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

As the United States has retreated from its lead role in globalization – ï¬ rst because of the 2008 ï¬ nancial crisis, and now under President Donald Trump’s leadership – China has become a major global ï¬ nancial 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 longerterm horizon. While technically classiï¬ ed 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 ï¬ nd 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 deï¬ cits. It endows governments with more ï¬ scal space to intervene in their economies by reducing their reliance on conditionality-linked Western ï¬ nancing. These results suggest that Chinese ï¬ nancing 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.