Comment on “Is China’s Development Finance a Challenge to the International Order?”

• Date: 01 July 2018
• DOI: http://doi.org/10.1111/aepr.12231
• Author: Yiping Huang
• Published date: 01 July 2018

Comment on “Is China’s Development

Finance a Challenge to the International

Order?”

Yiping HUANG†

Peking University

JEL codes: E22, E61, F35

Accepted: 13 March 2018

China is a latecomer but also a major player in global development finance. Today, the

balance sheet of the China Development Bank (CDB) already exceeds that of the World

Bank. What does this mean for the international order? The study by Dollar (2018) offers

a detailed, insightful and objective assessment of this often heatedly debated subject. Dol-

lar’s analysis unveils three key findings: first, Chinese lending appeared to be indifferent

to risks; second, the debt sustainability of borrowing countries varied widely; and, third,

Chinese banks evolved toward international norms of environment safeguards very

slowly. Dollar concludes that Chinese actions seem more a revision of the global system

than a challenge to it. But, since Chinese development finance (CDF) is a relatively new

phenomenon, it is too early to make any conclusive judgment.

I fully concur with Dollar’s analyses. So the main purpose of my comment is to

understand the behavior of CDF. Before starting the discussion, I would like to first

define CDF. There are three types of external finance: commercial finance which is

purely based on market principles and is conducted in pursuit of profit maximization;

policy finance which is conducted for national strategies, not for profit; and develop-

ment finance which is conducted for national strategies but which is commercially sus-

tainable (You & Qu, 2015). The narrowly defined development finance, which is the

subject of analysis in Dollar’s paper, does not involve fiscal subsidies and should be

commercially viable and financially sustainable.

We may think of two factors driving the significant rise of CDF during the past

decade. The first is the transformation of the Chinese growth model. Since the beginning

of economic reform, the Chinese economy has been quite open in trade. In recent years,

Chinese outward direct investment (ODI) not only exceededinward foreign direct invest-

ment (FDI), but China also became one of the world’s largest investors. However, the

expansion of Chinese financial institutions has lagged significantly behind that of Chinese

companies. There is also a significant mismatch between the two –companies are going

†Correspondence: Huang Yiping, 5 Yiheyuan Road, Haidian District, Beijing 100871, China.

Email: yhuang@nsd.pku.edu.cn.

© 2018 Japan Center for Economic Research 301

doi: 10.1111/aepr.12231 Asian Economic Policy Review (2018) 13, 301–302