of balance, harmony and love of nature. A bond of understanding has developed between the women workers and me. We understand that we are members of a society and that building a world with consciousness is of utmost importance. Having said this, Catalyst Foundation is still at an initial stage. Taking into consideration the aftermath of the sub-prime mortgage crisis, the next few years are going to be crucial for Catalyst Foundation in view of the rising Chinese unemployment resulting from the present global economic recession. This also raises an alarm to the CCP Government that a more holistic financial approach should be considered and adopted to achieve growth while bringing better equilibrium to the Chinese society, that is, if attaining harmony and balance is the goal of the Chinese leadership. From the masculine–yang-driven commercial banking archetype of CCBC to the two feminine–yin-oriented financial archetypes of Grameen and Catalyst Foundation, it is obvious that conventional finance is structured according to the dominant systems adopted within the institutional frameworks and is disconnected from one’s cultural roots. Given a loss of identity and pride is likely to result from such a disintegration, the pursuit of maximizing self-benefit and material returns are likely to override one’s social responsibilities. Taking into consideration the core position of finance within the overall socio-economic system, if sustainable development is to be achieved, a revival of history, philosophy and cultural tradition need to take priority when organizing finance systems.

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Endnotes 1 2

Lietaer, B. (unpublished). The Soul of Money. Hiwaki, K. and Tong, J. 2006. Credibility Trap: Japan today and China tomorrow. Human Systems Management, 25.

3

Zhai, F. and Wang, Z. 2002. WTO accession, rural labour migration and urban unemployment in China. Urban Studies, 39(12).

4 5

Chen, M.J. 2003. Inside Chinese Business. Boston, MA: Harvard Business School Press. Hiwaki, K. and Tong, J. 2006. Credibility Trap: Japan today and China tomorrow. Human Systems Management, 25.

6

Brabeck, K. 2004. Testimonio: Bridging Feminist and Participatory Action Research Principles to Create New Spaces of Collectivity, in Traveling Companions: Feminism, Teaching, and Action Research, edited by M. Brydon-Miller et al. Westport. CT: Praeger.

7

Brabeck, K. 2004. Testimonio: Bridging Feminist and Participatory Action Research Principles to Create New Spaces of Collectivity, in Traveling Companions: Feminism, Teaching, and Action Research, edited by M. Brydon-Miller et al. Westport. CT: Praeger.

8

Brabeck, K. 2004. Testimonio: Bridging Feminist and Participatory Action Research Principles to Create New Spaces of Collectivity, in Traveling Companions: Feminism, Teaching, and Action Research, edited by M. Brydon-Miller et al. Westport. CT: Praeger.

9

Fals-Borda, O. 1991. Some Basic Ingredients, in Action and Knowledge, edited by O. Fals-Borda and M. A. Rahman. New York, NY: The Apex Press.

10

Kemmis, S. 2006. Exploring the Relevance of Critical Theory for Action Research: Emancipatory Action Research in the Footsteps of Jürgen Habermas, in Handbook of Action Research, edited by P. Reason and H. Bradbury. London: Sage.

11

Fals-Borda, O. 1991. Some Basic Ingredients, in Action and Knowledge, edited by O. Fals-Borda and M.A. Rahman. New York, NY: The Apex Press.

12

Reason, P. and Bradbury, H. (eds). 2006. Handbook of Action Research. Revised Edition. London: SAGE.

13

Greenwood, D.J. and Levin, M. 2007. Introduction to Action Research. 2nd Edition. Thousand Oaks, CA: Sage.

14

Greenwood, D.J. and Levin, M. 2007. Introduction to Action Research, 2nd edition. Thousand Oaks, CA: Sage.

15

Fals-Borda, O. 1991. Some Basic Ingredients, in Action and Knowledge, edited by O. Fals-Borda and M.A. Rahman. New York, NY: The Apex Press.

C a t a l y s t F o u n d a t i o n : P a r t i c i p a t o r y A c t i o n a n d E m p o w e r m e n t 191 16

Liu, J.L. 2006. An Introduction to Chinese Philosophy: from Ancient Philosophy to Chinese Buddhism. Oxford, UK: Blackwell Publishing.

17

Yu, A.B. 1996. Ultimate Life Concerns, Self, and Chinese Achievement Motivation, in The Handbook of Chinese Psychology, edited by M.H. Bond. Hong Kong: Oxford University Press.

18

Fals-Borda, O. 1991. Some Basic Ingredients, in Action and Knowledge, edited by O. Fals-Borda and M. A. Rahman. New York, NY: The Apex Press.

19

Reason, P. 1994. Three Approaches to Participative Inquiry, in Handbook of Qualitative Research, edited by N.K. Denzin and Y.S. Lincoln. Thousand Oaks, CA: Sage.

20

Freire, P. 1996. Pedagogy of the Oppressed, revised edition. Translated by M.B. Ramos. London, UK: Penguin Books.

21

Greenwood, D.J. and Levin, M. 2007. Introduction to Action Research, 2nd edition. Thousand Oaks, CA: Sage.

22

Freire, P. 2005. Education for Critical Consciousness, revised edition. Translated by M.B. Ramos. London, UK: Continuum.

23

Gianotten, V. and de Wit, T. 1991. Action and Participatory Research: A Case of Peasant Organization, in Action and Knowledge, edited by O. Fals-Borda and M.A. Rahman. New York, NY: The Apex Press.

24

Gianotten, V. and de Wit, T. 1991. Action and Participatory Research: A Case of Peasant Organization, in Action and Knowledge, edited by O. Fals-Borda and M.A. Rahman. New York, NY: The Apex Press.

25

Hiwaki, K. and Tong, J. 2006. Credibility Trap: Japan today and China tomorrow. Human Systems Management, 25.

26

Hong Kong Trade Development Council. 2007. Market Profile on Chinese Mainland. Available at: http://www.tdctrade.com/main/china.htm [accessed: 29 August 2007].

27

Brabeck, K. 2004. Testimonio: Bridging Feminist and Participatory Action Research Principles to Create New Spaces of Collectivity, in Traveling Companions: Feminism, Teaching, and Action Research, edited by M. Brydon-Miller et al. Westport. CT: Praeger.

28

Smith, A. H. (2006). Zhongguoren De Xing [Chinese Characteristics], translated by M.Y. Zhang and L.J. Wang, translated by M.B. Ramos. Taipei, Taiwan: Fulin Wenhua.

29

Freire, P. 2005. Education for Critical Consciousness, revised edition, translated by M.B. Ramos. London, UK: Continuum.

30

Hong Kong Trade Development Council. 2007. Market Profile on Chinese Mainland. Available at: http://www.tdctrade.com/main/china.htm [accessed: 29 August 2007].

31

Yunus, M. 1999. Banker to the Poor. New York, NY: PublicAffairs.

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Tilakaratna, S. 1991. Stimulation of Self-Reliant Initiatives by Sensitized Agents: Some Lessons

from Practice, in Action and Knowledge, edited by O. Fals-Borda and M.A. Rahman. New York, NY: The Apex Press. 33

Tilakaratna, S. 1991. Stimulation of Self-Reliant Initiatives by Sensitized Agents: Some Lessons

from Practice, in Action and Knowledge, edited by O. Fals-Borda and M.A. Rahman. New York, NY: The Apex Press.

chapter

13 The Finance-in-Society Model

To the oppressed, and to those who suffer with them and fight at their side. Paulo Freire

13.1 Introduction This concluding chapter is structured to provide a deeper understanding and explanation of the theory and practice of the Chinese-based Finance-in-Society Model (FISM) described in this book and to illustrate the investigation required for its further development.

13.2 Background and Development Although the Grameen Bank has been very successful in helping the poor of Bangladesh, as examined in Chapter 11, Muhammad Yunus feels that it is only scratching the surface of the world’s poverty. Moreover, in view of the insignificant impact of its replicated programme in China, it becomes obvious that an effective communal project has to be deliberately rooted in its local context. However, while Yunus feels that Grameen and the respective replicated Grameen projects as just barely scratching the surface of tackling world poverty, Quenum, at the same time, states that ‘Intellectual honesty recommends noticing that these achievements represent a drop of hope in a sea of poverty.’1 While the dream of the World Bank is a world free of poverty, its records shows that the number of people living on less than US$2 per day grew by 300 million from 1981 and 2001. In The World’s Banker, Mallaby states that: In a world of 6 billion people, half lived on less than $2 per day, and a fifth subsisted with not even a dollar. In the next twenty-five years, moreover, the world’s population would swell by a further 2 billion, and all but 50 million of these would live in poverty-afflicted countries. Even if no simple link existed between poverty and terrorism, these population numbers surely meant something.2

The recent sub-prime mortgage-led financial crash and economic recession are going to further distance humankind from the dream of making poverty history. It is the poor who always suffer the most whenever a banking or financial crisis occurs, although the middle class has also been severely hit by the recent crash. With a rapid rise in the global population, forecast to grow from 6 to 8 billion people in the next quarter of a century, it should be recognized that most of this increase will occur in poor countries. The critical

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challenge facing humanity is whether the respective initiatives for funding the poor will be powerful enough to fight against the deepening poverty resulting from the occurrence of future financial crashes or economic crises. Moreover, in the light of the cycle of financial crises and crashes in the past four centuries, the question is not whether there will be another financial crisis, but where and when it will happen. The sad reality is that financial and economic turmoil usually hit the poor and disadvantaged groups the hardest. In 2003, the World Bank made the point that ‘There are over 7,000 microfinance institutions, serving some 16 million poor people in developing countries.’3 However, this represents only the tip of the iceberg, since the number of unsupported poor people around the world is set to increase over time. It has taken Yunus’s operations over 30 years to reach out to 6 million poor people in Bangladesh, and other patchy initiatives for funding the poor – mostly operated by non-profit organizations (NPOs) and non-government organizations (NGOs) – are simply not powerful enough to stop deepening poverty or to protect the poor from being badly affected by the next financial or economic crisis. If one of the ultimate goals of social sciences is to attain social stability and human sustainability, and, if taking into account the importance of banking and finance in relation to socio-economic stability, this book, through its application of critical theory and traditional Chinese philosophy to establish an interdisciplinary and interdependent knowledge of the Chinese-contextualized FISM, makes sense. Furthermore, taking into consideration that the aftermath of every financial crisis is a widening gap of wealth disparity, it should be recognized that such wealth disparity is one of the core challenges to the attainment of social balance and harmony. This huge wealth disparity is certainly a major hurdle for the world to overcome if its population is to continue to grow and sustain itself. Since the mathematical and quantitative method has been the dominant force in the operation and evaluation of global finance, a more holistic and qualitative Chinese philosophical approach offers a good alternative in this respect. Having said this, however, it does not mean that an orientation embedded in Chinese philosophy is superior or more effective than that of any other culture. Moreover, a call for a conscious awareness of indigenous Chinese values is particularly difficult in today’s China, given that the Chinese people have long been disconnected from their traditional philosophical roots. However, the fact is that the interdisciplinary characteristics of critical theory resonate well with the interconnected spirit of conventional Chinese philosophy. Therefore, adopting the Chinese philosophical approach aims to provide a qualitative alternative to the quantitatively-based domination at large in the current financial world. While Confucianism establishes the core social philosophy of the Chinese people, Daoism emphasizes understanding the innate nature of every individual. The Chinese financial industry is set in the modern context of an emerging capitalist system within a socialist centrally planned economy. This has evolved into a quasi-capitalist and quasi-socialist paradigm. A financial model which raises consciousness of the all-embracing original Chinese philosophy is definitely necessary in order to foster better social and economic equilibrium. The case study of the China Construction Bank Corporation (CCBC) in this book sets a very good point of reference for the largely pragmatic orientation of today’s Chinese financial institutions. This statement is supported by the investment of hundreds of millions of US dollars made in the bonds of Lehman Brothers by the Chinese banks, as reported in Metro Express on 18 September 2008.

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13.3 The Theory and Practice of the Finance-in-Society Model The FISM is built on both theory and practice. In Theory and Practice, Habermas states the following: The theory thus encompasses a dual relationship between theory and praxis. On the one hand, it investigates the constitutive historical complex of the constellation of self-interests, to which the theory still belongs and across its acts of insight. On the other hand, it studies the historical interconnections and action, in which the theory, as action-oriented, can intervene.4

While critical theory aims to integrate ideas into reality, truth exists in the moment of correct practice. Figure 13.1 illustrates, in a diagrammatic form, the interdisciplinary and interconnected relationship of the theory and practice embedded in the FISM as explained here. In this same diagram, the overall orientation of the FISM is identified through the objectives of the different participatory parties of a society at large.

Socio Economic Balance

Local Government Economic & Financial Perfo rman ce

Water

Nurturing & Developing Harmony

Sociology

The FISM Business Corporations

Metal Economics

Earth

Wood Philosophy

History

Fire y Psychology

Socially Conscious Enterprises (SCEs)

Financial Education

Financial Orientation & Practice

Equilibrium between Economics & Society

Figure 13.1 The interconnection of theory and practice within the Finance-in-Society Model

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13.3.1 The Theory of the Finance-in-Society model The formation of the theory of the FISM is rooted in both a critical understanding and a Chinese interpretation of banking and finance. Given the dominance of western financial knowledge, critical theory has been applied to examine banking and finance more deeply from its historical development to its present state in the hope of increasing awareness of its future challenges in relation to society and humanity. Critical theory, in fact, promulgates that the process of obtaining knowledge cannot be separated from historical being. While the interdisciplinary and intersubjective orientation of critical theory provides a more intuitive understanding of the interdependence and interrelationship between finance and society, its immanent criticism and emphasis on raising critical consciousness help to challenge the generally accepted volatility and extremity of financial practice which, in turns, disturbs social stability and disrupts human sustainability considerably. In addition, feminism is applied alongside critical theory in this process of deriving understanding, since it helps to highlight alternative characteristics of finance in contrast to the masculine–yang orientation which has long dominated the practice of the industry. Critical theory and feminism are applied to form the western methodological theory base of the FISM. In the case of Catalyst Foundation, the theory of the FISM in the Chinese context is adopted to establish a critical understanding of the situation in which the disadvantaged women workers of North-east China find themselves with the prime cause being the socio-economic changes taking place in the country. The holistic and all-embracing Chinese philosophy fits comfortably into a society fostering social balance and harmony. Taking into consideration that this philosophy incorporates both cosmological and socially oriented dimensions, and, in the light of the volatility and socio-economic disequilibrium caused by the recurrent financial crises and crashes, the qualitatively oriented Chinese philosophy stands a good chance of offering an indigenous and powerful underlying wisdom upon which to structure and practise banking and finance. While Yin–Yang focuses on maintaining the balance of all creatures, the theory of Five Elements emphasizes the importance of attaining harmony in all interrelated and interdependent relationships. When all things are nurtured by Dao, the highest feminine principle, balance and harmony, as well as sustainability, are attained.

Critical Theory The Western Methodological Understanding of Banking and Finance as Knowledge Base of the FISM Feminism

Figure 13.2 The western methodological theory base of the Finance-in-Society Model

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When the cosmological spirit of Yin–Yang, the Five Elements and Dao are in place, a society founded on the moral ideas of the Mean (Zhong Yong) and Knowledge (Zhi) is likely. It is important to recognize that both male and female principles are firmly rooted in Chinese philosophy. A balance between male and female energy is required to be maintained at all times and then, in spite of the dynamism and mobility of the elements of nature, harmony is always protected. This particular aspect of the indigenous Chinese philosophy, therefore, forms an essential part of the cognitive knowledge of banking and finance from local Chinese perspectives, especially in view of the industry’s role in providing the stability and sustainability of all the other socio-economic subsystems. In respect of China, when the past century of broken historical memories of the Chinese people are taken into account, a revival of Chinese cultural tradition becomes the fundamental element if renewal and transformation are going to take place. The application of an interdisciplinary FISM with both traditional Chinese philosophy and western financial rationale becomes a core developmental feature, particularly when the male-dominated western style of finance with mathematical analysis at its core has become more and more questionable in the current sub-prime mortgage crisis. While the western methodological understanding forms its critical knowledge base of the relationship between humanity and finance, the interdependent Chinese philosophy drives its cognitive development. Five Elements

Dao

The Chinese Philosophical Cognitive Knowledge Base of the FISM

YinYang

Zhong Yong

Zhi

Figure 13.3 The Chinese philosophical theory base of the Finance-in-Society Model

Critical Theory

Western Methodological Understanding

The Theory of Finance in Society Model

Five Elements

Dao Yin Yang

Chinese Spiritual Cognitive Knowledge

Feminism

Figure 13.4 The theory of the Finance-in-Society Model

Zhong Yong

Zhi

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13.3.2 The practice of the Finance-in-Society model The entire world has been affected by the energy crunch crisis and soaring food prices caused by the growth of biofuel production. The financial catastrophe caused by the sub-prime mortgage market crash has further exacerbated this problem. The Chinese Government gave priority to fighting rising inflation in the first half of 2008 over the possible financial crash and economic recession triggered by the sub-prime mortgage market. Given the country’s disconnection from her cosmological feminine orientation, it appeared totally justifiable for the Chinese Government to apply the Chinese way of monetary policy with rigid macro-control of the economy (宏观调控) to curb inflation. The macro-control of an economy includes, but is not limited to, strict control of the supply of money, availability of money, capital inflow, cost of money and restriction of investments, and so on. Although the sub-prime mortgage turmoil had already caused global economic recession, the Chinese Government seemed to have no alternative but to implement macro-control of the economy in the hope of keeping inflation low. Despite the fact that the masculine approach of macro-control of the economy can, by and large, speedily cool down inflation, rigid and hard control certainly dampens investment confidence and economic growth. Taking into consideration the massive labour supply of the country, such a rigid control is going to suppress employment growth and social stability and is, therefore, a tremendous threat. The Chinese Government had, in this case, sacrificed longer-term interests in the hope of striking a shorter-term balance. In the light of this phenomenon, a more feminine method should be considered to transform hot money or direct investment into a constructive capital inflow which would bring better social and economic equilibrium and sustainability. Since the FISM is built on an interdisciplinary and holistic basis, and giving consideration to the Chinese-contextualized nature of the FISM, the practice of the model, therefore, involves the interconnected support and participation of the local Chinese Government, business corporations (business investors) and socially conscious enterprises (SCEs), with the evolution of educational and financial practices that aim for the achievement of a better socio-economic equilibrium for a particular community. Therefore, the interconnected and intersubjective characteristics of the Five Elements need to be embedded in the application of the FISM from both the structural and organizational perspectives. Under Chinese company registration regulations, every business corporation must register in a local district of a city. Therefore, a local community in this sense can also be interpreted as a district of a city. The guidelines of practising the FISM are listed in the following section.

Business corporations (business investors) The structure of FISM needs to take into account that many business investment corporations are situated in the West. In Managing in Four Worlds, Lessem and Palsule state that ‘The two catchwords for traditional western business organizations have always been, “size“ and “profit”’5 whereas ‘metal occupies the western quarter’6 in the Five Elements. However, all business corporations, no matter whether locally- or

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foreign-owned, have to be supported by local resources including natural, social and human resources. Business corporations, therefore, should become socially responsible rather than just pursuing continuous expansion and profit-seeking objectives. From the perspective of a government, instead of adopting a hard credit crunch policy or strict regulations to restrict business expansion, it makes better sense to establish more friendly and embraceable policies to encourage capital to be allocated in a way which gives benefits both economically and socially. In the light of this objective, the following principles and policies are suggested for the compliance of every business corporation: 1. the investment of 5 per cent of its annual pre-tax profits in a locally incorporated SCE

and/or SCEs as direct investment; or 2. the investment of 5 per cent of each amount of inflow capital in a local SCE and/or

SCEs as direct investment; 3. the contribution of its business and management knowledge as well as technical

know-how to its invested SCE and/or SCEs; 4. the appointment of at least two of its senior executives to serve as board members of

its invested SCE and/or SCEs with the period of their appointment being on a threeyear rotation basis; and 5. every SCE designed and structured to become a participatory action research (PAR) project, in order to effect enlightenment and empowerment of its employees and other people in its based community. Business corporations, within the interdisciplinary FISM, act responsibly for their stakeholders rather than their shareholders alone. Every increase in their capital actually contributes to the social and economic development of its local community. Therefore, such capital expansion no longer exclusively benefits the rich or those in power. Taking into account the interpretation of the Five Elements that ‘metal rules over its destruction’,7 it is important that when business corporations adopt the FISM, they should become more socially responsible in order to bring better economic and financial harmony and equality to society at large.

The local government As described by Lessem and Palsule, ‘The Northern organizational form is one of order and stability’8 – a regime which is seen to be logical and rational. Within the Five Elements, ‘water occupies the northern quarter’9 and in the context of the FISM, water is positioned in the north where the power of government lies. Therefore, government has to understand its major role in encouraging and maintaining socio-economic development and balance rather than just acting as a purely political tool of the ruling party. Taking into account the strong control and influence of the Chinese Government over its society, and, given that the FISM is a Chinese-contextualized model, the support of local government is, therefore, going to make an irreplaceable impact on the development and successful implementation of the model. In order to facilitate a better balanced social and economic environment, the following elements of support have to be rendered by the particular local government:

200 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a 1. a 5–10 per cent investment in each approved locally incorporated SCE; 2. the allocation of lower than market interest rates on loans to qualified SCEs; 3. a tax reduction made available to business investors as an incentive for investing in 4. 5.

6.

7.

qualified SCEs; a grant of 15–20 per cent reduction in taxes on profits to those business corporations which have invested in locally incorporated SCEs; an offer of a progressive turnover tax reduction plan to business organizations which extend employment to the disabled and/or disadvantaged residents in the local community; encouragement to secure the support of a reasonable number of business corporations in investing in locally contextualized SCEs to achieve full employment of the disadvantaged people of its community; and the appointment of two local government officials to become non-executive directors of every SCE, with the appointment term of each official being on a three-year rotation basis.

While ‘water rules over cold’,10 an interdisciplinary and holistically oriented government brings warmth and hope to its people. It will no longer just act for the benefit of the ruling party or the rich, but will take the overall well-being of the economy, society and people as its main priority. It does not seek to deprive the disadvantaged and poor from opportunities; it encourages balance, harmony and equality, and will actively seek to prevent the occurrence of financial and economic disaster. A government with ties into the FISM would be adopting a more logical, sensible, supportive and reliable approach.

Education While ‘wood occupies the eastern quarter’,11 the eastern world is engaged in the insightful process of intuition and awareness. Whilst education lies at the heart of human growth and development, it is placed in the east of the FISM. According to Lessem and Palsule, ‘Harmony, in the eastern sense is not a derivative; it is not something that can be put together, from the outside. Rather, harmony precedes anything else. Harmony happens by itself, and creates order.’12 Wood, in the sense of Five Elements, ‘rules over the production of life’13 whereas education, within the FISM, nurtures and incubates the development of humanity. Taking into consideration the fundamental position of finance within the overall socio-economic system, financial education has to take responsibility for nurturing and developing harmony. The majority of textbooks on finance at present focus heavily on the scientific study of mathematical models and quantitative assessment of financial tools that have proved incapable of preventing the recurrence of financial turmoil. It is sensible therefore to consider adopting a qualitative and interdisciplinary approach when establishing financial theories and implementing financial practices. The following criteria need to be applied by the Chinese education institutions:

T h e F i n a n c e - i n - S o c i e t y M o d e l 201 1. the theories of finance as well as the curriculum of financial, finance-related and

2. 3. 4. 5. 6.

7.

economic courses have to be interdisciplinary and qualitatively designed by a panel of philosophers, economists, sociologists, historians and psychologists. Moreover, appropriate methodologies and methods have to be adopted as well; each and every student of finance, economics or business has to engage his or her study or research in a locally contextualized SCE as part of their graduation requirements; new financial and business skills and knowledge should be created to achieve better financial and economic balance rather than the pure pursuit of profitability at large; the study of and research on the risk management of investing in SCEs are to be developed; students are to be encouraged to form SCEs; it should be ensured that all graduates from the financial, economic or business disciplines will endorse a written commitment to help in establishing and developing an identified SCE; and to ensure that those students who have obtained government loans or scholarships must work in a SCE for at least two years after graduation.

Socially conscious enterprises (SCEs) In the paradigm of the FISM, SCEs are situated in the south. This is the world of indigenous values and has a deep sense of vision. Its emphasis on rooted culture and shared destiny becomes the underlying force of people empowerment. People empowerment is a prudent and essential element of practising the FISM since self-recognition and self-appreciation are crucial success factors of the model. With reference to the Five Elements, fire is situated in the southern quarter and rules over heat. Moreover, in the interpretation of Five Elements, fire can restrain metal whereas profit maximization will no longer be the prime consideration for an enlightened individual or business corporation. In view of the interconnected structure of the FISM, SCEs will help in the generation of a better equilibrium between business and society. An integral feature in the establishment and development of SCEs is the hope of reducing the risk of financial turmoil and its accompanying social and economic devastation. Having said this, defining the nature of a SCE is the prime criterion if the FISM is to be efficiently and effectively implemented. The following principles and conditions, therefore, have to be fulfilled to become qualified as a SCE within the FISM: 1. it must be locally incorporated by either a local resident or someone who obtains a

very good understanding and knowledge of that particular community; 2. it must have a locally contextualized business proposal, within which its fundamental

principles are to attain better socio-economic and socio-environmental equilibrium through its business operation. The proposal must be submitted for the approval of the panel which comprises of local government officials, the appointed executives of the business investor(s) and local academics; 3. it must be governed by a board which is structured according to the interdisciplinary orientation of the FISM. Therefore, the SCE board must consist of a number of directorships taken up equally by local government officials, management of the business investor(s), locally recognized social entrepreneurs, academics from the department or school of social sciences of a local university and the SCE staff representatives;

202 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a 4. before its listing, the shares of a SCE must be structured to be held by the business

investor(s), its founder and staff, and the local government; 5. in addition to the list of shareholders mentioned in point 4 above, the shares of the

SCE will also be held by the local community and the public when it is listed; 6. the term of directorship is on a three-year basis and the appointment of directors is in rotation; 7. at least 20 per cent of its employees or labour force must come from the disadvantaged or less-privileged groups within the community where it is incorporated. The disadvantaged are those who are either unemployed or have been living at a minimal subsistence level though they can only serve one SCE during any single period of time; 8. while the SCE founder may own 15 per cent of its shares, the SCE should have no other single shareholder or beneficiary that can own more than 10 per cent of its shares; 9. the founder of the SCE has to pay up the 15 per cent share capital when it is established; 10. if the founder cannot provide the 15 per cent initial capital investment, the local government and business investor(s) have an obligation to grant him or her a personal loan. Such a loan is subject to the market interest rate at the time of its formation and the founder has to personally guarantee repayment with appropriate collateral; 11. the founder has to commit to a service term of at least five years and the loan must be fully repaid before any sale of his or her shares in the SCE; 12. the average remuneration of top executives should not exceed 20 times of the rank and file; 13. at least 20 per cent of its annual after-tax profits must be retained within the SCE as its future capital and at least 15 per cent of such has to be available for investment in other SCEs though investment returns in other SCEs will be exempted from profit tax; 14. at least 10 per cent of its pre-tax profits must be allocated to the local social provident fund and such a fund should be managed by an elected panel of SCEs, local business investors and academics in rotation; 15. the appointment and evaluation of the performance of directors and key executives are based on their individual professionalism and commitment to corporate governance as well as business integrity; 16. an interdisciplinary and interdependent orientation must be governed in every SCE; and 17. the methodology of PAR has to be implemented in each SCE in order to effect enlightenment and empowerment of its employees and other people in its based community.

Financial orientation and practice Given the critical part played by finance within the overall socio-economic system, financial orientation and practice should be placed right at the centre of global management. In A History of Chinese Philosophy, it states that ‘Although metal, wood, water, and fire each have their own particular duties, they could not stand were it not for earth.’14 Therefore, earth is situated in the centre and since earth embraces all, it is the ruler of the Five Elements. As a result, the orientation of the FISM must be applied in the regulation of financial practice with its core objective of promulgating social and economic harmony and balance. The following principles have to be applied:

T h e F i n a n c e - i n - S o c i e t y M o d e l 203 1. 20 per cent of every investment fund inflow has to be invested in the shares of a

2.

3. 4.

5.

6.

SCE or SCEs for a minimum period of one year. Such investments will be subject of a reduced levy of 15 per cent over that of investments in ordinary shares; all other forms of capital inflow which have not complied with the regulations of 5 per cent direct investment or 20 per cent share investment in a SCE must be subject to a 30 per cent taxation before its remittance out of the country; a listing index of SCEs is to be established and introduced; the listing requirements, price–earnings ratio and evaluation of SCEs are based on their business performance as well as their results in achieving better socio-economic and socio-environmental equilibrium; all business corporations have to invest at least 5 per cent of their annual pre-tax profits in listed SCEs in order to keep their own listing status of the Chinese stock exchange; and at least 25 per cent of investments made by the respective local provident, retirement, government, insurance and social welfare funds have to invest in the shares of SCEs. Such investments will be subject to a 20 per cent reduction in levy over that of investments in ordinary shares.

From the above systematic illustration of the operative guidelines of the FISM, it is obvious that its effectiveness, to a very large extent, depends on the success of the interdependent and intersubjective cooperation among the parties involved. Furthermore, it is important to realize and recognize that although the theory of the FISM is built on a holistic and interdisciplinary foundation, if its practice is to be successful, it is required to be rationally and logically implemented and governed.

13.4 Measurement and Evaluation In order to feasibly evaluate the effectiveness of the FISM, a Socio-Financial Index has to be established and applied to measure the performance of the respective SCEs working through the model. The Socio-Financial Index is an interrelated set of indicators adopted to measure the overall well-being domains of the respective Chinese communities and the country.

13.4.1 Living Standards Instead of living at a minimal subsistence level, the disadvantaged will be lifted out of poverty and able to afford spending over the current international standard of US$2.00 per day. They will be engaged in secure and meaningful employment which brings self-esteem and allows them to be more resilient to financial or economic turmoil. The objective is to attain a more balanced quality of life. The doctrine of the Mean embodies the idea of equilibrium, which represents the highest state of human development.

13.4.2 People Empowerment Through the different PAR projects of the SCEs, the original disadvantaged will no longer be oppressed. Their potential and talent will be realized and actualized. The economic

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contribution of the SCEs to the country’s gross domestic product (GDP) will be a key indicator of the effectiveness of this domain of well-being. In Chinese culture, Dao is the source of empowerment and is situated in the highest sphere of living in the transcendent sphere. The transcendent sphere is, in fact, the sphere of philosophy. It can only be achieved through philosophy. In other words, to live in the transcendent sphere requires one to be familiar with the principles of Dao. Therefore, the economic contribution of the SCEs also indicates the standard of human morality, conduct and integrity.

13.4.3 Social Stability and Sustainability The disparity between rich and poor will be narrowing. Hatred caused by social inequality will be reduced and better harmony will be attained. The Gini coefficient should be applied as the key evaluation of disparity since China is estimated to have well passed the critical line of 0.50. An employment versus happiness measure is also required for the promotion of harmony.

13.4.4 Healthy Life Self-appreciation and improved financials lead to better health and balanced family life. A longer life expectancy and lower household medical expenses should be applied as the core indicators of this domain. Nevertheless, what is important is to modulate ‘daily life in harmony with the way of recuperating the essence and vital energy, thus they could master and practise the way of preserving a good health’.15

13.4.5 Ecosystem Growing environmental concerns and regulations will lead to an improved environment with less natural disasters. However, taking into consideration the indices already in place to assess the various aspects of environmental conservation, the major measure here is, however, to promote a healthy environment with other correlates of humanism. This reflects the interdisciplinary nature of humanism and, according to the Five Elements, any distortion of this indicator means harmony is under challenge: ‘In contrast to Hinduism or Buddhism, the Chinese believe that nature is real and beautiful. Heaven, humanity, history, and nature are all interrelated.’16

13.4.6 Financial Education Investment rather than speculation is encouraged. A qualitative rather than a pure quantitative approach to study finance leads to a more holistic and better balanced financial orientation. The assessment of academic and professional qualifications should be evaluated according to the individual’s knowledge and success in achieving financial stability and sustainability.

13.4.7 Financial System A financial system must promote financial stability and sustainability while at the same time discouraging any possibility of financial turmoil or crisis. Instead of allowing an

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overtly liberal environment for financial speculation and manipulation, an emphasis should be placed on assuring socio-economic security and stability. While financial institutions will be penalized and discouraged from inducing short-term exponent growth, they are encouraged and rewarded by obtaining long-term stable growth. Business executives should also be penalized or rewarded according to this same logic.

13.4.8 Community Vitality and Sustainability The inclusion of all members of the community encourages trust and a better sense of belonging. Safe communities and improved social responsibilities will lead to a harmonious society. An index is to be devised to measure the participation and involvement of the population in building, maintaining and developing social harmony and security of each particular community.

13.5 The Finance-in-Society Model in the Chinese Context While the FISM is operated through a series of quantitatively measured principles, the traditional Chinese philosophy is firmly rooted in its qualitative aspect. The spirit of balance and harmony of Yin–Yang, the interdependence and interconnected characteristics of the Five Elements, the all-embracing orientation of Dao, the idea of equilibrium of the Mean and the financial knowledge acquired through the concept of Zhi are embedded in the qualitative guidelines of the Socio-Financial Index. The FISM is, therefore, implemented through a practical financial and business application, which is set in a particular Chinese historical context integrating with its particular socio-economic and socio-political environment. It is then built on the critical understanding of banking and finance derived from the methodological research incorporating the Chinese philosophy as the cognitive knowledge base. Catalyst Foundation, the PAR project of this book, is a micro-scale and live example of putting the Chinese-contextualized FISM into practice. Catalyst Foundation, rooted in the historical and social context of the north-east region of China, although a nonprofit entity, is, nevertheless, built on a feasible financial model supported by a business process. On the one hand, it helps to improve the financial income of the oppressed Chinese women through work opportunities which allow them to realize and actualize their talent, while, on the other, it raises the critical consciousness of these disadvantaged women enabling them to become emancipated through subject–subject relations which helps to foster positive social change. The following diagrams are designed to illustrate the different characteristics and orientation between conventional finance and the FISM. Figures 13.5 and 13.6 are designed to illustrate the different characteristics and orientation between conventional finance and the FISM.

13.6 The Future Development of the Finance-in-Society Model In the light of the above section explaining the theory and practice of the Chinesecontextualized FISM, the following will focus on what future research is required for the development of the model.

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The Characteristics of Conventional Banking and Finance

Masculine Exclusive & Selective Pragmatic & Competitive Unstable & Unsustainable Segregated & Separate Disconnected Quantitative Taking, Accumulating & Concentrating Distrustful & Insecure

The Characteristics of FISM

Balance of Masculinity & Femininity Inclusive & All -Embracing Cooperative Stable & Sustainable Interdisciplinary & Interdependent Interconnected & Holistic Qualitative Giving, Caring & Sharing Mutual Trust & Secure

Figure 13.5 Characteristics of conventional banking and finance versus the Finance-in-Society Model

Orientation and Practice of Conventional Banking and Finance

Orientation and Practice of the FISM

Benefit to the Rich & Powerful Market Performance & Market Share Profit & Financial Growth Profit Maximization

Profit & Financial Benefits & Equilibrium through Balanced SocioFinance & SocioEconomic Performance Profit Optimization

Figure 13.6 Orientation and practice of conventional finance versus the Finance-in-Society Model

13.6.1 A holistic foundation of knowledge The FISM is built on an interdisciplinary understanding and explanation of banking and finance derived from critical theory, incorporating the cognition of Chinese philosophy. It successfully demonstrates the importance of building a bridge between

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western methodology and Chinese philosophical principles in order to provide a more holistic knowledge of finance. The interdisciplinary approach of critical theory is most appropriate in the research context of the interrelated and interdependent characteristics of the Chinese philosophy of the Five Elements. While both critical theory and the philosophy of the Five Elements aim at the achievement of a broader-based harmony, the Yin–Yang theory elaborates and supports the research’s orientation of balance further. However, in view of the fact that the theory of the FISM is still in its infancy, further research is required to develop a better and deeper understanding of the effects of integrating critical theory with the Five Elements to underpin the holistic knowledge base of the FISM.

13.6.2 An integration of Chinese philosophy and western rationale The next aspect which requires further research is the application of the indigenous Chinese philosophy as the qualitative financial knowledge base while the western financial rationale is adopted as a quantitative tool. As already discussed earlier in Chapter 8, Zhong Ti Xi Yong (中体西用), advocated by Zhang Zhidong in the late Qing Dynasty, has remained largely undeveloped. For the past 100 years, Chinese political leaders have vacillated between the adoption and the rejection of learning from the West. As a result, the task of incorporating western rationale into Chinese philosophy has remained unachieved. Nevertheless, the FISM has been built on the premise of making such a connection, melding western methodological understanding with Chinese philosophy to form a knowledge base which can work harmoniously alongside the western financial rationale. The FISM is aiming to achieve a breakthrough for the theory of Zhong Ti Xi Yong. Catalyst Foundation, the PAR project of this book, has provided the foundation for such an integration and incorporation. However, more practical models are required to apply and develop the theory further. In view of the fact that the FISM is rooted in history, future models for its customs and practice are needed to be rooted in the historical context with the Chinese philosophy remaining at the heart of the knowledge base while maintaining the application of western financial rationale as an operational instrument.

13.6.3 People empowerment What I have experienced from the PAR project of Catalyst Foundation is that people empowerment is a challenge to the FISM. Since the practice of the FISM aims to equip the oppressed with critical consciousness so that they can be liberated, the empowerment of people, is, therefore, a critical success factor in the implementation of the model. However, since the different groups of disadvantaged people are likely to be rooted in different historical environments, they also exist in a different social, psychological and behavioural context. As a result, a revival and reconnection to their cultural roots becomes the foundation of knowledge creation. Moreover, further research is required to study the way in which poverty impacts on different communities so that different practical models can be developed to enable the empowerment of the oppressed through the application of the FISM.

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13.7 Conclusion The FISM is a general theory which is relevant to all Chinese societies, while in practice its application may vary according to different contextual elements of history, economy, society, philosophy and psychology. Therefore, the FISM can be recommended for adoption by respective Chinese local governments because it has further development potential to become a real and powerful alternative to the present predominance of quantitative and mathematical-driven masculine–yang thinking and practice in the world of finance. The FISM holds out the possibility of achieving better financial stability and sustainability for humankind. It is also important to understand that, as with critical theory, the FISM is not a one-size-fits-all dogma and it is certainly not a closed book. Its flexible and openended characteristics allow it to be further refined, adapted and developed, taking into account the multi-various interdisciplinary and interrelated structures of humankind. As far as Catalyst Foundation is concerned, with it being a PAR project of the FISM, it aims to continue to develop throughout China and probably worldwide at a later stage. While its philosophical and theoretical development of the FISM will benefit from further academic research, such as the inclusion of the Catalyst Foundation case in the learning material of the Copenhagen Business School, the practice of the FISM is appropriate for adoption collectively by business corporations, governments, local communities, and financial institutions, as well as any consciously-thinking individuals and organizations. As a result of PAR, the four levels of communication are required to systematize and create knowledge. Since China is embedded in a diversified cultural environment, the collective research process of PAR will draw heavily on a dialectical approach in exchanging critical dialogues with the oppressed of different local communities. Therefore, with the help of the student directors from China Europe International Business School, Catalyst Foundation will continue to focus on recruiting local catalysts from the respective local communities to participate in the collective research. The communities selected for the research, based on objective knowledge, will be recommended by the women workers and friends as well as the board of directors of Catalyst Foundation. Subject to the information gathered from the collective research undertaken, Catalyst Foundation plans to work with the disadvantaged women of different local Chinese communities in the next few years with the aim of recovering and restoring their history and respective life stories from a critical perspective in the hope of increasing their consciousness. In respect of the growing unemployment of the country caused by the slowing-down of economic growth, this particular process is becoming very important for the future. As mentioned in Chapter 12, Catalyst Foundation is organized and operated based on the traditional Chinese values of integrity, diligence, trustworthiness and loyalty rather than law and order. Therefore, successfully raising critical consciousness and the effecting of self-emancipation of disadvantaged women are fundamental components in respect of realizing and reviving the cultural tradition. The attainment of cultural values, nonetheless, is an essential ingredient in maintaining social stability, particularly during the critical moments of economic downturn. Moreover, the core values of the different groups of women workers will be identified and recorded as part of the process of action research. Taking into account their recognized and identified values, the current women members of Catalyst Foundation will then work collectively to identify possible projects which will help to enhance the income of other disadvantaged women workers.

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While the board of directors and I will continue to assist in the review of the identified projects as part of the practice of the FISM, the current women members will also help in creating different projects in which both new and existing members will participate. Based on learning from previous experiences in Changchun and Dalian, it takes about two years from the initial stage of collective research to the real-life practice of the FISM. Since the mission of Catalyst Foundation is to reduce urban poverty and liberate the oppressed suffering from the massive privatization plan of the Chinese Government, and also because the privatization of State-owned enterprises affects almost every corner of the country, the focus of the next five years of Catalyst Foundation will be on spreading the theory and practice of the FISM throughout China. In view of the global recession resulting from the sub-prime mortgage-caused financial devastation, China, with the help of its Government’s RMB 4 trillion spending programme, came out of the recession sooner than its counterparts.. However, the country is still very much an export-driven and reliant economy, which can reasonably expect to face growing unemployment. This is going to be an across-the-board phenomenon of unemployment which includes young college graduates and laid-off migrant workers as well as the disadvantaged groups. In ‘Credibility trap: Japan today and China tomorrow’, Chinese unemployment was estimated at 30–35 per cent.17 The present recession is undoubtedly posing a further threat to the already critical unemployment situation of the country as it is likely to affect an even wider stratum of the Chinese society. According to a survey conducted in 2004, ‘Gini coefficient on individual’s annual income and per capita household income in China’s urban region was 0.529 and 0.561, respectively.’18 While the widening wealth disparity is critical to the country’s sustainability, the shortage of natural resources, environmental damage, corruption and poor corporate governance are bringing about further challenges. As a result, growing social and economic threats are reasonably expected. The FISM, therefore, postulates a feasible solution for obtaining better socio-financial and socio-economic equilibrium. I am, therefore, prepared to start lobbying the FISM to the respective Chinese local governments and businesses. In the case of Shanghai United Assets and Equity Exchange (SUAEE), the largest assets exchange in China, which is considering setting up an over-the-counter platform, the FISM is certainly going to provide a more balanced and harmonious alternative approach to investment. Furthermore, in the light of China preparing to allow foreign companies to list on the Shanghai Stock Exchange in about two years’ time, the FISM will be able to help to reduce financial risks resulting from short-term speculation and the influx of hot money as well. Coming to the conclusion of this book, I would like to reiterate the importance of stability of the banking and financial systems, or, to be more precise, the stability that the industry should bring to societies. It has been two-and-a-half decades since I first started my career in finance. Throughout this period, however, our societies have, unfortunately, been repeatedly attacked by financial crises and crashes of which the recent sub-prime mortgageled financial and economic crisis is the worst so far. Indeed, it is even being seen by many people as the most serious turmoil since the Great Depression. It is encouraging to see respective world governments taking a positive approach in working together to prevent further financial and economic trouble resulting from the sub-prime issue. Disappointingly, though, except for the tightening of governmental control, not a single alternative financial system which helps to liberate humankind from further exposure to the risks of financial devastation has yet been seen. The lack of creativity or dynamism of governments with regard to the prevention of financial devastation is particularly worrying.

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Looking at the various financial crises which have occurred over the last 30 years, from the debt crisis of Latin American countries in the 1980s to today’s failed sub-prime lending, governments have proven to be capable of only taking a remedial rather than preventive role. The passivity of governments has certainly provided the opportunity for the dramatic upheaval in investment banking. From my perspective within the industry, being a member of the industry was quite a respectable job in the early 1980s. The success of early investment banking largely depended on the professional service that was offered to clients, providing authentic financial and business analyses, and balancing the preservation of a firm’s goodwill with the protection of the public interest. However, with the participation of many financial institutions in obtaining huge profits from financial trading and speculation, in addition to engagement in their own sales, merger and acquisition operations, investment banking has since changed from a long-term oriented high-class business into a short-term focused financial casino. In The Accidental Investment Banker, Knee states that: The introduction of sales and trading at Morgan Stanley coincided with the firm’s launch of one of the first mergers and acquisitions departments among the major investment banking houses. Prior to that, these firms had often treated advice on mergers and acquisitions as something given away free to longstanding clients of the firm. Within a decade or two, ‘M&A’ would establish itself as the profit engine of traditional finance, with high-profile bankers whose names were often better known than that of either the clients or financial institutions they in theory served.19

Apart from the change of role from agent to principal, further pressure was put on the old ways of doing things when the US Government decided to allow the big commercial banks to engage aggressively in the investment banking business. As Knee points out, ‘Its ultimate repeal in 1999 paved the way not only for radically intensified competition but a wave of mergers that created enormous financial supermarkets with an entirely different ethos.’20 When I first joined the industry in the early 1980s, investment banking was seen as a lifelong career which focused on the longer term. It has since grown into a shortterm profit-orientated business. While investment bankers know only too well that any downturn of the financial markets may be their last day in the industry, to maximize their worth during such a potentially short career time-span, they must generate the highest revenue possible for the bank. I was very much trapped in a similar position with the increasing insecurity, distrust and work pressure leading to my decision to leave investment banking in 1992, though I remained in the same industry for the following decade. It was not until after the 9/11 catastrophe that I eventually came to be conscious of my position and decided to look for deeper values in my life. Empowered by my own transformation, I have been able to take a critical look into today’s banking and financial industry, in particular at how financial deregulation, free flow of capital, financial crashes and the trading activities of investment banking have affected the stability of finance. All of these have undoubtedly posed critical challenges to the industry, and more importantly, to humanity. Through my role as an incubator working with the disadvantaged women workers of Catalyst Foundation, I have come to realize the importance of living as a member of a society and, to a larger extent, the universe. To be able to do so requires strong self-consciousness.

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Besides, finance must be rooted in philosophy and cultural tradition, otherwise, greed and selfishness can easily become dominant. Taking into consideration my Chinese roots, where the foundation of my transformation is set, I have been working on developing the FISM, embedded in the Chinese context, over the past six years. Hopefully, the model will be effective in promoting better financial and economic stability in China given its particular circumstances. Although this Chinese-based FISM may not necessarily fit all cultures, it will serve as a good learning base for the development of further financial models which aim at the delivery of better balance and harmony. My personal transformation, therefore, will evolve as the FISM develops. Finally, at a global economic level, both developed and developing countries are now in the depths of a recession. At a time when thousands of employees serving in the private sector are losing their jobs and homes, most alarmingly and disappointedly, the US and Japan have announced government job cuts. Although many corporations have claimed they are more socially responsible during the last few years, reducing headcount is still at the top of their agenda when cutting costs is perceived to be necessary. However, when it comes to governments cutting jobs, the whole economy becomes more unstable. The job cuts in the US and Japan, the first and third largest economies of the world, incur further doubt and uncertainty over the stability and sustainability of capitalist economic systems. The 8.7 per cent GDP growth of China in 2009, announced on 21 January 2010, is believed to have overtaken Japan’s, making China the world’s second largest economy. However, the core concern should not be focused on whether the Chinese economy has overtaken the Japanese. The critical challenge remains how China is going to sustain her economic growth and avoid what Japan has been suffering since the 1990s. Taking a deeper look into the 8.7 per cent GDP growth, it is suspected that 88 per cent of the 2009 GDP growth was generated by the RMB 4 trillion stimulus package, whereas the total amount of loans extended reached RMB 9.6 trillion. Furthermore, taking into consideration that a good deal of this stimulus package has gone into infrastructure projects, stock markets and real estates, the financial benefits received by the individual Chinese citizen remain insignificant. It does, though, help to explain why the Shanghai Stock Exchange, after the New York Stock Exchange and NASDAQ, had the world’s third largest shares trading turnover in 2009. The estimated urban registered unemployment rate for China for the year of 2009 was 4.3 per cent, in comparison with 4.2 per cent for 2008. Given that the actual unemployment rate is a combination of rates for both the registered and unregistered workforce, the complicated and underlying unemployment situation of the country is worrying and still poses an unknown risk to stability. The widening income inequality between the urban and rural population also raises concerns and if the situation is not reversed as soon as possible, it is likely to lead to increasing socio-economic imbalance and distrust. Although the Chinese Government has been taking measures to tackle and reduce such inequality, it needs to break through from its present economic structure in order to create sufficient market forces to narrow the income inequality gap. The growing distrust within Japanese society, dissatisfaction with the government, the widening wealth gap, reduction in income and consumption, disillusion and hopelessness caused by the abolition of the lifelong employment policy in Japan should be viewed as a valuable lesson for the Chinese.

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Neither the capitalist free market systems nor the socialist centrally planned ones have proved capable of preventing financial catastrophe. There is an increasingly more convincing argument that a system or model which enables and promotes an interdisciplinary and interdependent cooperation among the different stakeholders of a society might stand a better chance of facilitating financial and economic equilibrium. There is now increasing doubt regarding financial ‘liberation’. The rescue of financial institutions has resulted in governments attempting to assert more control. It is encouraging to see that President Obama has decided to tackle the greedy and aggressive growth of US financial institutions. More importantly, his decision on curbing the scope of their activities provides a glimmer of hope that there is the prospect of correcting the actions of hitherto highly distorted financial institutions and markets. As an alternative, the FISM, although Chinese-contextualized, serves as a cognitive knowledge base for the development of financial systems that are, on the one hand, governed by the respective stakeholders of a society, and, on the other, allow and encourage financial freedom. They would also be focused on longer-term sustainable growth, rather than short-term speculation.

Endnotes 1

Quenum, B.M. 2004. Trading and Investing in Africa. Africabiz Online Synopsis RSS Feed [Online], 62(1). Available at: http://business.net/afraicabiz/arcvol1/Email62.php [accessed: 12 September 2006].

2 3

Mallaby, S. 2005. The World’s Banker. London, UK: Yale University Press. Quenum, B.M. 2004. Trading and Investing in Africa. Africabiz Online Synopsis RSS Feed [Online], 62(1). Available at: http://business.net/afraicabiz/arcvol1/Email62.php [accessed: 12 September 2006].

4

Habermas, J. 2004. Theory and Practice, translated by J. Viertel. Cambridge, UK: Polity Press.

5

Lessem, R. and Palsule, S. 1997. Managing in Four Worlds. Oxford, UK: Blackwell.

6

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

7

Fung, Y.L. 1991. Selected Philosophical Writings of Fung Yu-Lan. Beijing, China: Foreign Languages Press.

8 9

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Index Asian crisis 66–7 balanced harmony 136 Bangladesh 151–2 bank drafts 122 Bank of America 141 Bank of China 114 banking and finance Chinese philosophy 87–96 critical theory 83–4 cultural topography 31–5 history of 57–9 holism 34 humanism 34–5 international 59 pragmatism 31–3 rationalism 33 Baring Brothers bank 9 bears 62–3 Beijing, China 8 Black Monday 65–6 boom and bust 30, 57, 62, 63 Boxer Uprising 106 Bretton Woods system 65–6, 69 bribery 20, 120 bullion 43 bulls 62 business cycles 30, 47 capital 40, 50 free flow of 43, 69, 71 mobility of 58 capitalism 36, 40–41, 44–7, 76–7 Catalyst Foundation 25, 178–87, 208–9 case study 165–89 methodology 168–70 catalyzation 30–31 CCBC see China Construction Bank Corporation

CDOs (collateralized debt obligations) 68 central planning 49 Changchun, China 172–84 Chen Duxiu 109–10 Chiang Kai-shek 108–9 China bank restructuring 20, 33, 135–6 banking and finance 19–21, 30–35, 126–7 banks 114 bribery 20, 120 capital adequacy of banks 114 capitalism 136 communism 105 Communist Party 109–12 corruption 113–14, 120, 123 cultural values 79–80 economic development 15 economic growth 211 feminism 166–8 finance houses 30, 87 Finance-in-Society Model 205 financial crises 125–7 financial deregulation 141 financial industry 118–21 financial stimulus package 15 four-world phenomenon 77 gold crisis 125 isolation 101 local bankers 121–4 microfinance 142–4 modern history 99–114 non-performing loans 126–7 North-east 170–72 poverty 181–2, 184–6 privatization 33 socio-economic environment 124 socio-economic instability 25 socio-economic sustainability 16

216 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a socio-political environment 124 state capitalism 77 stock exchanges 125, 127 traditional financial culture 20 tribute system 101–2 unemployment 15–16, 165–6, 167, 174, 209, 211 wealth disparity 112–13 World Trade Organization 19–20, 114 China Construction Bank Corporation 25, 114 case study 131–44 critical theory 132 feminism 133 methodology 132–3 competition 140 critical consciousness 137–40 financial instruments 142 historical development 133–5 management training 137–44 microfinance 142–4 profits 142–4 senior executives 137–8 transformation 135–6 Chinese identity 5, 7–8, 12–13, 103 Chinese philosophy 30, 31, 36, 70–71, 87–96, 88–9, 113, 128, 139–40, 194, 207 Christianity 7–8 Code of Hammurabi 57–8 cognitive knowledge 1 collateralized debt obligations 68 collective research 174–5 combining knowledge 157–8 commodity economy 76 communism 105 comparative advantage 43 competition 140 Confucianism 103 consciousness 69 cooperative movement 50–52 corruption 113–14, 120, 123 credit unions 51–2, 70 critical consciousness 69, 84, 137–40 critical recovery of history 175–6 critical theory 21–2, 24, 35–7, 70, 75–6, 149

banking and finance 83–4 concepts of 79–82 interdisciplinary characteristic of 77–8 political economy 76–7 critical thinking 23 crony capitalism 67 Cultural Revolution 112 cultural topography 31 culture 78 currency see money Dalian 184–6 Dalian University of Technology 137 Dao 92–3, 140 demurrage-charged currencies 58–9 Deng Xiaoping 112 dialectic 22, 81 Dialectic of Enlightenment 78–9 dialogue 81–2 discourse analysis 23 doctrine of the mean 93–4 domination 79 DUT (Dalian University of Technology) 137 economic equilibrium 44–5, 49, 70 ecosystems 204 education 200–201 empowerment 203–4, 207 enlightenment 78–9 Eros 63–4 exchange rates 45, 46, 47, 64–5, 69 externalizing knowledge 159–61 feminine-yin force 19, 36–7 feminism 22, 149–50, 166–8 Finance-in-Society Model 24, 193–212 business corporations 198–9 China 205 communities 205 ecosystem 204 education 200–201 financial education 204 financial systems 204–5 future development 205–7 health 204 living standards 203 local government 199–200

I n d e x 217 measurement and evaluation 203–5 people empowerment 203–4, 207 practice of 198–203 social stability 204 socially conscious enterprises 201–2 sustainability 204 theory of 196–7 financial capital see capital financial crises 17, 18, 24, 29–30, 39–40, 59–71, 69, 125–7, 134, 209–10 financial deregulation 84, 141 financial education 204 financial instruments 142 speculative 68–9 financial press 10 financial speculation see speculation FISM see Finance-in-Society Model five elements 90–91 flexible exchange rates 45, 46, 47, 64–5, 69 folk culture 176–8 foreign exchange speculation 44, 46, 64–5 four-world phenomenon 77 free enterprise systems 40–41 free flow of capital 43, 69, 71 free market economies 41–2, 77 free trade 18 freedom 41–4, 50 Friedman, Milton 45–6, 47 Friere, Paulo 138 gold crisis 125 government intervention 45, 47 Grameen Bank 25–6, 156–62 case study 147–62 critical theory 149 feminism 149–50 methodology 149–51 Great Depression 46 Great Leap Forward 111–12 Guangxu, Emperor of China 105, 106 guanxi 20–21, 139 Habermas, Jürgen 80 Hammurabi Code of 57–8 harmony 136 Hayek, Friedrich August von 44–5, 49

health 204 holism 34, 140 Holland 59–60 Hong Kong 2–4, 5, 102 Horkheimer, Max 21–2, 77–8 hot money 43, 45, 46, 71 humanism 34–5 Hundred-Day Reform 105–6 identity theory 79, 81 IMF (International Monetary Fund) 65 indirect competition 140 inflation 43–4 internalizing knowledge 156–7 international banking 59 International Monetary Fund 65 Internet Bubble 67–8 investment banking 210 Japan 172 Jiang Jieshi 108–9 Jilin Province, China 172–84 Jinshang 120, 121 job cuts 211 Kang Youwei 105–6 Keynes, John Maynard 46–7 Kipper- und Wipperzeit 59 knowledge 94–5 combining 157–8 derivation of 21–3 diffusion 186–7 externalizing 159–61 holistic foundation of 206–7 internalizing 156–7 production 186–7 socializing 160–62 Kuomintang government 108–9, 125 labour theory of value 43 lambs 63, 64 Latin American debt crisis 64–5 Lei Lvtai 122 Lessem, Ronnie 1 Li Dazhao 109, 110 living standards 203 Logos 63–4

218 F i n a n c e a n d S o c i e t y i n 2 1 s t C e n t u r y C h i n a Manchuria 171–2 Mao Zedong 110–12, 126 Marcuse, Herbert 82 market capitalism 44–7 market socialism 49–50 markets and freedom 41–4 Marx, Karl 48 masculine-yang force 18, 31–5 materialist identity theory 79 May Fourth Movement 106–9 mean doctrine of the 93–4 Mexico 65 mianzi 123 microfinance 142–4, 194 Mises, Ludwig von 48 monetary manipulation 44–5 monetary systems 17 money 42–3, 43–4, 58–9 money drafts 122 money supply 44, 50 monopolization 42, 44 morality 100 negative thinking 81 Netherlands 59–60 non-performing loans 126–7 North-east China 170–72 oil prices 65 one-dimensional philosophy 82 OPEC (Organization of the Petroleum Exporting Countries) 65 Opium War 100–102, 105 Organization of the Petroleum Exporting Countries 65 Owen, Robert 51 paper money 42, 43–4 participatory action research (PAR) 23, 168–9, 208 people empowerment 203–4, 207 Piaohao 121, 122 political economy 76–7 poverty 69, 181–2, 184–6, 193–4 pragmatism 31–3 privatization 33

professional investors 63 profits 142–4 Qian Long, Emperor of China 101 Qianzhuang 87, 100, 118–20, 122 Qing Dynasty 102, 106, 120, 171 quasi-capitalism 77 rational profit maximisers 63 rationalism 33 reason 78–9 Rectification of Names 122 Ri Sheng Chang 122 Ricardo, David 43–4, 61 Rochdale Society of Equitable Pioneers 51 Russia 171 SBCI (Swiss Bank Corporation International) 9 SCEs (socially conscious enterprises) 201–2 science 78 security 16 self-consciousness 31 self-emancipation 174 Shanghai United Assets and Equity Exchange 209 Shanghai, China 5, 6, 71 Shanxi merchants 120, 121–3 Smith, Adam 41–3, 61 social and economic transformation 24, 35–7 social stability 204 socialism 36, 40, 47–50 socializing knowledge 160–62 socially conscious enterprises 201–2 South Sea Bubble 60–61 speculation 18, 44, 57, 58, 59–61, 141 speculative financial instruments 68–9 state capitalism 77 statistics 49 stock exchanges 125, 127 SUAEE (Shanghai United Assets and Equity Exchange) 209 sub-prime mortgage crisis 16, 68, 70, 209 Sun Yat-sen 107 sustainability 20, 24, 204 Swiss Bank Corporation International 9

I n d e x 219 T’ung-chih Restoration 103–4 Taiping Revolution 102–3 Tao 92–3, 140 technology 78 Thailand 66 Theory and Practice (Habermas) 80 Tiananmen Massacre 9–10 Tong, Junie T. adult transition 8 adulthood 8–12 career 8–9 Chinese identity 7–8 Christianity 7–8 family roots 4–6 father 6–7 financial consultancy 10–11 life formation 6–8 mother 7 Tongzhi, Emperor of China 103 tulipmania 59–60 unemployment 47, 165–6, 167, 174, 209, 211

value theory 43 Verenigde Oostindische Compagnie 59–60 Wall Street crash 62 Wall Street Fauna 62–3 wealth disparity 18, 19, 69, 112–13 wolves 63, 64 World Trade Organization 19–20, 114 Wu Xing 90–91 xiagang 165–6, 167, 174 Xiangsheng-Xiangke 70 yang force 18, 31–5 Yin and Yang 12, 90 yin force 19, 36–7 Yunus, Muhammad 148, 149, 153–6 Zhang Zhidong 105 Zhangju 120, 122 Zhi 94–5 Zhong Ti Xi Yong 105, 128 Zhong Yong 93–4