Calculated capital: the business logic behind Chinese lending in the Global South

Abstract

Overseas development finance plays a pivotal role in China’s expanding global engagement. Existing scholarship often underestimates the commercial astuteness of Chinese capital, portraying it as “patient” due to its higher tolerance of risk compared to Western capital, which prioritizes short-term gains. However, we demonstrate that this narrative overlooks the calculated decisions behind much Chinese overseas lending. Our empirical analysis of Chinese overseas loans committed between 2000-2021 shows that far from being patient, Chinese capital employs hard-nosed risk-mitiga- tion strategies. In risky countries, China routinely demands collateral in the form of future natural resources revenues for its loans, while also requiring loan insurance for projects, and charging higher interest rates on these loans. More specifically, our models demonstrate that loans to countries with higher credit risk levels are more likely to be resource-backed, as are loans that are insured. We also demonstrate that, surprisingly, resource-backed loans carry higher interest rates than their non- resource-backed counterparts, as do insured loans. To explain this surprising finding, we draw on qualitative case studies based on field interviews in the Democratic Republic of Congo, Ecuador and Ghana, and propose three potential mechanisms: political corruption and political business cycles in terms of political risks, and the security of the resource used as collateral in terms of financial risk. These findings suggest that Chinese state lending remains motivated by returns, even though it can also advance broader economic and political aims. This calculated finance, combined with the moral hazard posed by risk-seeking Chinese state-owned enterprises, can heighten sovereign default risk in the Global South. Recognizing the underlying pragmatism of Chinese global finance is critical for understanding the risk perceptions and priorities of emerging sovereign lenders.

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