POBLACIÓN INFANTIL EN EDAD PRE-ESCOLAR Datos de la población.

This section will outline my contributions to existing IPE and China studies literature by positing a distinction and relationship between liberalization and internationalization, which is not well understood in the literature on post-socialist transition and on the liberal international order.

8 _{Because China has a three-tiered equity market (A-shares, B-shares, and foreign H-, N, etc, shares) the}

data normally used to illustrate financial integration in emerging and advanced economies does not capture China’s idiosyncratic equity market setup.

The first two subsections explain two sets of literature that this theoretical contribution concerns: The China studies debate on the nature and future of Chinese economic reforms and the IPE debate on globalization and the role of the state. It offers a definition of internationalization as a process of connecting a country’s economy to the global economy through particular channels or linkages—through adopting international practices or by making use of globalized space, such as global cities or production chains. It describes how both sets of literature can benefit from applying this definition to China’s financial internationalization between 1990 and 2012, which shows us that integration with the global economy does not necessarily imply liberalization: the withdrawal of the state from determining market outcomes and the removal of legal, regulatory, and informal barriers to competition.

3.1 China’s economic reforms: the big debate

My research was prompted in part by an ongoing debate about the future of financial reform—and more broadly, about the future of economic reform—in China. Throughout the 1990s, scholars of Chinese politics vigorously debated whether China would disintegrate under the weight of corruption, or whether market reforms would allow the country to escape the inefficiency of a centrally-planned economy, while keeping the country together. One side of the debate emphasized China’s ‘trapped’ transition on the road to market liberalization (For contemporary iteration of this perspective, see Pei 2009; Åslund 2012). According to this view, China’s selective opening and bureaucratic decentralization—the foundation of Deng Xiaoping and Zhu Rongji’s strategy for legitimizing and diffusing market reform throughout the country—would inevitably lead to a crisis of governance and distorted market reforms would lead to economic stagnation.

A different perspective emphasized the transformative nature of China’s institutional changes in the reform era. Those who saw China’s economic transition in a more positive light

stressed the responsiveness and adaptively of China’s political institutions to external pressures and internal crises (Yang 2004; Naughton and Yang 2004). This literature sometimes references the adoptive capacity of China’s ‘Leninist’ political institutions and portrayed China’s authoritarianism as malleable and adaptive in the face of demands for institutional change (Heilmann 2005b). However, following China’s accession to the WTO and its increasingly prominent role in the global economy, the debate surrounding the future of China’s economy took a different turn. As the CCP appeared to be more resilient than many had anticipated, and as economic openness became increasingly moot, debates increasingly centered on financial system reform and privatization.

While some saw China’s financial and banking and financial markets becoming ‘liberalized’ and becoming more driven by market incentives (Green and Liu 2005; Chang and Lochel 2012; Steinfeld 2010), others saw command economy legacies in China’s financial system take precedence of market-based resource allocation (Shih 2008; Walter and Howie 2009, 2012). Those who take the former perspective stress the state’s shrinking share in China’s economy (Lardy 2014) and the resilience of China’s central bureaucracy in the face of changing domestic economic institutions (Heilmann and Perry 2011). Those who take the latter perspective have tended to emphasize the role of intra-party bureaucratic politics in subverting the reform process (Shih 2007) or the role of the central government in using reform to finance state liabilities rather than enacting market reform to foster a rational distribution of financial resources into the economy (Walter and Howie 2012).

This recent debate harkens back to the prior debate in one fundamental way. One side sees China as changing to resemble other advanced economies, and the other sees China as failing to escape the inefficiencies of a command economy. And while these debates have certainly furthered our understanding of China’s economic and political transformation since the 1990s, they are ultimately unsatisfactory. The literature that emphasizes China’s eminent stagnation and stalled market reform tends to portray China’s economic system as being state-capitalist (as opposed to ‘market capitalist.’) However, the idea of ‘state capitalism’ isn’t very well defined. For example,

while many industries—including banking, telecommunication and energy—are dominated by state-owned enterprises, in a range of other industries, including manufacturing (Gallagher 2011; Huang 2003) and accounting (Gillis 2014) the state had outsourced the entire market to foreign- based multinational corporations. At the same time, those who emphasize a market-based trajectory fail to explain more recent trends towards re-nationalization in a range of industries including accounting (Gillis 2014) and private equity (Robertson 2015). Moreover, many of the newly emerging private technology and financial services firms have deeply institutionalized linkages with the Communist Party and enjoy significant advantages over foreign counterparts in accessing capital in China. This debate has also been picked up by IR scholars, who focus on whether China is, or will, join the existing international order, or overturn it to create something new (see Bremmer 2010; Ikenberry 2012; Hurrell 2007). The present research concerns China’s financial liberalization since the early 1990s and will specifically explore the role of FFIs therein. The research presented here seeks to make a small contribution to the debate outlined above, by outlining the ways in which China’s ‘outsourcing’ of financial sector development to international companies (Steinfeld 2010)—a process I will outline in detail and describe as the formation of spatial and elite-based linkages—makes China’s financial system appear both ‘state-capitalist’ and market-oriented, and how the structure of the international financial system allows for this paradoxical outcome. Throughout this thesis I will show how FFIs have helped Chinese ‘state capitalism’ emerge by helping Chinese policymakers use the global financial system, and Anglo- American market liberal practices more broadly, to strengthen Chinese financial and non-financial state enterprises.

3.2. Financial Globalization and the State

Lastly, my analysis has some implications for the debate about the role of the state and non-state actors in the study of IPE. The debate surrounding the role of the state in the post-Bretton

Woods era of international economic and financial integration (Strange 1996; Krasner 1999; Schmidt 2009) is not a new one and my intention is not rehash or further it. However, my analysis does lend support for the side of the debate that emphasizes the state’s agency, specifically, vis-à- vis the global financial market. In a way, China’s interaction with FFIs points to the inherent flexibility of the global financial system, which has allowed China to play by the rules of the system, while maintaining a great degree of agency in pursuing its own reform objectives. Specifically, my conclusions run contrary to a number of studies that examine the pressures placed on emerging economies by the international system to liberalize their financial sector to FFIs (Stein 2010; Martinez-Diaz 2009; Epstein 2008, 2014; Bonin et al 2010; McDermott 2007). In one way or another, these studies show that FFIs come to own a significant share of emerging economies’ financial assets because the latter seek to take advantage of the benefits of global economic integration and cannot do so without ceding a significant share of national ownership.

I show that China is an important exception to the narrative that we have seen to take place in other emerging and post-communist economies. The policies pursued by China’s policymakers allowed them to take advantage of the financing available on international stock exchanges as well as the managerial and financial products expertise offered by FFIs, while delaying the opening of its banking system to foreign ownership or the greater financialization of its economy. In this thesis, financialization is used to refer to the increasing reliance on non-bank financial instruments in the financial system—the disintermediation of debt (Epstein 2005). Alternatively put, it implies the rise of direct financing (Seabrooke 2001).

To be sure, the Chinese case might be more of an exemption than the rule—its economy is uniquely large and attractive for FFIs and investors across the globe. But it remains the case that for a country that has faced a domestic banking crisis (in the late 1990s), sought the aid of international capital, and sought out international legitimation and acceptance of its policies on foreign trade and investment, the benefits of global financial integration were leveraged without taking the same kinds of immediate trade-offs that many of its post-command economy transition

countries have had to take. Moreover, this outcome was no mere accident. Rather than conceding to this ‘defeat,’ FFIs have been instrumental in helping China to achieve these ends.

A common thread that runs through these two sets of literature is the dichotomy between states and markets. Regardless of the country case in question (China or other emerging or post- communist transition economies), there is always an implicit assumption that a tug of war persists between liberalization and state control. My goal in this thesis is to explain why the process of internationalization—a process through which China has engaged with the global economy—might blur this dichotomy. It is also to explain internationalization as a process that allows China to ‘have its cake and eat it too:’ to benefit from global markets and practices without necessarily scaling back the role of the state in allocating economic resources.

3.4 Defining Internationalization

This section will outline my main theoretical contributions to the study of financial reform in China. It will explain FFI’s role in China’s financial evolution from the more abstract angle of China’s interaction with the global financial system. The study of the internationalization of the financial sector in China is not a new one. There is already a burgeoning literature on China’s power and leverage in the international monetary and financial system (Chin and Helleiner 2008; Helleiner and Kirshner 2014; Helleiner and Malkin 2012). However, these studies are concerned with the implication of China’s greater role in international finance rather than the process of internationalization itself.

The most detailed and systematic examination of China’s internationalization in the area of finance is Schlichting’s (2008) work on foreign banks’ entry into China’s banking and equities markets. Schlichting’s analysis offers a useful framework for understanding internationalization of China’s Mainland banking industry and stock markets. As Schilchting (2008, p. 2) put it,

Internationalisation here is understood as a process in which new (external) actors enter markets and in which the incentives and market environment of domestic actors are altered simultaneously. Internationalisation affects both market conduct and the rule-setting for markets, and through both contributes to market development. Altered incentives and constraints, new actors and actors’ constellations, and new modes of interaction between regulators and industry players in the domestic market are key elements of this process.

Schilchting’s study of foreign banks in China and her definition of internationalization represent the first scholarly attempt in the field of IPE to conceptualize internationalization of the financial sector in China; it is also the first systematic study of FFIs in China. However, the study is limited in a number of ways. First, Schlichting’s study does not make a clear distinction between the process of internationalization in banking and financial markets. Because her focus is on finance in the Mainland it only includes a cursory discussion of international IPOs of Chinese firms and the role of the outsourcing of Chinese equity market development to overseas stock exchanges in the process of internationalization. Another limitation (flowing logically from the first) is that Schlichting dichotomizes the process of globalization as choice between exogenous norms and practices and endogenous prerogatives.

Schlichting is not alone in drawing these conclusions. Nolan (2010) for example, has surveyed the opinion of foreign banks with respect to the norms and practices of international finance as they are realized in China. She finds very limited normative diffusion at the bureaucratic and corporate governance levels: “While regulators may still aim for international standardization, the experience of the participants in this study is that, at the level of the organization, there is little will, and few incentives, to change current practices” (Nolan 2010, p 431). This suggests an inside- out causal mechanism, whereby Chinese policymakers, bureaucrats, and financial institution

managers only adopt those aspects of international finance that fits their organizational and normative worldview. Gonzalez-Vincente goes even further and concludes that

Whereas it could be argued that China’s gradual integration in the international political economy has occurred via the acceptance of certain hegemonic patterns of capitalist socio-economic organization, there is little evidence of the extent to which this may have been the effect of Western economic and cultural dominance rather than of inner Chinese governmental and extra-governmental strategies contingent to China’s ‘Opening Up’ and ‘Going Out’ processes (Gonzalez- Vincente 2011, p. 404)

However, these studies fall short of clearly tracing the degree and processes of internationalization; namely, how international financial practices were adopted (what policies led to their adaptation) and in what ways they were fundamentally rejected.

Robertson (2012; 2015) has, by contrast, conducted a detailed study of private equity (PE) in China by examining the impact of ‘returnees’—national elites educated in overseas universities and bearing international experience in the field—on the industry. With reference to Steinberg’s (2001)’s notion of ‘bilateral activists,’ who have one foot in the world of global elites, and one foot in the world of China’s national princelings (descendants of China’s Civil-War era CPC elites), Robertson describes how the influence of financial returnees both brought global practices to Chinese PE and endogenized them. Unlike Nolan, Robertson finds a large degree of diffusion of international practices and norms in the area of PE, demonstrating that while unable to challenge the core structure of China’s political economy (i.e. dominance of state firms and the preference for CPC-connected private firms), the business models and corporate governance of locally-owned Chinese PE firms very closely resemble international models. Chin (2007) has argued that the

by local choices and policy prerogatives, or an ‘outside-in’ dynamic, whereby exogenous norms and practices displace local ones. Chin contends that China’s experience has been somewhere in the middle on a scale between inside-out and out-side in, with exogenous norms and practices influencing China’s policy prerogative, just as China’s policymakers modify these norms and practices, choose the ones they deem appropriate for China’s conditions and level of development, while rejecting others outright.

With respect to the first limitation in Schlichting’s study, there is, in fact, a dearth of literature to explain the difference between the fully internationalized Hong Kong and the very partially globalized Shanghai/Shenzhen financial markets, let alone the significance of overseas Chinese listings in New York and other global financial centers. The only exception is Walter and Howie’s (2012, chapter 6, para. 28) brief discussion of overseas IPOs and their apt observation that Zhu Rongji’s decision to let Chinese companies to begin listing overseas “led the dramatic growth of the Hong Kong Stock Exchange (HKSE) from its position as a small regional exchange in 1993 to a global giant in the twenty first century.” But beyond this, the fact that academic studies barely mention the explosion of overseas listed Chinese assets (especially their proliferation since the 1997 China Telecom listing) as an aspect of China’s financial liberalization demonstrates a significant gap not only in China studies but in the study of IPE as well.

Lastly, Schlichting’s analysis is lacking in ways that are similar to past studies of the subject—in particular when the country in question is a post-communist transition economy. Keohane and Milner’s (1996) edited volume of case studies of internationalization relies on a very similar definition of the term, emphasizing the “underlying shifts in transaction costs that produce observable flows of goods, services, and capital” (p. 4). The key characteristic of their definition (and that of Schlichting’s) is the change in transaction costs and interests facilitated by exposure to international markets and institutions/practices. But neither Schlichting (2008) nor Keohane and Milner’s (1996) volume make a clear distinction between internationalization and liberalization. A

number of important questions remain, including: do the change in incentives and interests ultimately lead to liberalization? And, if so, what is the process by which liberalization occurs?

Empirically, Keohane and Milner’s framework was not entirely on sound grounds because, as the chapters by Evangelista, Shirk, and Haggard and Maxfield (respectively) showed (See Keohane and Milner 1996), in the case of late-industrializing economies and large and powerful post-communist transition economies (Russia and China), integration with the global economy had little to do with exogenous pressure. Rather, it was driven entirely by domestic financial crises. Zweig (2002) attempted to resolve these empirical issues by describing how Chinese policymakers created localized spaces of experimentation where local policymakers’ and private actors’ incentives could be altered. Very usefully, Zweig discussed ‘linkages’ between China’s domestic economy and the global economy (he identifies rural, industrial, and educational). Zweig, however, was imprecise about how the segmented and localized experiments he documented would be adopted nationally and whether, again, this would ultimately lead to liberalization: the retreat of the state from the economic sphere and its replacement by private actors. His work, however, did produce important insights about the functioning of Chinese policymaking and its interaction with the global economy: the idea that linkages with the global economy could be established without actually liberalizing the sectors to which the global economy becomes connected. This may seem paradoxical, but a number of more recent studies shed light on how internationalization could be understood as a process that is related to but ultimately distinct from liberalization.

Mary Gallagher (2011) and Huang Yasheng (2003; 2011) provide us with studies that question the idea that introducing foreign enterprises and foreign business norms and labour practices necessarily translates into the liberalization of a particular sector of the economy. Gallagher (2011) argues in Contagious Capitalism that foreign firms in China’s manufacturing sector provided testing grounds for new labour and management practices for Chinese SOEs to directly emulate—to become efficient through learning and emulation rather than through direct

takes this argument further and suggests (with the aim of critiquing the CCP’s approach to economic reform) that deliberate state discrimination against private domestic firms has allowed foreign firms to benefit from privatization, which was, in effect, a project of selling Chinese assets to foreigners rather than private domestic capitalists. In both instances, the CCP is motivated by