Between State and Market: China's Development Banking in Comparative Perspective

Abstract

In recent decades, China has been massively financing infrastructure projects around the world, building highways, railways, bridges, power plants and ports both domestically and overseas. Conventional wisdom sees this infrastructure boom as a typical story of state-led development, which is to a large extent true, but there is also a “market” aspect of the story that has often been overlooked. Through examining the agencies, i.e. China’s policy banks that capitalize these projects, this dissertation explores the incentives and rationale behind China’s infrastructure investment, discusses the state-market relations reflected in the banks’ operating models, and presents an alternative means of development finance that is peculiar to China and differs from what has been practiced by industrialized countries. The dissertation consists of three essays, focusing respectively on the fund-raising, domestic lending, and international lending of China’s policy banks, and specifically, the China Development Bank (CDB), which is also the world’s largest development bank. Comparing China’s policy banks to their overseas counterparts as well as to their own past, the research comes to the conclusion that China’s development finance is surprisingly market-based. This does not mean an absent role of the state; rather, it shows that market means can be used to achieve state goals and that the state and the market are mutually constitutive. The CDB has departed from traditional means of infrastructure finance, in which the state plays a direct role of fiscal allocation. Instead, it demonstrates an alternative, indirect role of the state, i.e. enhancing projects’ creditworthiness and thereby allowing market mechanism to function. This “state-supported, market-based” model enables the financing of infrastructure projects that are neither affordable by fiscal revenue nor attractive to market capital, and provides a prescription to a long-lasting problem facing the developing world, i.e. how to finance infrastructure when neither “the state” nor “the market” can offer sufficient capital.