China’s rise, weaponised interdependence and the increasingly contested geographies of global finance

ABSTRACT

In recent decades, scholars have investigated China’s rise within the global financial system – from identifying China’s different state-market configurations, to understanding its controlled financial opening and entanglements with the neoliberal, US-dominated global financial order. The recent geoeconomic turn, however, has fundamentally changed the macro-context of this development. Largely in response to China’s rise, the US started weaponising finance, upending key trends and reshuffling actor constellations: within China, in private finance, in non-Western countries and in the West itself. To understand China’s emerging global role, we need to explore this new geopolitical context and how it reshapes global financial geographies.

KEYWORDS:

• China
• global finance
• geopolitics
• neoliberalism
• state capitalism
• financial geography
• great power rivalry
• financial globalisation

JEL:

• F6, F65
• F5, F51
• F3, F38
• G18
• P00

1. INTRODUCTION: THE CHANGING GEOGRAPHIES OF GLOBAL FINANCE

Global finance is changing. While the global financial system had been dominated by transatlantic financial networks up until the 2007–2009 global financial crisis (GFC), we could observe important tectonic shifts within the last 15 years. Especially with the decreasing relevance of Europe within the global financial system (see Pape & Petry, 2023, pp. 10–15), the geographies of global finance are increasingly shifting eastwards (Lai et al., 2020b). And while Asia as a region has gained in significance, overall, China’s financial rise stands out.

Whereas China’s financial system only developed in the 1980s, it has become increasingly central within the contemporary global financial system. Today, China is home to some of the largest capital markets globally, its banking sector has become the world’s largest, it is the second largest hub for venture capital and has even emerged as a global leader in areas such as FinTech and central bank digital currencies (see Allen et al., 2017; Xu, 2023). While a lot of its financial development is domestically focused, China is also increasingly impacting global finance. On the one hand, global investments into China have been steadily increasing. By 2021, US investors had invested US$1.2 trillion into Chinese capital markets, up from merely US$50 billion in 2005. The Renminbi (RMB) was included into the IMF’s special drawing rights (SDR)-basket, while Chinese securities were included in global benchmark indices. On the other hand, China has become the largest bilateral provider of development finance, controls ∼1/3 of sovereign wealth fund (SWF) assets, holds the world’s largest FX reserves and Chinese banks represent 26% of lending to developing markets and 7.5% of overall cross-border lending. In addition, it created new sets of international financial infrastructures: from capital markets along the Belt and Road Initiative (BRI), to RMB swap lines, cross-border payments (CIPS) and multilateral development banks (NDB, AIIB). It has arguably risen to become one of the most important hubs within the contemporary global financial system (Chen & Petry, 2023).

An extensive interdisciplinary research programme has consequently developed that analyses China’s emergence within global finance. But as this article illustrates, the context in which China’s rise takes place has drastically changed. While we could previously observe China’s (controlled) integration into a neoliberal, US-dominated global financial system, the politics of finance have become much more contested with the recent geoeconomic turn and the corresponding weaponisation of finance. This creates new fault lines and poses important challenges for how we study China’s continued rise. The article thus sketches possible trajectories and outlines a research agenda for exploring the new geoeconomics of global finance.

2. BEFORE GEOECONOMICS: BETWEEN IMBRICATION AND RESISTANCE TOWARDS A NEOLIBERAL GLOBAL FINANCIAL SYSTEM

Over the last decade, China’s rise was a primary research concern for scholars interested in the changing contours of the global financial system. On the one hand, scholars studied the domestic characteristics of China’s financial system and its similarities and (substantial) differences to Western finance. Importantly, the Chinese state has an outsized and qualitatively different role within the financial system (Pan et al., 2021; Töpfer, 2018; Wang, 2015). Many of China’s largest financial institutions are (partially) state-owned, motivated by both commercial and policy objectives, significantly blurring the state-market dichotomy that informs conceptions of ‘Western’ finance (Liu & Dixon, 2021). Regulatory actions are more frequent, encompassing and disruptive (Collins & Gottwald, 2014), while the growth of Chinese finance takes place within a political-economic system where the Chinese Communist Party maintains control over socio-economic development (Gruin, 2019), as the authorities exercise ‘statecraft [through] financial control’ (Sum, 2019, p. 386). Financialisation in China is thus closely intertwined with state-capitalist economic structures (Petry, 2020).

On the other hand, Chinese finance has become increasingly and deeply imbricated with the global financial system. Before the GFC, China had become the largest holder of US government debt (Hung, 2009); a setup which Ferguson and Schularick (2009) aptly called ‘Chimerica’. Reversely, China became subject to increasing financial inflows over time and was integrated into global capital circuits, not least by its inclusion into benchmark indices which one FX trader likened to ‘basically China’s ascent into the Champions League’ (cited in Petry et al., 2021, p. 168). But whereas China seemed to converge with the US financial model, this process ended abruptly with the GFC as Chinese authorities realised the pitfalls/dangers of neoliberal finance (Gao, 2023, pp. 234–235; Kirshner, 2014, pp. 221–222). Overall, a very different understanding of finance and its role within the economy developed in China as is also demonstrated by many official documents and policies (e.g., Liao, 2017).

This very much informed China’s financial opening (Li, 2018). Rather than a ‘Big Bang’ style liberalisation, scholars have underscored how China created a network of differential financial centres (Lai, 2012), access channels (Töpfer, 2017) and infrastructural arrangements (Petry, 2021) that enabled a controlled opening while maintaining its state-capitalist characteristics. These controls are not perfect, of course, and capital is also ‘leaking out of China, escaping the reach of the Chinese state’ (Wójcik, 2018, p. 274). Overall, China largely resisted pressures to conform with neoliberal norms of how Western finance operates, initiating debates about how to analyse China’s state-capitalist financial networks within a neoliberal global financial system (Töpfer, 2018).

This different understanding of finance also influenced the internationalisation of Chinese finance (Balmas & Dörry, 2022; Pan et al., 2017). While we can observe considerable overlaps with the US-dominated global financial networks (Töpfer & Hall, 2018), China has begun to create alternative financial spaces – through its growing footprint in development finance (Chen, 2021; Chin & Gallagher, 2019), increasing financial integration with other countries such as the BRICS (Hooijmaaijers, 2021; Oliveira, 2022), the internationalisation of its currency (Hall, 2017; McNally & Gruin, 2017) or in the context of the BRI (Lai et al., 2020a; Petry, 2023). Through this process, China created financial spaces that partially function differently from Western finance, thereby also propagating and projecting its different vision of how finance ought to work internationally.

3. A CHANGING CONTEXT: THE GEOECONOMIC TURN IN GLOBAL FINANCE

One important focus of much of this existing research was to understand differences in the state-market configurations that inform China’s financial system and its internationalisation. Often, this was contrasted with a global financial system based on neoliberal norms of efficient markets, free flows of capital and non-intervention, which was guaranteed by but also reproduced US power (Drezner & McNamara, 2013). The collapse of Bretton Woods and economic paradigm shift towards neoliberalism (Peck & Tickell, 2002) had resulted in the reemergence of finance as a powerful global force that was centred around an Anglo-American core (Fichtner, 2017; Helleiner, 1996; Konings, 2008). As Agnew and Crobridge (1995, p. 127) noted, ‘the dollar […] remain[ed] the world’s leading reserve currency, and Wall Street continue[d] to serve as one of the most important nodal points in a world economy’. American power had not declined but globalised.

And while punctually intervening into finance in moments of crisis, the nature of US financial power was structural (Strange, 1990); asymmetric financial networks were seldomly utilised in an instrumental way to achieve geostrategic objectives. For the longest time, this context enabled China’s seamless integration into and imbrication with the existing global financial system but it also caused extensive resistance towards convergence pressures and research emphasised China’s relationship with/impact on this rather static global order (Hung, 2013; Petry, 2021; Töpfer, 2018; Vermeiren & Dierckx, 2012).

However, in recent years – and largely as a response to China’s rise – the US increasingly relied more on state power to maintain its global primacy (Eichengreen, 2023). As Schindler et al. (2022) noted, the macro-context within which global finance operated had changed fundamentally amidst growing geoeconomic competition. The US increasingly began to weaponise interdependencies within the global economy in which it occupied crucial nodes or ‘chokepoints’ (Farrell & Newman, 2019) – from hi-tech, to communication and financial infrastructures. As Caytas (2017, p. 21) notes, these infrastructures ‘can be made instrumental’ for achieving geoeconomic objectives. Geoeconomics can thereby be understood as the ‘admixture of the logic of conflict with the methods of commerce’ (Luttwak, 1990) and ‘a more subtle means [than military power] for seeking relative gains, with less risk of major counteractions that could prove costly in a situation of interdependence’ (Wigell & Vihma, 2016, p. 605, for a conceptual history, see also Mallin & Sidaway, 2023). While prior instances of such weaponisations occurred (e.g., financial sanctions against Iran), we can observe its acceleration in the context of growing geoeconomic tensions as the spatial logic of twenty-first century great power competition is ‘geared towards control over networks and their structures’ (Schindler et al., 2023, p. 12).

Finance has thus become subsumed by the geoeconomic turn and previous trends that facilitated China’s financial rise have been upended or even reversed: While Chinese companies had been encouraged to list on US exchanges for a long time – famously Alibaba in 2014 with the then world’s largest initial public offering (IPO) – we can observe the forced delisting of Chinese state owned enterprises (SOEs) (Chan, 2023). Ever since China’s World Trade Organisation (WTO) accession, greater access to Chinese financial markets had been a key US policy objective, whereas now we see increasing investment restrictions like the entity list for Chinese companies producing in Xinjiang or the investment ban on PLA-linked Chinese companies (Reuters, 2021). And from passively allowing Chinese investments into Western securities/companies, we can observe more scrutiny and the implementation of investment screening mechanisms (IISD, 2022). The US increasingly ‘weaponised’ its hegemonic position within the global financial system to stymie China’s rise.

Rather than assuming the backdrop of a static neoliberal global financial order, the context of China’s rise has massively changed. Importantly, this raises a series of issues concerning the study of China’s growing footprint within the global financial system. So, how can we make sense of China’s financial rise in a world where finance is increasingly used as a ‘weapon of choice’ as Gordon Clark (2022) writes?

4. A RESEARCH AGENDA: CHINA WITHIN A CHANGING GLOBAL FINANCIAL SYSTEM

While previous studies analysed China’s statist insertion into/differences with a neoliberal global financial system, rising geoeconomic tensions have created a series of new fault lines, adaptations and actor constellations. Importantly, this is not limited to China alone. The following section therefore points towards the changing context of China’s rise and how it affects financial geographies on a global scale. Moreover, it outlines different potential trajectories – from reglobalisation, deglobalisation, bifurcation, to regionalisation or fragmentation – that could be explored as part of a future research agenda.

First, we need to investigate whether and how China is adapting to this new context. Arguably, geoeconomic tensions triggered a rethinking of how to engage with the global financial order within China’s party-state apparatus as national security concerns have become more prominent in policy discussions (Xi, 2022). China is thereby learning from past mistakes as its entanglement with the existing global financial order has created a series of potential vulnerabilities; as Summers (2020) argues, China and its financial policies (e.g., BRI) were fundamentally constrained due to its reliance on a US-dominated global financial system. Consequently, there have been increased and more concerted efforts to strengthen financial autonomy, to find ‘Chinese solutions’ (zhongguo fangan) and develop mechanisms to cope with a more hostile financial environment (Zhang, 2020; 2023). One example is the strengthening of China as a financial centre by getting Chinese companies to list domestically, as a result of which China emerged as the largest IPO market globally in 2022/2023 (Neeley, 2023). Furthermore, learning might change the intentionality behind policies. While previous research has, for instance, largely focused on ‘RMB internationalisation’ – examining the growing global impact of China’s currency (power as influence) – it might be more fruitful to shift attention towards ‘de-dollarisation’ (power as autonomy). Instead of a controlled integration into the US-dominated, neoliberal global financial system, we might also observe a greater focus on building/strengthening capabilities to construct what could amount to a parallel, China-centred system of financial markets (Petry, 2023).

Second, the role of private finance within the global financial system is changing. Because of the geoeconomic turn, the interests of increasingly geoeconomically motivated governments and continuously profit-oriented financial institutions are diverging. We see this especially in the US: while the White House wants to curb China’s growing financial influence, Wall Street has by and large continued to expand its business activities in China. Notwithstanding some of the inherent problems of China’s financial system (e.g., in real estate or local government debt), the growth potential in Chinese financial markets remains huge, especially compared to already saturated, highly financialised Western markets. Whereas the US, for instance, has $29,196bn in pension assets (136.2%/GDP), in China, they only amount to $223bn (1.6%/GDP) (Hale et al., 2021). Driven by the promise of (future) returns from China, private finance accepts, adapts to and even legitimises China’s non-liberal rules – much to the dismay of the US government (USCC, 2021). One possible trajectory could therefore be that – in spite of geoeconomic tensions – China becomes a new frontier of financial globalisation. Globalisation is not upended but becomes relocated, albeit in a potentially less neoliberal way.

At the same time, private finance must adapt its strategies due to geoeconomic tensions. Some US investors/institutions are indeed retreating from the Chinese market amidst geoeconomic tensions and divestment pressures from the US government. US-based venture capital firms like Sequoia or GGV Capital, for instance, split their US and (booming) China business into separate companies (Chen, 2023) and US investment banks might not be able to participate in the planned Shanghai-based $9bn IPO of Syngenta since its parent company ChemChina is sanctioned (FT, 2023). More stringent data and anti-espionage laws in China might also force financial firms to compartmentalise their China business. Rather than continuing or relocating global financial activity towards China, increasing bifurcation of global financial networks might therefore offer an alternative trajectory. Overall, we thus need a better understanding of private finance (and multinational corporations more broadly) within the context of increasing geoeconomic rivalry.

Third, the question is how other non-Western countries adapt to these new circumstances. As the US increasingly weaponises the global financial system, many start to rethink their dependence on US(D)-(de)dominated global finance. Here again, different trajectories are possible. The swath of initiatives for using local currencies in bilateral and regional trade might signal a move towards a more multipolar currency system, albeit this has raised questions about the viability of such a fragmented currency system. Another alternative would be a strengthened role for the RMB which, as some argue, would be the only viable alternative to the USD in the absence of a proper global reserve currency like the bancor (Alloway & Weisenthal, 2023). In fact, not only obvious cases such as other sanctioned countries like Iran and Russia are becoming evermore financially integrated with China; even Indian refineries started paying for Russian oil in RMB (Verma, 2023). Other countries like Pakistan have been following suit (Mangi & Stapczynski, 2023), Saudi Arabia considers accepting yuan for its oil sales (Said & Kalin, 2022) and other emerging markets like Brazil agreed on using RMB/local currency in bilateral trade (Reuters, 2023). And while some US investments in China were curbed, Middle Eastern SWFs have increasingly invested into Chinese securities (Xue & Zhen, 2023). We should therefore investigate whether and how countries might be carving out financial spaces of autonomy to shield themselves from US influence – and examine China’s role within these new configurations.

Fourth, where does Europe stand in all this? Another trajectory might be an increasingly divided West. While the European Union (EU) has introduced investment screening mechanisms and Chinese investments have become very politicised, unlike the US neither the EU nor large economic powers such as Germany or France have initiated concerted efforts to counter China’s rise (Amaro, 2023), whereas others like the UK, Switzerland or Luxembourg continue to court Chinese investments (Balmas & Dörry, 2022; Peter & Rao, 2023). While de-risking with respect to China is politically debated and China has been labelled a ‘strategic competitor’, financial ties are still largely untouched by state actions – in contrast to the US – and many European companies have increased their exposure to China in recent years. Large European banks like UBS might even benefit from geoeconomic tensions as US financial institutions need to navigate increasingly difficult waters and countries like Switzerland emerge as new nodes in China’s global financial network (Li et al., 2022). Will Europe continue on its path or eventually follow the US in weaponising finance? And how will the US react towards Europe’s approach? More needs to be done to investigate Europe’s stance amidst growing US–China geoeconomic rivalry (Babic, 2023; Babić et al., 2022).

The geoeconomic turn has yet again changed the geographies of global finance, upending long-standing principles, creating new ruptures and shifting global financial networks. Correspondingly, different trajectories about the politics of global finance are imaginable. In order to explain China’s continued impact, we need to come to grips with the new context in which Chinese finance is situated and learn how it reshuffled the cards and changed the rules of the game in the global casino.

ACKNOWLEDGEMENTS

I would like to thank Ruben Kremers for his feedback on a previous version of this paper.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by Deutsche Forschungsgemeinschaft: [grant number no 855/7-1/446618653]; Economic and Social Research Council: [grant number 1791638].