The Latecomer’s Rise: Policy Banks and the Globalization of China's Development Finance (Book Excerpt)
PKU's Muyang Chen argues in her book that China’s rise yields more than a rivalry, and its impact varies by issue area.
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Over the past few decades, China has become the world's largest provider of bilateral development finance. Through its two national policy banks, the China Development Bank (CDB) and the Export-Import Bank of China (China Exim), it has funded infrastructure and industrial projects in numerous emerging markets and developing countries. Yet this very surge and magnitude of capital has raised questions about the characteristics of Chinese bilateral lending and its repercussions on the international order.
In The Latecomer's Rise: Policy Banks and the Globalization of China's Development Finance, Muyang Chen of Peking University reveals the nature and impact of a rapidly growing form of international lending: Chinese development finance. Drawing on a variety of novel Chinese primary sources, including interviews and official bank documents, Chen pinpoints the distinctiveness of Chinese bilateral development finance, explains its origins, and analyzes its effects. She compares Chinese policy banks with their foreign counterparts to show that the CDB and China Exim, while state-supported, are in fact also market-oriented - they are as much government organs as they are profit-driven financial agencies that serve both state and firms' interests. This approach, which emerged out of China's particular economic history, suggests that Chinese overseas lending is not merely a tool of economic statecraft that challenges Western-led economic regimes. Instead, China's responses to extant rules, norms, and practices across given issue areas have varied between contestation and convergence.
Rich with empirical detail and penetrating insights, The Latecomer's Rise demystifies the little-known workings of Chinese development finance to revise our conceptions of China's role in the international financial system.
Muyang Chen‘s work has appeared in International Affairs, European Journal of International Relations, World Development, Development Policy Review, Studies in Comparative International Development, New Political Economy, Review of International Political Economy, and The Oxford Handbook of Industrial Policy.
Muyang holds a Ph.D. from the University of Washington, an M.A. from the University of California, Berkeley, and dual bachelor’s degrees from Peking University and Waseda University. Prior to joining Peking University, she was a research fellow at the Global Development Policy Center of Boston University and a visiting scholar at Japan's National Graduate Institute for Policy Studies
A landmark study. The Latecomer's Rise offers a deep level of understanding of Chinese banking developments, the relationship between domestic changes and international activities of China's policy banks, and the challenges facing China, its borrowers, and its global competitors. This book will be a vital reference for anyone concerned with China's global banking.
Deborah Brautigam, Johns Hopkins University
China's overseas development banks have surged onto the global scene, filling infrastructure gaps, enabling growth, and fostering a new wave of South-South cooperation. Drawing on detailed, embedded research, The Latecomer's Rise offers the first empirical-based understanding of these banks that places them in comparative perspective and sheds light on their origins as well as the trajectory of Chinese development finance. Essential reading for those interested in state-market relations and the role of the state in China's rise.
Kevin Gallagher, Boston University
Challenging the dominant paradigm of zero-sum Chinese conflict with the existing rules-based international economic system, The Latecomer's Rise offers valuable insights on China's approach to development finance, especially through the experience of Beijing's large, powerful policy banks.
Robert B. Zoellick, former President of the World Bank and US Trade Representative
From The Latecomer’s Rise: Policy Banks and the Globalization of China's Development Finance, by Muyang Chen, published by Cornell University Press. Copyright (c) 2024 by Cornell University. Used by permission of the publisher.
For simplicity, the excerpt removes all footnotes and in-text citations.
The Puzzle
In the twenty-first century, China has engaged in massive overseas finance, funding highways, railways, bridges, dams, power plants, and ports around the globe. By 2019, China had provided more capital to emerging market and developing countries than all Western-backed development finance institutions combined. Major advanced industrial economies have responded to China’s Belt and Road Initiative (BRI) and its increasing global influence with initiatives and development programs of their own, such as Japan’s Partnership for Quality Infrastructure, the European Union’s Global Gateway, and the United States’ Build Back Better World (B3W) initiative.
The intensifying rivalry between major powers in development finance raises the question: What makes Chinese finance distinctive from that of the West? A few years ago, I posed this question to a Chinese bank official who was an expert in financing projects in Africa. He answered with a question: “You are a doctoral student, aren’t you? Who do you think does a better job in tutoring high school students in passing college entrance exams, you or a first-year undergrad?”
I understood what he meant: a doctoral student is too far from the college entrance examination to teach others well. Because China took the “exam” of development quite recently, it is well placed to tutor others to pass it.
Indeed, China is a latecomer to global development finance. By contrast, Europe expanded railway finance during the industrial revolution, the United States implemented the Marshall Plan and development assistance after the end of World War II, and Japan achieved economic catch-up and regional infrastructure export in the postwar decades. These historical rising powers and the many social science theories built on studying their overseas finance following their industrial development shed light on today’s China as a typical emerging, industrializing economy.
Yet, China’s outward capital is of unprecedented magnitude. The domestic political-economic system that determines the destinations and conditions of Chinese lending is unique, and China is not a member of several important Western-led international institutions governing the flow of development finance loans and therefore not constrained by their rules. These sui generis features, while allowing China more autonomy in its developmental financing decisions, have generated fears, suspicions, and concerns not only in developed countries that have been leading the existing international orders but also in developing countries where most of the China-financed projects take place.
This book aims to understand both the general and the peculiar characteristics of China’s development finance through a comparative lens. It explores the origins of China’s unique pathway to development, examines the impact of the globalization of this “Chinese pathway” on Western-led international regimes, and discusses possible future changes to China’s development finance. In so doing, this book serves three overlapping audiences. First, it uncovers empirical details likely to be of particular interest to those eager to learn more about the nuts and bolts of Chinese lending, presenting stories about how China has funded the development projects of its own as well as in countries along the Belt and Road. Second, it engages with scholars who seek to conceptualize China’s development in a broad comparative framework. The combination of rapid economic rise and strong party-state control poses a big challenge to existing social science theories that generalize rules of growth. Focusing on development finance, a crucial aspect of the Chinese economy, this book attempts to make sense of the specific trajectory of China’s late development and thereby advance the theoretical discussion of state-market relations in economic development. Third, the book provides insights to researchers, policymakers, journalists, investors, students, and anyone else eager to understand the global implications of China’s rise. Many wonder whether and in what ways China has changed existing international orders through its massive overseas financing. By showing the institutional similarities and disparities between China, the challenger, and earlier industrialized economies, the rulemakers to date, this book sheds light on the impact that an emerging China has on the global development landscape.
Policy Banks, Public Financial Agencies, and State-Market Relations
To understand China’s development finance, the book looks particularly into its two national policy banks (zhengcexing yinhang)—the China Development Bank (CDB) and the Export-Import Bank of China (China Exim). The CDB is mandated to finance infrastructure and industrial projects, and the China Exim is mandated to support the export and overseas investment of Chinese firms.
There are two main reasons for focusing on the policy banks. The first is their size. As the following chapters will illustrate, loans from the policy banks, not the Chinese government’s revenue or commercial banks’ investments, have capitalized the majority of China’s global development finance. The two banks’ overseas lending has made China the world’s largest provider of bilateral development finance. China has also provided finance through multilateral channels, making contributions to the World Bank and creating new multilateral institutions—the Asian Infrastructure Investment Bank headquartered in Beijing and the New Development Bank headquartered in Shanghai. Yet the volume of capital funneled through these means has been much smaller than that offered by the policy banks (as discussed in chapter 4). While acknowledging China’s important contribution to multilateral development finance, this book focuses on the bilateral side of Chinese lending.
The second reason is the policy banks’ dual identity. As their name suggests, policy banks were created to serve policy goals, on the one hand, and pursue commercial interests as banks, on the other. A scrutiny of these agencies reveals the state-market boundary and demonstrates how political and economic factors interplay in a Chinese context. Particularly important is the CDB’s operating rationale in understanding China’s development, as it is the main bank that has facilitated the country’s domestic infrastructure and industrial development and created a Chinese means of development finance—kaifaxing jinrong. Chapters 1 and 2, which explain the domestic origin of the Chinese pathway to development, will therefore focus primarily on the CDB. China’s state-owned commercial banks, which are increasingly playing significant roles in financing overseas projects, also lie at the state-market intersection, and yet their overseas lending volumes are still much smaller than policy-bank loans, and most importantly, they are not mandated to serve policy objectives and therefore undertake projects driven mostly by business incentives. While discussing commercial banks’ interaction with the policy banks (chapters 3 and 5), the focus of this book will be the policy banks.
Nonetheless, the dual identity of the policy banks makes a comparative analysis between China and advanced industrial economies challenging, because it is difficult to find a proper Western benchmark to which the policy banks could possibly be compared. The banks’ pursuit of business interests in international markets suggests that they should be compared with profit-seeking Western investors, which are generally privately owned. Their policy-serving responsibilities, on the contrary, suggest that they should be compared with Western-led development finance institutions with similar public mandates. The banks’ dual identity not only confounds researchers that seek to make sense of China’s development finance through a comparative lens but also perplexes decision makers within them. Ever since their establishment, the policy banks have been struggling to define themselves as either a state organ or a financial agency, or something in between, and consequently, they have been struggling to define how China’s development finance should be designed.
In fact, policy banks are not a type of financial agencies peculiar to China. Throughout history and across countries, public financial agencies (PFAs) such as national development banks, aid agencies, export credit agencies, and multilateral development finance institutions have played crucial roles in capitalizing industrialization, facilitating export, and fostering economic development, and yet they have been largely underexamined in academic literature, either in terms of empirical studies or theoretical discussions. The reason is straightforward—given their dual nature, neither political scientists nor economists treat them as typical focal points for analysis. Like policy banks, most of the PFAs had historically faced or are currently facing the challenge of balancing public mandates and financial sustainability. In other words, the Chinese policy banks are not alone in struggling with the state-or-market dilemma.
Using PFAs of advanced industrial economies as a benchmark, this book characterizes state-market relations in China’s development finance through a comparative lens. The benchmark serves two purposes. First, much of existing analyses seeking to conceptualize Chinese capital use either “global private capital” or “Western foreign assistance” as a benchmark. Indeed, policy banks and the private banks of advanced industrial economies are comparable in certain respects—for instance, they both undertake commercially oriented businesses in the developing world. Yet, choosing such a benchmark would unquestionably highlight the statist aspect of Chinese capital, yielding a conclusion that China’s development finance is more state-led than its Western counterparts. Policy banks and aid agencies are also comparable, as they are both major financiers of underdeveloped regions. Yet, choosing such a benchmark neglects the fact that policy banks are rather business-driven and serve the interests of firms, and China in fact has other government organs responsible for disbursing foreign aid. To better understand the dual identity of policy banks, it makes more sense to compare them with financial agencies that are more alike.
Second, the Chinese policy banks are latecomers to the PFA family worldwide and have thus been borrowing the experiences of their foreign predecessors to build up their own operating models. As the book will show, the CDB and the China Exim were founded in 1994, whereas the main PFAs that they have been emulating—namely, Germany’s Kreditanstalt für Wiederaufbau (KfW) Group, Japan’s national development bank and export-import bank, and the World Bank—were established in the 1940s and 1950s. Examining how the policy banks resemble and differ from their foreign counterparts therefore sheds light on how China’s development finance comes into shape. By demonstrating both the peculiar and the general features of the Chinese PFAs with reference to PFAs of advanced industrial economies, this book is the first that has examined China’s policy banking from a comparative perspective.
Arguments
This book makes four arguments. First, China’s development finance reflects a distinctive means of late development, one that is both state-supported and market-based. While studies on China’s industrial predecessors show that the degree of state intervention is associated with lateness of development, China’s late development reflects a more nuanced state role, one that empowers and employs the market to achieve state goals. Instead of allocating budgetary revenue to fund projects, the state has transformed government organs into market entities, employed financial tools borrowed from overseas to strengthen state capacity, and established market institutions to fund rapid and massive industrialization and urbanization. In other words, the state and the market reinforce one another in China’s development finance.
Second, China’s distinctive means of development finance has its origins in the country’s domestic experience transitioning away from a centrally planned economy. In the reform era, the state’s direct allocation of budgetary revenue is considered inefficient, and “marketization” is thought to be the prescription for economic growth. The CDB, in particular, has pioneered the creation of China’s domestic interbank bond market to raise long-term funds for development and assisted Chinese subnational governments in creating financial vehicles that would allow them to mortgage their revenues and go beyond fiscal constraints. While the policy banks are criticized for encouraging developing-country governments to take on large debts supported by collateralized revenue streams, they are in fact reproducing the lending mechanisms they have practiced at home.
Third, the globalization of Chinese development finance has affected the international regimes led by advanced industrial economies. While conventional literature juxtaposes a state-led China with a U.S.-led liberal international order and underscores the tension between the two, this book argues that China’s rise yields more than a rivalry, and its impact varies by issue area. Examining the international rulemaking in the issue areas of bilateral development finance/aid, export finance, and sovereign debt relief, this book finds the following. In bilateral aid and export finance, China, with its advantage of backwardness, has been filling a lacuna insufficiently covered by the financial schemes of Western-led international regimes. Policy banks have indeed nurtured national champions and allowed them to compete with firms of advanced industrial economies, contesting the international export credit regime. Yet, they have also supported Chinese firms in undertaking projects that their Western counterparts have “left over” in the developing world. China’s integration of development and trade has partly incentivized traditional donors to advocate for the incorporation of firms and commercial investors in undertaking development projects, yielding a convergence rather than a contestation between China and the international aid regime. China’s state-led, market-based finance, however, has led to controversies in sovereign debt relief. To keep nonperforming loan rates low, policy banks have been reluctant to write off debts. This contests the international sovereign debt regime led by the International Monetary Fund and the Paris Club, which is more accepting of debt forgiveness practiced by official bilateral creditors.
Yet, as China becomes fiscally capable of financing more infrastructure projects with government revenue, and as Chinese firms rely less on policy banks as their primary sources of funding, the question arises as to how long China will keep practicing its peculiar means of development finance. This book’s final argument suggests it may not be long. While it has been filling the global infrastructure gap insufficiently covered by advanced industrial economies, China is also losing the advantage of backwardness and converging toward the Western means of managing bilateral finance. Much like PFAs of advanced industrial economies at earlier points in history, policy banks have inevitably arrived at a crossroads where they need to make a decision: to prioritize state imperatives or firms’ interests. In the long run, China may continue financing projects in low-income countries, but it may not necessarily finance them with the policy banks’ state-supported, market-based means of lending; rather, China is more likely to use government foreign assistance directly to support projects in underdeveloped regions and have commercial banks support Chinese firms’ competition for profitable projects.
From The Latecomer’s Rise: Policy Banks and the Globalization of China's Development Finance, by Muyang Chen, published by Cornell University Press. Copyright (c) 2024 by Cornell University. Used by permission of the publisher.
