The Varieties of Chinese Capital in the Developing World

Chinese foreign direct investment (FDI) has grown from a few million dollars in the 1990s to $2.5 trillion in 2015, spurring economic growth and reducing between-country inequality in the host countries and regions. This concentration of Chinese investments in states and sectors with low investment grades has led China to be caricatured as a “bad investor” that corrodes host state institutions, with assertions that its recent Belt and Road Initiative (BRI) is primarily motivated by China’s geopolitical ambitions. However, is geopolitical greed the sole driver of Chinese FDI?

In a new policy brief, Alvin Camba outlines three possible recommendations for host state policymakers to avoid losing Chinese investments. Based on his own 2017 research, where Camba examined Chinese FDI in the Philippines, he determined Chinese FDI is composed of, at the very least, state, private and illicit capitals. However, growing anxieties about China have led to popular conflation of Chinese state capital with private capital, coming from small, medium or large enterprises owned by Chinese citizens, and illicit capital, where Chinese investors form ties with host state actors to operate illegally in strategic, controversial sectors. These three types of investments underscore the futility of using nationality to generalize FDI. 

Policy recommendations:

• Host states should institute a separate and independent Chinese capital review board: In order to increase transparency and generate much needed public discussions of Chinese capital, the board would be solely responsible for assessing and publicizing the economic and strategic implications of major Chinese and BRI-related FDI projects.  A representative from the board’s decision-making body would accept or reject Chinese FDI and aid projects, and work with but remain independent from existing economic departments, the military establishment and the broader government bureaucracy.
• OECD countries should recalibrate existing aid policies to address the “infrastructure gap” in developing countries: Since the 1990s, Western countries have focused on “soft infrastructures,” leaving a few donor states or commercial banks with higher interest rates and more stringent conditions to fund the “hard infrastructures.” Adjusting existing development aid to target infrastructures, particularly for airports, railroad networks and ports, helps address the existing gap and increases competition between Western and Chinese finances, giving developing countries more leverage to acquire the best possible deal.
• The OECD should create a new aid initiative that funds host state security agencies to exclusively target illicit capital. Currently, policies strengthening border security mainly target drugs, terrorism or human trafficking. Small-scale mining or prostitution rings, products of money laundering from China and other places, do not have the same focus as these other issues, despite having similar serious and long-lasting consequences.