Patient vs. Impatient Capital: The Political Economy of Chinese Global Finance

• In Event: The Political Economy of Finance in Developing Countries

Abstract

As the United States has retreated from its lead role in globalization -- first because of the 2008 financial crisis, and now under President Donald Trump’s leadership -- China has become a major global financial player. What are the implications? Does China’s emphasis on state-led capitalism signify a challenge to U.S. regional influence and Western governance standards? Does China’s lack of conditionality risk sowing the seeds for another Latin American debt crisis?

At the turn of the 21st century, the widespread acceptance of neoliberalism was emblematic of the power of the United States. To attract global capital, many countries around the globe adopted a neoliberal development model grounded in austerity, or budgetary restraint.

Given the centrality of budgetary financing to domestic political initiatives, however, austerity posed a threat to a government's national autonomy and social responsiveness. Fiscal discipline might help promote economic stability by improving a country's credit standing, but by requiring deep budget cuts it jeopardized social stability. In light of this debt-induced austerity, many governments, particularly those from the left, have sought to insulate themselves from financial market scrutiny by searching for alternative funding sources.

Over the last decade, China has endowed nations with such a funding source. With Western capital reeling from the 2008-09 global financial crisis, state-owned capital made historic inroads globally. China, as the world's largest saver, has more than doubled its overseas banking presence to become one of the top five banking creditors globally. Chinese policy banks, charged by the government to finance overseas infrastructure and trade, are central to this phenomenon, and often headline the state’s infrastructure-led investment packages.

I hypothesize that the availability of Chinese state-led financing increases the policy discretion of developing-country governments to more heavily intervene in their economies or pursue alternative development models. I contend that China’s state-led capitalism is an important form of patient capital, characterized by a lack of policy conditionality that translates to a longer-term horizon and a higher risk-tolerance than traditional Western creditors.

In order to operationalize Chinese bilateral financing and examine its effect on the state, I employ a unique, novel dataset, dubbed the China Global Financial Index. The index characterizes Chinese policy loans by their financing channel (state-to-state vs. market-based) for each national level investment project. In other words, when Chinese financing takes the form of state-to-state lending, the lack of policy conditionality enables incumbent politicians to more readily increase their budgetary spending. By contrast, when loans are booked to a corporate entity in the marketplace (either a private firm or a separately managed state-owned enterprise) through government concessions, the central government does not benefit from the loan directly. To my knowledge, it’s the first of its kind to classify policy bank loans by their investment channel.

I gathered this data directly from primary sources during my field research in Latin America, a region where policy banks have steadily increased their financing since the onset of the 2008 global financial crisis. About three-fifths of Latin American countries have tapped Chinese policy bank financing, making it a fitting environment to examine how Chinese finance affects fiscal governance.

I exploit this variation in sovereign financing type to test whether Chinese state-to-state financing enhances Latin America’s fiscal policy autonomy and yields higher deficit spending. Employing cross-national data from 17 Latin American countries from 1990-2017, preliminary empirical tests show that left governments are more likely to borrow directly from China compared to their center and right counterparts who tend to book loans through private procurement in the marketplace. However, independent of this initial choice of creditors, Chinese state-to-state lending tends to uniformly reduce governments’ reliance on conditionality-linked Western financing, giving them more autonomy to use budget deficits to intervene in their economies.

These findings suggest that Chinese financing could be a development opportunity, but only if debtor governments invest wisely. Otherwise, by lending without policy conditions, China may be encouraging developing country governments to spend without bounds, sowing the seeds for future debt problems. These findings offer important new insights for the study of globalization, Latin American development, and China-Latin American relations, by helping explain the conditions under which nations veer from Western governance models.

Author

• Stephen B. Kaplan, George Washington University