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China's overseas financing is a distinct form of patient capital that marshals the country's vast domestic resources to create commercial opportunities internationally. Its long-term risk tolerance and lack of policy conditionality has allowed developing economies to sidestep the fiscal austerity tendencies of Western markets and multilaterals. Employing statistical tests and extensive field research across China and Latin America, Stephen Kaplan finds that China's patient capital endows national governments with more room to maneuver in formulating domestic policies. The author goes on to evaluate the potential costs of Chinese financing, raising the question of how Chinese lenders will react to developing nation's ongoing struggles with debt and dependency. By disaggregating the structure of international finance, Globalizing Patient Capital has significant implications for the rise of China in Latin America, offering new insights about globalization and showing the costs and benefits of state versus market approaches to development.
Chapter 4 employs an originally constructed data set, the China Global Finance Index, to conduct cross-national tests spanning eighteen Latin American countries from 1990 to 2017. The index characterizes Chinese policy loans by their ?nancing channel (state-to-state vs. market-based) for each national-level investment project. The chapter ?nds that China’s state-to-state loans, as a share of a country’s external public debt, are positively correlated with budget de?cits, supporting the primary hypothesis that China’s patient capital expands governments’ ?scal policy space. In exchange for this lack of policy conditionality, however, policymakers tend to have more extensive commercial conditionality. Notably, when Chinese ?nancing is instead directly booked with corporate enterprises through private procurement in the marketplace, these commercial conditions are less extensive. China’s patient capital behaves more like long-term equity capital given the underlying private sector competition promoted by domestic procurement laws. National governments do not gain additional ?scal space and are more likely to comply with policy conditionality.
How does China’s emergence as a global creditor a?ect national policymaking? The international and comparative political economy literature has long debated the extent to which international capital mobility constrains national autonomy, but has mainly focused on private capital ?ows. Incorporating China’s state-led capitalism into this political economy framework, I expect that Chinese credit enhances national governments’ room to maneuver. It is a distinct form of long-term capital characterized by a risk-tolerant ?nancial system that marshals China’s patient form of domestic capital internationally. Its lack of policy conditionality endows governments with more ?scal space to intervene in their economies. For developing country governments facing strong redistributive pressures, su?cient ?scal space to supply more jobs, higher wages, and better public services is often key to political survival. However, patient capital has its costs. The ?ne print of these state-to-state deals often involves commercial conditions, ranging from contracting with Chinese ?rms and suppliers to providing state guarantees or commodity collateral, that risk intensifying national debt and dependency.
Chapter 7 assesses the cost and bene?ts of China’s commercial conditionality by employing extensive qualitative evidence, including more than 200 interviews with Chinese creditors and Latin American debtors, and in some cases, examining the original loan contracts. This chapter also evaluates the extent to which China can foster good governance and sustainable development without policy conditionality. For example, these loan provisions, which typically involve some combination of Chinese foreign content and commodity guarantees, are designed to improve the global competitiveness of Chinese ?rms. However, they may also impose costs on Latin American countries. Preferential treatment for Chinese capital inputs and machinery may undermine Latin America’s industrial competitiveness. At the same time, commodity guarantees embedded in loans-for-oil agreements risk eroding commodity proceeds that could otherwise be channeled toward domestic spending or reinvestment in state energy ?rms. Perhaps most important, China’s tendency to focus on commercial rather than policy terms may encourage governments to spend beyond their means, catalyzing future debt problems.
This book’s macroeconomic analysis suggests Chinese ?nancing could o?er nations a development opportunity by exploiting Western ?nance’s Achilles's heel: the maturity mismatch between the capital market’s short-term ?nancing and debtor nations’ long-term development goals. Chinese policy banks have the capacity to ?nance big-ticket public infrastructure projects over a long-term horizon. However, Chinese capital also has its drawbacks given its tendency to secure its lending with microeconomic ties or commercial conditions embedded in its loan contracts. Popular attention has also focused on the question of whether Chinese lending is a form of "debt-trap" diplomacy used as a coercive economic tool to acquire long-run strategic assets. Rather than debt-trap diplomacy, however, this book argues, China’s tendency to invest in maximizing long-run markets rather than short-run profits has at times ensnarled its policy banks in creditor traps where they must lend defensively to recover their initial investments. Chapter 8 also examines how these creditor-debtor relationships have changed over time and how they are likely to continue to evolve in a post-coronavirus world.
This chapter provides an overview of this book, which examines China’s economic expansion into the Western Hemisphere from both the creditor and debtor perspectives while making several contributions. First, this study brings new and original data to bear on the classic question of states’ room to maneuver under ?nancial globalization, a question that is increasingly pertinent given the rise of state-led ?nance over the past two decades. Second, employing a mixed-method approach, this book sheds light on the behavior of state-led ?nancing, particularly how its commercial conditionality rather than policy conditionality a?ects national-level governance decisions. Finally, it makes an important theoretical contribution by disaggregating the structure of global ?nance. The globalization scholarship suggests local state capacity and institutional development can mitigate "race to the bottom" pressures, but this study ?nds that the type of international investment (state vs. market) can also in?uence the extent of policy discretion. The emergence of China’s state-led ?nancing endows governments with greater ?scal space, or the ability to sustain their spending through volatility.
Chapter 5 conducts a comparative case study analysis across ten presidential administrations in six countries (Argentina, Bolivia, Costa Rica, Ecuador, Jamaica, and Venezuela) using national-level government policies as the unit of analysis. By varying exposure to Chinese state-to-state ?nancing over time, it compares periods of large-scale Chinese bilateral ?nancing to periods of extensive multilateral ?nancing (i.e. where countries have IMF and World Bank programs). Chapter 5 finds that governments that directly contract Chinese financing bilaterally are more likely to use these credit lines to cover budgetary shortfalls in exchange for future oil delivery or nontendered concessions to Chinese ?rms and machinery suppliers. Notably, it also finds that extensive Chinese state-to-state financing frameworks that replace public procurement laws, such as those used in Ecuador and Venezuela, are more likely to yield expansive fiscal expansions than project-level financing that is legally exempt from existing public procurement frameworks.
Chapter 6 conducts a comparative case study analysis across ?ve presidential administrations in two countries (Argentina and Brazil) using national-level government policies as the unit of analysis. By varying exposure to market-oriented ?nancing over time, it examines how Chinese state-backed ?nancing compares with private-market ?nancing when it is channeled to corporate enterprises through public tender. A robust private sector and strong constitutional commitment to public procurement tend to increase the resiliency and efficacy of public procurement laws . Under these conditions, public procurements laws compel Chinese policy banks to operate through government concessions rather than direct state-to-state lending, leaving national governments with little additional fiscal space. They instead pursue policy conditionality (i.e. fiscal discipline) to improve their sovereign credit standing and ultimately to lower their project financing costs.