Power to Truth: China, Power, and What We Fail to See

Key Concepts

• China Development Bank (CDB): The world’s largest policy bank, instrumental in China’s economic development and Belt and Road Initiative, with significant influence both domestically and internationally.
• Local Government Financing Vehicles (LGFVs): Quasi-governmental institutions in China used to borrow money for infrastructure projects, often backed by land as collateral.
• Corporate Transparency: The degree to which ownership and financial information of companies is publicly accessible. The US, surprisingly, lags behind China in this area.
• Offshore Financial Centers: Jurisdictions used to conduct financial transactions with low or no taxes and minimal regulation, often used for illicit purposes. The US itself functions as a major offshore center.
• McKinsey & Company: A global management consulting firm whose influence extends across governments and corporations, often operating with significant secrecy.
• Know Your Customer (KYC) & Anti-Money Laundering (AML) Regulations: Rules designed to prevent financial crime by requiring institutions to verify the identity of their clients and report suspicious activity.
• Princelings: The children of high-ranking Chinese Communist Party officials, often holding positions of power in business and government.

The Interplay of Power: China, the US, and the Role of McKinsey

This conversation between Anat Admati and Mike Forsythe delves into the complex relationship between power – both private and governmental – and the pursuit of truth, focusing on China and the United States, with a significant discussion of the consulting firm McKinsey & Company. The discussion highlights the surprising levels of opacity in the US financial system compared to China, despite perceptions of the latter as a closed society.

China’s Financial System and the Role of CDB

Forsythe’s work on China’s Super Bank revealed the immense power and influence of the China Development Bank (CDB). Established in 1994, the CDB is wholly state-owned and serves as a crucial instrument of Chinese economic policy. It’s not merely a bank, but an “arm of the state,” providing funding for both domestic infrastructure projects and the Belt and Road Initiative. In 2013, the CDB was already larger than the World Bank.

A key aspect of the CDB’s influence was its role in developing China’s bond market and financing local governments through Local Government Financing Vehicles (LGFVs). These LGFVs accumulated significant debt, often collateralized by land, contributing to rapid economic growth but also creating substantial financial risk. While China recovered quickly from the 2008 global financial crisis, this recovery was fueled by “wasteful infrastructure projects” and a build-up of debt.

Forsythe notes that while China’s financial system is often perceived as opaque, it actually offers more transparency regarding corporate ownership than the United States, particularly when Chinese investments are made abroad. This is because Chinese regulations require disclosure of ownership information to Chinese government agencies.

The Paradox of Transparency: US vs. China

The conversation repeatedly emphasizes the ironic reality that the US, despite its claims of transparency and rule of law, often presents greater obstacles to uncovering financial information than China. This is largely due to the prevalence of Limited Liability Corporations (LLCs) and the lack of robust disclosure requirements at the state level, particularly in states like Delaware, Wyoming, and South Dakota.

Forsythe illustrates this point with the example of tracing ownership of Delaware LLCs. Ironically, the easiest way to uncover the owners of these LLCs is through Chinese government records, as investments in China require disclosure of the underlying ownership structure. He states, “America is the biggest offshore,” highlighting the ease with which wealth can be hidden within the US legal system.

This lack of transparency extends to other areas, such as the ability of US law firms to assist clients in concealing assets, as demonstrated by a sting operation conducted by Global Witness.

McKinsey’s Global Influence and Secrecy

The discussion then shifts to McKinsey & Company, the subject of Forsythe and Walt Bagnovitch’s book, When McKinsey Comes to Town. McKinsey’s pervasive influence extends across both the public and private sectors, advising governments, corporations, and even organizations with questionable ethical practices.

A key concern is McKinsey’s commitment to client confidentiality, which is taken to an extreme level, even hindering transparency in public sector work. The firm actively fights to minimize disclosure of its government contracts, making it difficult to understand the scope and impact of its advice.

The conversation highlights McKinsey’s long-standing relationship with Ping An Insurance in China, where the firm played a role in transferring Western insurance knowledge to China. However, this relationship also involved potential conflicts of interest, as the son-in-law of a former Chinese Premier was a McKinsey partner.

Forsythe notes that the scrutiny McKinsey faces in the US is less intense than in China, where journalists have more freedom to investigate the firm’s activities.

The Evolving Landscape of Financial Secrecy

The conversation concludes by acknowledging the evolving challenges to financial transparency, particularly with the rise of cryptocurrency and technologies like mixers (e.g., Tornado Cash) that facilitate anonymous transactions. Despite the existence of regulations like the Bank Secrecy Act and KYC/AML requirements, these are increasingly circumvented by new technologies, allowing illicit funds to flow more easily.

Notable Quotes

• Mike Forsythe: “America is the biggest offshore.” – Emphasizing the surprising level of financial secrecy within the US.
• Anat Admati: “Until you go to the ground, you don't know what all these words actually mean on the ground.” – Highlighting the gap between regulatory frameworks and their actual implementation.
• Mike Forsythe: “We can find out ownership of Delaware LLCs in the United States, by going to China, which is crazy.” – Illustrating the ironic paradox of transparency.

Conclusion

This conversation paints a nuanced picture of power, transparency, and accountability in the 21st century. It challenges conventional wisdom about the openness of Western financial systems and reveals the surprising degree of opacity that exists within the US. The discussion underscores the importance of investigative journalism in uncovering hidden financial networks and holding powerful institutions like McKinsey accountable. Ultimately, the pursuit of truth and the strengthening of transparency are crucial for ensuring a more just and equitable global financial system.