While Shanghai and Hong Kong are often viewed as the financial centers of China, Beijing, the capital, is in reality where all financial decisions are made-decisions that affect the country's banking system and overall financial structure, which has implications on a global level. Carl Walter, a managing director of JPMorgan China, spoke at a Stanford China Program seminar on November 1 about the frequent changes in China's banking system since 1949 and the cost of these reforms within and outside of China.

China's banking system is currently controlled by the Ministry of Finance (MOF), which has competed at several points with the People's Bank of China (PBOC) for influence within the state bureacracy. During the Cultural Revolution period, MOF first moved to the fore of China's banking system, merging together the until-then separate PBOC and Bank of China (BOC) and eliminating all other banks. With China's "Open Door" economic reforms of 1978, the banks were again separated, with PBOC having oversight for three commercial banks and MOF for two, including BOC. In 1994, authority for all commercial banks, such as BOC and the Agricultural Bank of China (ABC), moved to PBOC and MOF took control of three newly established policy banks, such as China Development Bank and the Agricultural Development Bank. Premier Zhu Rongji drove these and all other banking reforms until 2003.

Major bank restructuring has taken place since 1998, the big four banks were re-capitalized, problem loans spun off into four "bad" banks and the international accounting system adopted in preparation for international share offering on both domestic and international markets. All four banks successfully raised capital internationally and domestically over the past five years. Two large sovereign wealth fund-like entities came into being-Huijin, controlled by PBOC, and China Investment Corporation (CIC), operated under MOF- that were used to hold the Chinese state ownership of these banks.  The year that it was established in 2007, CIC acquired Huijin and MOF thereby indirectly gained control of all of the banks under PBOC.

The greatly increased level of bank capital achieved through restructuring and recapitalization was eroded, however, due to the enormous growth of loans in 2009 so that China now is faced with raising virtually the same amount of capital again, stated Walter. Everyone is paying the price, including international and domestic equity investors, who are being diluted, and China's own government, which to avoid dilution, must buy new shares at high market prices. The values of these shares, moreover, may be inflated due to the techniques used earlier to remove bad loans from their balance sheets. This has left banks exposed to these now worthless portfolios. To that extent, international accounting firms and market regulators put their reputations on the line when they support capital raising by the banks internationally. In short, the politics and economics of China's bank reforms and the struggles to control the banks have been internationalized.

Walter suggested that China is trapped with a banking system that is suited to the country's political system, but not to its economy. His forthcoming book, Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise, co-authored with Fraser J.T. Howie, examines this issue and the recent history of China's financial system in depth.

With a Republican majority in the U.S. House of Representatives and anticipation building in Beijing for a change in leadership in 2012, domestic politics in both countries are playing a major role in the bilateral relationship. On the eve of his own milestone—his 80th birthday—John W. Lewis, one of the world’s foremost China scholars and the director of CISAC's Project on Peace and Cooperation in the Asian-Pacific Region, discussed the direction of the U.S.-China relationship, the importance of dialogue between the two powers, and the potentially rocky road ahead. Excerpts:

CISAC: The conventional wisdom seems to be that relations between the two countries are not very good and getting worse. Can you provide some context?

Lewis: There have been many, many times when the relationship has been worse. The fundamentals in U.S.-China relations, in my view, have over time gradually gotten better. Both sides recognize that there is a complementarity in their relations in the Pacific. There is a kind of synergy that is very important, and when things get bad, as they are now certainly—or not good—both sides try to keep the genie in the bottle. Several things are important: even though the Chinese think we made the Taiwan problem worse with the sale of $6.4 billion worth of advanced weapons, the Cross-Strait relationship is actually pretty good. That ingredient in our relationship with China is not a serious problem. The issues that we have are not abnormal in big power relationships.

What is so sad at this point is that the militaries on both sides—the Pentagon and the People's Liberation Army—they both want to have a serious engagement with each other. They want to have a security relationship with us, but we have these constant issues such as the South China Sea and the Yellow Sea. It changes every day, but now they say they want to put the USS George Washington in the Yellow Sea, or what the Koreans call the West Sea. It's stupid militarily and it's provocative from the Chinese point of view, and you can't defend it other than that the South Koreans want it. And from the Chinese point of view, they cannot imagine why during the calm periods with North Korea, for example, we don’t try to take advantage of that, why we don’t try to make progress in the Six-Party talks. So they see this constant set of problems that project into China that do affect U.S.-China relations. Add into that the political rhetoric in this country, the loss of jobs to China, for instance. It's a big political deal in the United States now. With China, there are endless things we could do. But politically Obama will not do it because he’s going to take a hit domestically. The anger against China is so strong in Washington, and perhaps in the rest of the country, whether it’s because of human rights or questions related to their currency exchange rate. But again, the fundamentals are quite different. They are actually pretty sound.

CISAC: China is gearing up for a major transition of power. How will this affect the relationship?

L: Now that Xi Jinping has been made vice chairman of the Central Military Commission it’s pretty clear that the jockeying is already moving in the direction [that he will succeed President Hu Jintao]. Can something happen? The Chinese always worry, as any politician would, about the next round. So they’re not going to make any mistakes, and they’re not going to do anything that gets themselves off track. They cannot back down [on foreign policy]. No one can back down against the United States or anyone else, particularly now with the Japanese. They’re going to come right at the Japanese.

CISAC: So the transition makes things more difficult?

L: Absolutely, and it’s true in the United States. Obama's looking at the election and he's going to do everything he can to move to the right and look like he’s really tough on all the things the Republicans can hammer him on. That’s going to shape how the Chinese pick their leadership in 2012. Their selection will come at about the same time as ours in 2012—the campaigns will be simultaneous—and it’s too bad. If we become very nationalistic, it’s going to look very hostile to them. And we’re going to be wagged by the Japanese and South Korean dog, and this great power, the United States, is going to look helpless to them. China is offering opportunities to solve problems and we are not prepared to take them, and they're saying, ‘are you not willing to talk to us?’?

Beyond his childhood ties to Hawai'i and Indonesia and his self-styled designation as "America's first Pacific President," President Barack Obama has demonstrated significant and genuine interest in Asia and in developing trans-Pacific ties. He embarked on November 5 for the second presidential visit to Asia during his term, and while there he will visit India, Indonesia, South Korea to attend the summit of the Group of 20 (G20), and finally to Japan to attend the annual heads of state meeting of the Asia-Pacific Economic Cooperation (APEC) conference. Secretary of State Hillary Clinton will travel a week ahead of Obama to attend the Association of Southeast Asian Nations (ASEAN) gathering and the East Asia Summit (EAS) in Vietnam, followed by visits to Malaysia, Papua New Guinea, New Zealand and Australia. Her trip will include an added-in stop to China's Hainan Island. To address major issues surrounding the President's trip to Asia--including the "China question" and historic U.S. bilateral alliances--four scholars from the Walter H. Shorenstein Asia-Pacific Research Center (Shorenstein APARC) gathered for a public panel discussion on October 27.

Thomas Fingar, Oksenberg/Rohlen Distinguished Fellow of the Freeman Spogli Institute for International Studies, spoke about the symbolic aspects of Obama's visit, noting the importance of a presidential visit for showing a sense of real commitment to the region and an acknowledgement of the "rise" of countries like China and India. On a more pragmatic side, he also suggested that meeting in person with other leaders is crucial in order to "bring about deliverables." The omission of a visit to China should not be weighed too heavily, Fingar said, pointing out that the President visited China last year. The stops in Japan and South Korea are tied to important multilateral meetings, though they will also reaffirm longstanding ties with those allies, while the visit to India is an indication of growing relations between the two countries. Of particular importance is Obama's participation in the G20 Summit in South Korea and the APEC meeting in Japan because, Fingar stated, a major purpose of the visit is about the "United States having a role in building new multilateral institutions." Finally, while much of the success of the Asia trip rests on how well Obama conducts himself, Fingar expressed confidence that the President would skillfully manage the visit.

During his visit to Indonesia, Obama will meet with Indonesia's President Susilo Bambang Yudhoyono for a bilateral discussion of such issues as economics, security, and higher education. Donald K. Emmerson, director of the Southeast Asia Forum, said that the postponement of earlier-planned visits to Indonesia has lessened some of the enthusiasm for Obama's "homecoming" to Jakarta. China's omission on the trip agenda is noteworthy, he suggested, and Clinton's addition of a stop in Hainan is due, in part, to help alleviate recent tension between the United States and China regarding China's claim of sovereignty over the South China Sea. Clinton's involvement in the EAS is an "important multilateral engagement" for the United States because of the presence of its ally Japan and the fact that the United States and China both have a voice there, unlike the ASEAN Plus Three meetings that do not include the United States. While in recent months the U.S.-China relationship has become more strained, Emmerson asserted that the "United States is not going to get into a cold war with China."

Obama will travel from Indonesia to South Korea for the G20 Summit, another major multilateral engagement during his travels. David Straub, associate director of the Korean Studies Program, described several significant aspects of this time in South Korea. While not technically an organization, Straub said, the Summit is an important forum for the discussion of economic stability and growth. Similar to Fingar, Straub noted the efficacy and significance of in-person meetings. The Summit provides an opportunity for world leaders to have face-to-face discussions on non-economic issues, such as North Korea's political situation. Straub suggested that President Lee Myung-bak's investment in the Summit is based, in part, on raising South Korea's global prestige, which is tied also to increasing the status of the G20 to become the premiere global financial organization. Finally, Straub stated that alongside the G20 meeting, Obama and Lee are expected discuss bilateral relations, which are at an all-time high, including the stalled U.S.-South Korea free trade agreement (Korus FTA). The FTA, which would be the most significant free trade agreement for the United States since NAFTA, has faced opposition and mixed support on both sides.

Obama's visit to India will be the third U.S. presidential visit there in the past decade, which is indicative of changing U.S. perceptions of India brought about through the IT boom and growing economic ties, suggested Daniel C. Sneider, associate director of research for Shorenstein APARC. Sneider pointed to a broader shared agenda despite a lack of clarity on some issues, such as Pakistan, and a focus on India as Asia's "other" growing economy. He stated that he would be watching for the United States and India to work together to emphasize India's role in East Asia, highlighted by India's participation in the EAS. India's Prime Minister Manmohan Singh has championed a "look east" policy and expressed stronger interest in East Asia, especially China. In terms of Obama's visit to the APEC heads of state conference in Japan, Sneider noted the importance of this trip also for the U.S.-Japan alliance. The newly formed government of Prime Minister Naoto Kan has worked to ease tensions in the alliance and both countries hope to use the visit to bolster a more positive image of the alliance. Certain points of contention, like the move of the U.S. military base on Okinawa, have been put aside for the time being. Sneider stated that recent China-Japan tensions have also served to reinforce the importance of the relationship.

Events during Obama's Asia visit in the next two weeks will help to solidify or possibly call into question his image as the "Pacific President," and undoubtedly influence the role of the United States in Asia for the future.