The Latecomer's Rise: Policy Banks and the Globalization of China's Development Finance

By Muyang Chen

In The Latecomer's Rise, Muyang Chen reveals the nature and impact of a rapidly growing form of international lending: Chinese development finance.

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.

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.

• Language: English
• Publisher: Cornell University Press
• Release date: Jun 15, 2024
• ISBN: 9781501775871

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Cover: The Latecomer’s Rise, Policy Banks and the Globalization of China’s Development Finance by Muyang Chen

THE LATECOMER’S RISE

Policy Banks and the Globalization of China’s Development Finance

Muyang Chen

CORNELL UNIVERSITY PRESS    ITHACA AND LONDON

Contents

Acknowledgments

List of Abbreviations

Introduction: State Actors, Market Games

1. Capitalizing Development: From Tax Revenue to Bonds

2. Debt for Growth?: The Domestic Origin of the Chinese Pathway

3. Globalizing Late Development: What Makes China’s Industrial Catch-Up Special?

4. The Latecomer’s Challenge: China and the West

5. What’s Next?: China’s Development Finance at a Crossroads

Conclusion: Reassessing China’s Rise

Notes

Bibliography

Index

Acknowledgments

Growing up in coastal China in the post–Cold War era, I saw and heard the word marketization (shichanghua) frequently in my everyday life. In decades of economic transition, market has acquired a strong positive connotation in a Chinese context, associated with modernity, efficiency, and a better quality of life. When I studied in Japan in my third college year, the same year China surpassed Japan and became the world’s second largest economy by gross domestic product, my perception of these positive connotations was shaken. I still remember how startled I was reading Chalmers Johnson’s MITI and the Japanese Miracle in a class at Waseda University and learning that a key factor contributing to the postwar economic success of our wealthy, capitalist neighbor was a rational planning state.

With this state-versus-market puzzle still unsolved in my mind, I went to the United States for graduate studies. My seven years living in the United States coincided with China’s rise as a major development finance provider. Inside and outside classrooms, friends, classmates, and colleagues from around the world asked me questions about the Belt and Road Initiative, the Asian Infrastructure Investment Bank, and fundamentally, the rationale underlying China’s massive overseas financing. What struck me most was that despite decades of marketization, furthering marketization, and deepening marketization, the highly globalized Chinese economy is still mostly viewed as far from laissez-faire.

This book is an effort to understand state-market relations reflected in China’s development finance. In writing this book, I benefited tremendously from the guidance and support of so many wonderful people and organizations. I owe significant debts to my graduate advisers, T. J. Pempel and Steven Vogel, at the University of California, Berkeley, where I developed my research interest in comparing national development banks in China and Japan. Bonnie Wade, who chaired Berkeley’s Asian Studies MA Program, encouraged me to follow my intellectual curiosity. At the University of Washington, David Bachman, Marie Anchordoguy, and Susan Whiting walked me through the tough journey of formulating, writing, and defending my doctoral research, and they always inspired me with challenging questions and sharp comments. Gary Hamilton, Sarah Quinn, and Jerald Herting offered invaluable feedback at my research presentations. I also would like to thank Saadia Pekkanen and Nathalie Williams for running an individualized PhD program at the Jackson School of International Studies, which provided students such as me the flexibility to integrate area-studies expertise with theoretical analysis and explore highly policy-relevant topics, including the subject of this book. I am extremely grateful to Kevin Gallagher for hosting me at Boston University’s Global Development Policy Center as a predoctoral fellow. There, I shared an office with a group of fascinating researchers working on development finance. Talking with them made writing much less lonely.

For the research of this project, I conducted fieldwork in several countries. I am grateful to the summer language program at Goethe University Frankfurt, which allowed me to learn German while conducting research on Germany’s promotional banks. I express my gratitude to Atsushi Sunami and the National Graduate Institute for Policy Studies for kindly hosting my field trip in Tokyo. A million thanks to colleagues at the KfW Group, Japan International Cooperation Agency, Japan Bank for International Cooperation, China Development Bank, Export-Import Bank of China, and the many wonderful people I interviewed at various financial institutions, government organs, and corporations. They generously carved time out of their busy schedules, educating me and sharing their life stories with me as development professionals.

In revising and expanding this book, I received immense support from colleagues at Peking University, Beida, which is also my alma mater. Working at China’s top university whose history has been tightly associated with the country’s modernization allowed me to think broadly and deeply about this project in the context of a rapidly changing global landscape. I extend special thanks to the students who took my courses at Beida for grilling me with questions about China’s role in global development. I especially thank Jiupeng Jia and Julian Snelling for their excellent research assistance.

At various stages of this project, I received invaluable comments and insights from many scholars at the annual meetings of the Society for the Advancement of Socio-Economics, International Studies Association, Association for Asian Studies, American Political Science Association, and Midwest Political Science Association. I especially want to recognize Deborah Brautigam, Gregory Chin, Takeshi Daimon, Austin Dean, Julian Gruin, Kristen Hopewell, Roselyn Hsueh, Yufan Huang, Stephen Kaplan, Saori Katada, Wendy Leutert, Chen Li, Jessica Liao, Guanie Lim, Adam Liu, Chuyu Liu, Zongyuan Liu, Peter Lorentzen, Xiao Ma, Christopher McNally, Daniel Mertens, Natalya Naqvi, Johannes Petry, Meg Rithmire, Victor Shih, Yasutami Shimomura, Yixian Sun, Tobias ten Brink, Matthias Thiemann, Johannes Urpelainen, Hanjie Wang, Yinagyao Wang, Saul Wilson, Christine Wong, Karl Yan, John Yasuda, Weiwen Yin, Ying Xia, Kankan Xie, Jiajun Xu, and Youyi Zhang.

The research for this project was made possible by generous financial support from the following institutions: China Studies Program, Japan Studies Program (Kristen Kawakami Dean Fellowship), and the International Policy Institute of the Jackson School of International Studies, University of Washington; Association for Asian Studies; Social Science Research Council/Japan Society for the Promotion of Science (Project No. PE17722); Global Development Policy Center, Boston University; China Scholarship Council; Peking University (Fundamental Research Funds for Central Universities); National Social Science Fund of China (Project No. 21CGJ004).

Chapter 1 of the book is built on my article State Actors, Market Games: Credit Guarantees and the Funding of China Development Bank, published in New Political Economy. In Beyond Donation, published in Studies in Comparative International Development, I described Chinese financial agencies involved in overseas finance and their relations with the state. I expanded this material to discuss the globalization of China’s catch-up in chapter 3. In Infrastructure Finance, Late Development, and China’s Reshaping of International Credit Governance, published in European Journal of International Relations, I examined how Chinese lending affects OECD-led international governance. A part of chapter 4 is grounded in this work. In China’s Reshaping of Sovereign Debt Relief, published in International Affairs, I compared China’s current debt relief approach to that of Western private banks during the Latin American crisis of the 1980s. The research contributed to the analysis on China’s impact on the international sovereign debt regime in chapter 4. I thank the reviewers of these articles for their constructive comments and the journals for granting me permission to reuse content.

I would also like to express my sincere gratitude to Eric Helleiner and Jonathan Kirshner, series editors of Cornell Studies in Money, and Jim Lance, Clare Jones, and Jackie Teoh at Cornell University Press for guiding me through the process of publication. The anonymous readers of the manuscript provided enlightening, encouraging, and detailed suggestions for revision, from which I have benefited enormously.

Pursuing an academic career as an Asian woman is challenging, since there are visible and invisible walls limiting the choices that girls and women can make. I am extremely thankful for my parents and my husband for supporting me in choosing this pathway. Last, I am grateful for a golden era of openness and globalization, which allowed me to travel and think across borders in seeking answers for this book and making sense of a rising China by exploring the world.

Abbreviations

Introduction

STATE ACTORS, MARKET GAMES

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.¹ 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?²

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 development 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.³ 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.⁴ 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.⁵ 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.

Nevertheless, an empirical study focusing on the policy banks is a challenging task. Compared with PFAs in other countries, these Chinese banks reveal very limited official data with regard to the volumes, destinations, and terms and conditions of their loans. They do not even report their total annual disbursements consistently. Their data disclosure procedure has become even more restrained in recent years, as non-Chinese media has cast both banks in a negative light, accusing them of debt trapping developing countries; well-known cases have included the CDB’s oil-backed lending in Venezuela and the China Exim’s financing for Sri Lanka’s Hambantota Port.⁶ As a result, quantitative depictions of the banks’ overseas business have thus far primarily relied on secondary data collected by research institutes.⁷ To tackle this challenge and illustrate how these banks actually function on the ground, this book triangulates various sources of primary data, including quantitative data from published historical and recent official documents that capture the amount, composition, and cost of policy-bank bonds and loans, as well as qualitative data collected from interviewing people working in policy banking and related fields. I conducted in-depth field research with both banks from 2015 to 2021, interviewing people who are working or used to work in the policy banks, other financial agencies that are also engaged in China’s overseas financing, enterprises that are clients of the policy banks, and government organs that are involved in the coordination of development financing. Interviews with the policy banks were conducted with bankers of various ages, administrative levels, and departments in both the Beijing headquarters and provincial branches. Because both banks have been extremely cautious in sharing their operating details in public, the majority of interviews were off the record. When an interviewee refused to be quoted, I fact-checked their statements with sources that are openly accessible, such as media reports, memoirs and autobiographies, and officially documented speeches, and cited the latter. In addition, I conducted field research in Germany (Frankfurt and Berlin) in 2016 and in Japan (Tokyo) in 2017 and 2019, collecting firsthand quantitative data and interviewing public bank officials working at the two countries’ PFAs—namely, Germany’s KfW, the Japan International Cooperation Agency, and the Japan Bank for International Cooperation.

Grounded in empirical evidence, this book presents three stories about China’s development finance. One story is about how China has financed its own infrastructure and industrial development rapidly over the past decades; a second story tells how China, by supporting the overseas business expansion of national firms, globalizes its peculiar means of late development, especially in the developing world; and a third story is about how the globalization of China’s late development affects existing international orders and global governance led by advanced industrial economies, especially the United States.

China’s Development Finance: The State-versus-Market Debate

Scholars and policymakers generally perceive China’s global development finance as being state-led. Indeed, the state has initiated national strategies, mobilizing and coordinating various economic actors to explore business opportunities overseas and facilitate international development. From the Going Global (zou chu qu) strategy launched in the early 2000s to the BRI announced in 2013, the state has played a leading and guiding role in the business expansion of national firms and banks. Another reason China’s global development finance is seen as state-led is that the main agencies responsible for implementing the initiatives are state-owned. The largest financiers of China’s overseas projects are state banks, primarily national policy banks and increasingly state-owned commercial banks. Although state banks offer loans to private enterprises, their major clients are state-owned enterprises (SOEs), primarily the fewer than a hundred central SOEs (yangqi) regulated directly by China’s State-Owned Assets Supervision and Administration Commission that cover the industries most vital to China’s national economy.⁸

It is common for scholars and others to assume that Chinese loans, as a result of their stateness, follow an anti-market logic—that they are not necessarily driven by business incentives of profit maximization but serve the state’s policy objectives and distort market mechanisms. In academic writings, policy discussions, and media reports, China’s overseas lending is frequently portrayed as an instrument of economic statecraft, fulfilling the state’s foreign-policy and geopolitical agendas.⁹ News headlines and policy statements have increasingly cited China-financed projects as evidence that China is engaging in debt trap diplomacy. That is, it is intentionally trapping borrower countries (usually developing countries) by offering loans that these countries cannot possibly repay, thereby gaining political leverage over borrowers.¹⁰

Yet, empirical findings have shown that China’s development finance cannot be fully explained through a statist lens for several reasons. First, it remains unclear who the state is. Emergent research points out that China’s economic development functions in a rather fragmented manner.¹¹ Different executive agencies have distinctive priorities. For example, the Ministry of Foreign Affairs prioritizes the mission of advancing diplomatic relations with partner countries whereas the Ministry of Commerce prioritizes the mission of trade expansion of Chinese firms. Both missions fall under the broad BRI agenda of advocating mutual connectivity between China and countries along the Belt and Road. A monolithic state that represents concerted interests of various actors and dominates the entire process of overseas development finance does not seem to exist. Furthermore, the state-owned economic actors—namely, state banks and SOEs—are not just instruments that pursue national strategies. Their state ownership does not constrain them from seeking profits like private investors do. Quite the contrary, the state as a shareholder incentivizes the banks and firms to pursue profits in order to increase the value of state assets.¹² As a result, these economic actors do not follow the state’s top-down command to undertake designated projects; rather, they leverage the BRI to brand their projects and pursue their commercial interests. The market-oriented characteristics of the state banks and SOEs and their nuanced relationship with the state therefore require further examination.

This book takes as a departure point that the Chinese loans are not necessarily targeting projects that favor the state’s foreign-policy or geopolitical objectives. They are profit-seeking in their peculiar way. Stephen Kaplan conceptualizes Chinese capital in Latin America as a form of patient capital that has a long-term maturity horizon and high-risk tolerance. Rather than exiting the overseas market in cyclical downturns, China’s state investors would acquire cheap assets to exploit long-run business opportunities.¹³ Along the same line, when explaining Chinese state capital in Africa, Ching Kwan Lee expands the definition of profits, arguing that the utility function of Chinese investors not only includes commercial gains but also political influence and access to resources.¹⁴ These empirical analyses and characterization of Chinese capital underscore the complexity of China’s development finance: though significantly distinctive from profit-seeking global private capital, it is not entirely state-led. A market logic is obviously functioning, despite strong state presence, and figuring out how the state and the market interplay requires further scrutiny.

A main objective of this book is to highlight and explain the marketness of China’s development finance. This is not to say that China’s development finance is free of state participation; it has been and continues to be strongly state-led. Yet the Chinese state, as the following chapters will illustrate with empirical evidence, has created and empowered the market to serve public goals, facilitating a mutually reinforcing state-market relationship for development. Without understanding how the market plays a role in this context, it would be impossible to understand the state’s role, either.

The market logic of China’s overseas development finance has a domestic origin. It is reflected not only in the financing of infrastructure or industrial projects but in various aspects of China’s economic development since the country’s Reform and Opening Up (gaige kaifang) starting from 1978. The economic transition started with a Soviet-style, centrally planned economy, where there was no market. The state coordinated almost all economic activities and was the sole allocator of capital. China’s fiscal system and financial system at that time were essentially identical, as the state controlled the financing for public projects and for projects that would have been commercial in a laissez-faire market economy. The economic and financial history of China since the late 1970s, therefore, was primarily a history of rounds and rounds of marketization (shichanghua), a term that has frequently appeared in China’s policy documents, even to date.

Scholars of Chinese political economy have attempted to make sense of the Chinese market that has grown out of its centrally planned economy. They characterize the various means through which the Chinese state interacts with the market—penetrating, permeating, regulating, shareholding, investing—and highlight the fact that the state has become a component conducive to the market.¹⁵ Scholars have also detailed the process of marketization, which involves the creation of markets from scratch and the transformation of state actors that serve public goals into market actors that pursue commercial interests. For example, in the post-1978 decades, government ministries that used