New Types Of Financing For A New Financier: A Theory Of Chinese Development Finance

Why are some development finance packages issued on stricter terms than others? I investigate this question for the important case of China using a mix of quantitative methods and case studies. Chinese organizations use a wide variety of financial arrangements including grants, zero-interest loans, freelance contracting, equity investment, tied loans, and resource-backed loans. In the event that loans are not repaid, China then turns to a secondary set of options including debt forgiveness; debt restructuring or deferment; debt-equity swaps; and non-renegotiation. Many of these tools have not been treated in depth by the literature to date. I address this gap by sorting them into a hierarchy of strictness, finding that Chinese diplomatic and geostrategic motivations are associated with laxer terms, but that Chinese commercial interests are associated with stricter ones. I further find that geostrategic and commercial interests become associated with progressively stricter terms as political risk increases. These findings expand existing theories of development finance to better fit a major actor which puts greater emphasis on commercial interests in its development finance policy and uses very different modalities of domestic governance and external engagement