The Rise of China's Patient Capital: A Tectonic Shift in Global 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. China, as the world’s largest saver, has rapidly expanded its cross-border lending since the crisis, more than doubling its overseas banking presence. This article develops a theory about how China’s emergence as a global creditor affects 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 flows. 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 patient capital, characterized by a long-term horizon and a lack of policy conditionality, that endows governments with more fiscal space to intervene in their economies. Employing an originally-constructed dataset, the China Global Financial Index, cross-national tests (spanning 15 Latin American countries from 1990-2015) find that left governments tend to borrow directly from China when they can dilute market-oriented investment laws. However, independent of this partisan choice, Chinese state-to-state lending reduces reliance on conditionality-linked Western financing, leading to higher budget deficits