Originally published on April 20, 2018
In his working paper, “The Rise of Patient Capital: The Political Economy of Chinese Global Finance,” Stephen Kaplan discusses how China has become a significant global financial player. The country has capitalized on the US’s retreat from its lead role in globalization, first following the 2008 financial crisis, and now the Trump Presidency. China has quickly expanded its cross-border lending, more than doubling its overseas banking presence since the crisis. Kaplan discusses the implications that follow and finds that “China’s state-led capitalism is an important form of patient capital, characterized by a longer-term horizon.”
State owned capital is less likely to quickly exit debtor countries due to its geopolitical shrewdness and higher risk tolerance, when compared with traditional forms of mobile capital, such as bond and equity market financing. And debtor governments often gain more policy freedom too. Conducting an econometric test across 15 Latin American countries from 1990-2015, Kaplan finds that Chinese state-to-state lending decreases government dependency on “conditionality-linked Western finance” which allows more freedom to use budget deficits to intervene in their economies. The results show Chinese financing as a potential development opportunity, but it is dependent on whether governments invest wisely and avoid future debt problems.
At the end of the 2008 global financial crisis, China began creating new trade opportunities through investments overseas and regional investment in construction, infrastructure and heavy extraction industries. The hope was that these would improve its energy supplies and access to natural resources. China also hoped to secure new export markets in order to replace what was lost in the recession in the United States.
In present day, China acts as a “top trade partner” for various Latin American countries such as Peru, Brazil and Chile. China also works as a key capital provider to various Latin American countries who wish to address infrastructure deficits which have existed for a long time. In the past 10 years, Latin America has become the second largest destination for China’s overseas investment, making the region a “natural extension” for China’s flagship economic development program known as the Belt and Road Initiative.
In the next 10 years, China has promised to invest 250 billion pushing the annual figure above 20 billion (or nearly 7 percent of regional GDP). Kaplan finds that because of the significant size of these loan commitments, it is necessary to consider their effects on Latin American budgets and indebtedness – especially in comparison to the dominant source of cross-border investment over the past 20 years, private sector flows.
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