The Rise of Patient Capital: The Political Economy of Chinese Global Finance

37 Pages Posted: 1 Feb 2018 Last revised: 24 Sep 2018

See all articles by Stephen B. Kaplan

Stephen B. Kaplan

George Washington University - Department of Political Science; George Washington University - Institute for International Economic Policy (GWIIEP)

Date Written: July 24, 2018

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. What are the implications? I contend that China’s state-led capitalism is an important form of patient capital, characterized by a longer-term horizon. While technically classified as mobile capital, its higher risk tolerance and geopolitical shrewdness make state-owned capital less likely to swiftly exit debtor countries. Compared to traditional mobile capital, debtor governments thus gain more policy freedom, particularly during hard times when Western creditors might otherwise impose austerity and other onerous policy conditions. Employing an originally constructed dataset, the China Global Financial Index, I conduct an econometric test across 15 Latin American countries from 1990-2015. I find that left governments are more likely to borrow from China. However, notwithstanding this initial creditor choice, Chinese state-to-state lending then uniformly leads to higher budget deficits. It endows governments with more fiscal space to intervene in their economies by reducing their reliance on conditionality-linked Western financing. These results suggest that Chinese financing could be a development opportunity, but only if 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.

Suggested Citation

Kaplan, Stephen B., The Rise of Patient Capital: The Political Economy of Chinese Global Finance (July 24, 2018). Available at SSRN: https://ssrn.com/abstract=3108215 or http://dx.doi.org/10.2139/ssrn.3108215

Stephen B. Kaplan (Contact Author)

George Washington University - Department of Political Science ( email )

Department of Political Science
Monroe Hall 470, 2115 G Street, N.W.
Washington, DC 20052
United States
202-994-6680 (Phone)

George Washington University - Institute for International Economic Policy (GWIIEP) ( email )

1957 E Street, N.W.
Suite 502
Washington, DC 20052
United States

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