Beyond ports,roads and railways: Chinese economic statecraft,the Belt and Road Initiative and the politics of financial infrastructures

Financial infrastructures: enabling statecraft through connectivity (power)

What is the connection between financial infrastructures, power and statecraft? Armijo and Katada (2015) define financial statecraft as ‘the intentional use, by national governments, of domestic or international monetary or financial capabilities for the purpose of achieving ongoing foreign policy goals, whether political, economic, or financial’ (p. 43). Thereby, financial statecraft can be ‘bilateral’ or ‘systemic’ in scope, utilise ‘monetary’ or ‘financial’ means and can be ‘offensive’ or ‘defensive’ in character – that is directed outwards to exercise power vis-à-vis other actors (‘sword’) or used as a ‘shield’ to preserve policy autonomy (Andrews, 2006: 19; Armijo and Katada, 2015: 46–47; Cohen, 2008). Financial statecraft therefore is a subset of economic statecraft, that is, facilitating the achievement of foreign policy through economic means (Baldwin, 2020). While authors have pointed out the importance of credit, investment or currencies/swap lines for financial statecraft (Armijo and Katada, 2015; Cohen, 2018; Lim et al., 2021; McDowell, 2019), there is a financial infrastructure dimension to statecraft that has so far been neglected in this literature.

A key feature of infrastructures is that they create connectivity – establishing linkages between different places and entities, thereby enabling certain socio-economic transactions to take place (Larkin, 2013). But providing these infrastructures is more than a mere technical exercise. As de Goede (2020) notes, infrastructures ‘sediment’ power relations and ‘shape, enable, constrain that power in specific ways’ (pp. 4–5). Similarly, Ho (2020: 1470–1471) noted that ‘structural power can be exercised through infrastructure when cross-border infrastructure projects give rise to asymmetric relations between states’ as through infrastructures ‘the dominant state can non-intentionally and indirectly dominate and penetrate . . . the subordinate state’. Powerful states can utilise infrastructures as tools of economic statecraft as the connectivities these infrastructures create enable them to extend their rules both domestically and internationally (Weiss and Thurbon, 2018: 781–784). The weaponization of the SWIFT payments infrastructure through the United States to invoke economic sanctions against Russia and Iran, for instance, illustrates this (Farrell and Newman, 2019), or more recently concerted Western financial sanctions against Russia following the Ukraine invasion. Infrastructures do not only enable connectivity, but through the resulting increased centrality of dominant actors within this networked relationship and their ability to thereby define how these socio-economic transactions take place infrastructures are themselves an important source of power and statecraft (Munn, 2020: 177).

This also applies to financial infrastructures. While financial markets are used by investors to allocate financial assets, provide corporate financing and facilitate economic growth, certain arrangements must exist to enable these transaction – existing and newly emerging socio-technical systems through which ‘payments are settled, risks are assessed, and prices agreed’ (Bernards and Campbell-Verduyn, 2019: 777). But markets are always organised by someone and for specific purposes; as Bernards and Campbell-Verduyn (2019) noted, ‘power often depend[s] on control over key financial infrastructures’ (p. 783). Whoever controls financial market infrastructures has significant power to shape financial markets and their socio-economic outcomes.

Since the 1980s, capital markets emerged as a key financial infrastructure in the global economy and as important drivers of economic growth (Lavelle, 2004). Between 1978 and 2020, the number of listed companies tripled from 13,712 to 43,248 while their market capitalization increased from 23.1 to 134.6 percent of global gross domestic product (GDP; World Bank, 2021). The spread of capital markets changed how corporate governance, financing and ownership of companies function globally and are central to financialization processes that have engulfed not only the core but also the periphery of the global economy (Bonizzi, 2013). Their establishment was facilitated by institutions like International Monetary Fund (IMF) and World Bank and inscribed into global development paradigms like the Washington (and more recently Wall Street) Consensus (Gabor, 2021). While in 1978 only 9 percent (1,257) of listed companies were from non-high-income countries, today 39 percent (16,870) are listed in emerging/developing economies. Consequently, how capital markets are organised, who organises these markets and which constraints and incentives these actors face matter globally.

For capital markets, financial infrastructures are mainly provided by stock exchanges (Wójcik, 2012). Rather than investors who are active within markets, as infrastructure providers exchanges play a more architectural role (Petry, 2021a). As central hubs, exchanges facilitate the circulation of financial information and concentration of financial services firms, thereby serving as ‘anchors’ for financial centres (Wójcik, 2012). However, they are not only marketplaces (i.e. the stock market), but exchanges are themselves powerful actors as they actively shape the infrastructural arrangements – from market data, indices, products to trading platforms – that enable the operation of capital markets. First, by deciding which companies can list on their market or which products (stocks, bonds, derivatives, indices, etc.) can be traded, exchanges define investment opportunities. Second, exchanges exercise influence over who gets to participate in these markets and who is able to invest into – and own – these listed assets, thereby influencing investor structures. Third, whoever wants to participate in these markets can only do this through the systems implemented by exchanges. Through these systems, exchanges set investment rules of how trading/investing is conducted, monitored and sanctioned. Furthermore, exchanges have historically had close relationships with regulators/governments, especially in emerging markets (Lavelle, 2004). Exercising control over exchanges therefore also conveys a potential degree of political influence beyond capital markets. Overall, by providing financial infrastructures exchanges exercise structural power as they change the range of choices open to market participants, rewriting the rules of the game (Strange, 1988: 31).

Consequently, if a country can exert influence over another country’s exchange and is thereby able to shape according to which rules and parameters financial resources are allocated represents an important source of economic statecraft. Both intentionally and unintentionally, exchanges can thereby exercise power vis-à-vis foreign actors and achieve state objectives. As the following section highlights, this process plays out differently in US-dominated global markets, Chinese markets and in developing countries.

Chinese and global exchanges in the differential organisation of capital markets

Not all exchanges organise markets equally. To understand the construction of Chinese BRI financial infrastructures, one has to acknowledge the context of the contemporary GFO ² which is based on liberal norms of profit-oriented, lightly regulated, internationally integrated financial markets and which is guaranteed by but equally reproduces US power (Drezner and McNamara, 2013). In this global system, the provision of financial infrastructures is highly concentrated and a hierarchy exists with a handful of exchanges shaping capital markets globally (Petry, 2021a). These mostly US-based, profit-driven, globally active companies (‘global exchanges’) run the largest, most prestigious and profitable markets and own the most important products, indices and technology.

Global exchanges organise capital markets according to liberal norms where markets ought to create ‘efficient’ outcomes which is achieved by enabling the generation of (private) profit through the free flow of capital without state intervention. They create systems that facilitate profit-driven market activity rather than market oversight/surveillance (investment rules), facilitate the dominance of profit-driven global institutional investors (investor structure) and create profit-oriented financial products/practices such as high-frequency trading (HFT) (investment opportunities). They do this because they are themselves listed, profit-driven companies that aim to generate shareholder profits; global exchanges are embedded within a neoliberal institutional logic that informs their activities (Petry, 2021b). Importantly, through these infrastructures they reproduce US financial hegemony and enable its exercise of economic statecraft. This was, for instance, exemplified by the US-facilitated delisting of Chinese companies from global indices/US stock exchanges during the US–China trade war (Yu and Horta e Costa, 2021). Similar to the SWIFT episode (Farrell and Newman, 2019: 54), the United States only utilises such measures in exceptional circumstances. Importantly, however, the infrastructural arrangements created by global exchanges enable this weaponisation in the first place.

With the global spread of capital markets, this also has implications for developing countries. As a global exchanges’ marketing director stated, ‘not only are we looking to grow and innovate in the developed market, but basically the emerging markets space is a fundamental strategy – new market development and international strategy is a big focus for [us]’. ³ Nasdaq, for instance, provides technology to 130+ market organisers in 50 countries, ⁴ 40+ exchanges use LSE Group’s Millennium platform, ⁵ while CME Group has multiple similar cooperations. ⁶ Especially when exchanges are (relatively) underdeveloped, such infrastructure and knowledge transfers are crucial (Wójcik, 2012: 114, 121). Asked about global exchanges’ role for capital market development globally, one interviewee replied,

I’d say pretty important. In developing countries, certainly, they wouldn’t get off the ground if they didn’t have some kind of help. . . it’s the technology as well, I mean where do you get the technology from if you don’t have another exchange to provide it? ⁷

Importantly, venturing into new/underdeveloped markets is an important source of (future) revenues for global exchanges, hence their growing global engagement. ⁸ Thereby, global exchanges significantly shape how developing country capital markets work.

A useful example is Borsa Istanbul which in 2015 overhauled its trading system and migrated to Nasdaq’s infrastructure (BISTECH). Since then, HFT grew significantly, accounting for 25 percent of trading volume. As one senior official noted, ‘the ability of HFT companies to trade was made possible by the technical infrastructure of the exchange reaching global standards’, ⁹ as BISTECH facilitated HFT through co-location/low latency networks. Similarly, after introducing the new trading platform, derivative trading increased sixfold between 2015 and 2020, while ownership by foreign institutional investors grew to more than 60 percent. As Nasdaq’s Head of Market Technology noted, ‘the journey that started with us [for Turkey] is to change all the technology to best practices, to globally-known technology to decrease all barriers of entry [and] making the market easier to access for international investors’. ¹⁰ This, however, also made Turkey subject to volatile financial flows which was evident when foreign investors sold stocks worth US$4.1 billion after index provider MSCI threatened to downgrade Turkey if not further liberalising its market. By 2020, Borsa İstanbul had the highest share turnover velocity globally, ¹¹ indicating a pattern where market infrastructures facilitate lightly regulated, profit-driven trading (short-term speculation) with relatively little real-economic benefits (long-term investment) – a development that many would deem characteristic of global market infrastructures (Bernards and Campbell-Verduyn, 2019: 780–782).

While this process is not always as encompassing, this example demonstrates that through providing financial infrastructures and advising ‘local’ regulators/exchanges how markets are supposed to work, global exchanges create, connect and shape marketplaces globally. Similar to the regulatory convergence around insider trading rules facilitated by US regulators (Bach and Newman, 2010: 521), financial infrastructures globally converge around characteristically American ‘best practice’. Global exchanges disseminate liberal norms that reproduce a US-dominated GFO and it is against this backdrop that we need to analyse China’s construction of BRI financial infrastructures.

Importantly, capital markets do not necessarily have to follow this liberal script (Petry et al, 2021a). While Chinese authorities have recognised the usefulness of market-based economic coordination, ‘free’ financial markets are seen as endogenously crisis-prone, socially unproductive and loosening control over the economic system if not strictly regulated. While today boasting the world’s second-largest capital markets, their growth occurred within the constraints of Chinese state capitalism where the Chinese Communist Party (CCP) aims to maintain control over socio-economic development, in part by managing policy uncertainties through the financial sector (Gruin, 2016: 27). This translates into state control within capital markets through monitoring, regulating and intervening into them and exerting state influence through finance by directing market outcomes towards state objectives. This is partially achieved through exchanges which in contrast to publicly owned/profit-oriented global exchanges are state-owned entities and consequently shape the infrastructural arrangements of capital markets according to state-capitalist institutional logics. The defining difference between liberal and state-capitalist logic is not the existence of capital markets per se but rather the principles that underlie market organisation (profit creation vs state objectives) and the actors that dominate/shape these markets (private finance vs state institutions).

Of course, the Chinese state is not an all-powerful, monolithic entity that can simply direct economic actors to achieve its strategic objectives. Even most state-owned banks/enterprises are listed, partially profit-oriented commercial actors (see Chen, 2021), and state control over these is only possible under specific conditions (Norris, 2016: 28–30). Chinese exchanges, however, are more firmly embedded into state structures. Unlike most Chinese financial actors, they are not organised as (partially) commercially oriented ‘companies’ but are part of China’s financial regulatory apparatus itself, organised as not-for-profit entities and embedded into the institutional structures of the Chinese party-state (e.g. nomenklatura system). As one Chinese exchange official noted,

You know, foreign exchanges, they are pure companies, they need to earn profit. But in China, the exchanges work under the CSRC, they are managed by the government. So, we don’t care about how much money we earn. . . serving the real economy, that is the main purpose of our business. ¹²

Instead of profit/shareholder value, the performance of exchanges, their personnel and management are measured by their contribution towards state objectives rather than commercial indicators. They consequently organise market infrastructures in ways that contribute to these state policies both domestically and abroad (Petry, 2021b). So, while investors within Chinese markets are largely profit-driven, ¹³ Chinese exchanges organise the infrastructural arrangements of markets according to state objectives. Through this architectural role, they place constrains and incentives on market actors, thereby partially aligning their behaviour with state objectives.

Domestically, Chinese capital markets are designed to facilitate real-economic development, prevent overspeculation, stabilise the socio-political system or aid efforts to reform Chinese companies, as Xi Jinping noted in 2017. ¹⁴ This is reflected in the infrastructural arrangements of markets that enable a surveillance of market activities by implementing segregated-account/‘see-through’ monitoring systems, balancing speculative and commercial investment activity by restricting HFT/introducing hedging quotas, or creating financial products that are considered to contribute to real-economic development, for example, commodity futures that facilitate commercial hedging and global pricing power (Petry, 2020). Consequently, state involvement/management of Chinese markets is much more pronounced than in global markets, with much more stringent regulatory oversight (Collins and Gottwald, 2014). As Charles Li, then CEO of HKEx, fittingly noted, ‘While Europe is struggling with MiFID II, in China you have MiFID 10’. ¹⁵

This logic of facilitating state objectives also extends into Chinese exchanges’ international activities, like the construction of financial infrastructures in BRI countries. Thereby, their activities are fundamentally different from global exchanges’ profit-driven approach; as one global exchange’s APAC director stated, ‘What is the goal of SSE buying PSX? . . . It just doesn’t make sense to me. . . there is no business case’. ¹⁶ However, as a former Chinese exchange official explained, ‘to be honest, [our international activity] doesn’t have to make economic sense every time. It could be political needs, politically we would have to be more connected to a certain country or region, it could be strategically important. . .’ ¹⁷ Similar to how China increasingly challenges liberal norms of development finance (see AidData, 2021; Chen, 2021), the construction of Chinese financial infrastructures abroad differs from those created by global exchanges.

Rather than following profit-oriented rules, being penetrated by global investors and integrated into global networks of US-based exchanges, Chinese exchanges facilitate the creation of capital markets along the BRI with ‘Chinese’ characteristics (Table 1): facilitating investments into BRI projects through listing BRI-related companies (stocks), providing long-term funding for BRI-related projects (bonds), or further facilitating these investment through ETFs or indices (investment opportunities); integrating these countries into Chinese financial circuits, enabling cross-border financial flows and facilitating Chinese ownership by attracting Chinese investors/brokers into BRI markets (investor structures); and shaping these capital markets in their image by changing how these markets operate, for example, by training exchange staff and introducing financial infrastructures that function similar to Chinese rather than liberal markets (investment rules).

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Table 1.

Differences between global and Chinese capital markets.

	Global capital markets	Capital markets with Chinese characteristics
Exchanges	Shareholders, profit-driven	State ownership, policy-driven
Investment consideration	Short-term profit considerations	Long-term strategic considerations
Primary role of markets	Enable profit creation to achieve ‘efficient’ outcomes	Enable market management/control to achieve state policy
Investment rules	Rules that facilitate profit logic	Rules that facilitate market management/control
Investor structures	Integrate markets with profit-driven global investors / US-dominated financial system	Integrate markets into Chinese financial circuits / facilitate Chinese ownership
Investment opportunities	Create profitable investment opportunities(e.g. HFT)	Create ‘useful’ investment opportunities(e.g. financing BRI projects)
Objective of economic statecraft	Entrench US financial hegemony (implicit)	Facilitate Chinese state policy (e.g. BRI; explicit)

HFT: high-frequency trading; BRI: Belt and Road Initiative.

This is of course a somewhat stylised summary. State control is neither absolute in Chinese markets, nor do Chinese internationalisation efforts fully replicate their domestic model. Also, global markets are neither purely profit-driven nor shielded from state interests (see, SWIFT example). Overall, however, two different institutional logics inform the organisation of capital markets in China and the US-dominated GFO.

Drawing on this conceptual framework, the following empirical section first investigates how BRI financial connectivity became an important foreign economic policy for China. It then analyses how by strategically investing into BRI financial infrastructures and shaping investment rules, structures and opportunities, Chinese exchanges create financial connectivity between China and BRI countries, thereby facilitating Chinese economic statecraft as they contribute to this important state objective.

PSX: financial connectivity along the China–Pakistan Economic Corridor

The case of the Pakistan Stock Exchange (PSX) – where Chinese exchanges acquired a 40 percent stake – is instructive in this respect. While in 2016 Pakistan was the fifth best-performing capital market globally, ³⁶ the product range was limited and data leakages and unfair competition practices were endemic. To facilitate the development Pakistan’s stock markets and curtail the influence of PSX’s existing members – so that ‘the big boys aren’t manipulating the rules to their own advantage’ ³⁷ – Pakistan’s central bank was looking for a strategic investor for the partially demutualised exchange.

As Chinese Premier Li Keqiang noted, the China–Pakistan Economic Corridor (CPEC) is a ‘flagship project’ in China’s BRI strategy; consequently, the Chinese exchanges scooped in. While foreign investors could only hold 30 percent of PSX, CFFEX, SSE and SZSE formed a consortium with Pakistan’s Habib Bank (5%) and Pakistan-registered but Chinese-owned China–Pakistan Investment Company (5%) and bought a 40 percent stake with a financially generous offer and the promise to modernise PSX. ³⁸ As the Pakistani Prime Minister’s adviser on finance, Miftah Ismail, stated, ‘The government was endeavouring to make Pakistan’s capital market among the most competitive in the world [and] the Chinese investment was a catalyst in introducing technological advancement, diversified financial products and global visibility’ (Jabri, 2018). The Rs8.96 billion (US$85 million) deal was sealed on 21 January 2016.

But as one Chinese regulator noted, while ‘of course mutual benefit and cooperation is important’ in such collaborations, ‘[as] shareholders [China’s exchanges] can also exert some influence’. ³⁹ The Chinese exchanges received a majority (4/7 seats) on the Board of Directors by replacing Pakistan’s financial regulator and obtained the right to nominate PSX’s top management. After resistance from some Pakistani brokers, the Chinese CEO candidate, Richard Morin was ‘pushed through’ ⁴⁰ as PSX’s first non-Pakistani CEO, while CFFEX’s CEO became the deputy-CEO. As a Pakistani broker noted, ‘after the acquisition [the] dominance of local brokers within the Board has been significantly diluted’. ⁴¹ Effectively, the Chinese exchanges superseded the Pakistani brokers and regulator in PSX’s governance. From this vantage point, the Chinese exchanges started reorganising Pakistan’s market.

The Chinese exchanges also took first steps in reorganising Pakistan’s capital market (investment rules). Formerly, ‘data leakages’ were endemic which gave certain investors access to real-time trading data (think information asymmetries like in HFT as facilitated in neoliberal markets, only achieved through corruption). But, as one Karachi-based asset manager noted, since the Chinese investment, ‘they have introduced greater transparency [and] data leakages were largely reduced or are unheard of which wasn’t the case in the past’. ⁴² In this process, PSX has ‘tightened the regulatory regime’ through ‘standard[ising] the broker back-office system so that all brokers follow clearly specified standardised recording and accounting procedures of their dealing/transactions with investors’ which then ‘can be audited [more] easily by [PSX’s] Joint Inspection Team’ (PSX, 2018). Instead of buying LSE Group’s system, PSX opted for implementing SZSE’s trading and market surveillance system, including features such as ‘real-time monitoring’, ‘ex-post investigation’ or ‘data query and reporting’ (PSX, 2020). Thereby, PSX’s new infrastructure resembles China’s ‘see-through monitoring system’ that enables fine-grained surveillance and management of market activities, and in contrast to Western markets, the new system does not focus on implementing profit-oriented infrastructural arrangements (e.g. HFT through colocation/low latency). Heralded as a ‘breakthrough in technological cooperation between emerging markets’ (BR, 2019), this system is designed to boost PSX’s position as ‘front-line regulator’ whose task is not maximising profit but more focused on monitoring market dynamics to facilitate national development objectives. In addition, as PSX Chairman Suleiman Mehdi noted, this new system also includes a ‘China Connect’ interface that would eventually link PSX with Chinese stock markets similar to the Hong Kong Stock Connect. While the Pakistani partners hoped to develop their market, the Chinese partners strive to ‘drive market cooperation through technology, promote interconnection of financial infrastructure and mutually beneficial integration of markets along the Belt and Road’. ⁴³

Next to the deputy-CEO, CFFEX also has three to five full-time staff members working on-site and one to two people in Shanghai to assist the project, ⁴⁴ who aim to develop financial products/mechanisms that would link Chinese and Pakistani markets and enable fundraising for Chinese companies in Pakistan to further CPEC projects (investment opportunities). ⁴⁵ CFFEX, for instance, is preparing to list futures/ETFs and exchange-traded funds (ETFs), while PSX licenced its KSE-30 index to Chinese asset managers for developing ETFs to be traded on Chinese stock markets. In addition, China Three Gorges South Asia Investment (CSAIL), a subsidiary of state-owned China Three Gorges, the largest hydropower company globally, will become the first Chinese company to list on PSX. ⁴⁶ As a Pakistani business newspaper noted, ‘the listing is going to be significant for Pakistan as it will open avenues for similar listings in the future’ (Hassan, 2020) as Chinese companies ‘are planning to raise tens of billions of dollars for financing of future CPEC projects through PSX’, according to a source at PSX (cited in Syed, 2020). ⁴⁷ While CSAIL already accounts for 7 percent of Pakistan’s electricity generation, the listing would certainly facilitate its mission to acquire, develop, and operate energy projects in Pakistan. ⁴⁸ Without China’s acquisition of PSX such listings would not be possible; ⁴⁹ China’s construction of financial infrastructures therefore also facilitates the development of physical CPEC infrastructures.

The Chinese exchanges also worked on attracting more Chinese investors into Pakistan’s market (investor structure). CLSA, a subsidiary of China’s largest investment bank, for instance, bought a 25 percent stake in Alfalah Securities, a leading Pakistani broker, in order to ‘provide the best access and advice to Chinese companies looking to acquire businesses [or] set up joint ventures’. ⁵⁰ As one interviewee noted, ‘these days we’re desperate for money in Pakistan, for foreign investment’, ⁵¹ which facilitates the increasing presence of Chinese financial actors (Afridi and Khalid, 2016: 662). Several industry conferences/roadshows were organised to connect Chinese and Pakistani markets, while PSX and its Chinese partners lobbied their governments to allow Chinese investors greater access to Pakistan’s stock market (Siddiqui, 2019). ⁵² As one Pakistani broker stated, ‘we believe the PSX acquisition [is] connected to CPEC and strategic asset investment at a broader level, with a case in point being the ongoing transaction of Karachi Electric’. ⁵³ Reversely, Habib Bank – the minority partner that facilitated China’s acquisition of PSX – forged close ties and received very favourable financing conditions from Chinese financial actors/regulators which boosted its competitive position. It became Pakistan’s first bank to open branches in China, is now offering end-to-end RMB intermediation and has emerged as the largest executor of CPEC-related financing in Pakistan (US$6+ billion), servicing the BRI activities of 400+ Chinese companies. ⁵⁴ As Aliuddin Ansari, Chairman of Alfalah CLSA Securities, noted during an investor event in 2018, ‘Your stock market is now owned by the Chinese and China is coming to Pakistan’ (cited in Masooma, 2018). As Wahid et al. (2021) demonstrate in an econometric analysis of stock market volatility dynamics, over time Pakistan’s stock market has gradually decoupled from global markets and instead aligned more closely with Chinese market dynamics. Overall, PSX’s acquisition has clearly contributed to a deeper integration of the two countries’ financial systems in order to facilitate BRI.

As Pakistan’s prime minister Imran Khan noted in September 2020, ‘our economic future is now linked to China’. ⁵⁵ Amid an increasing interdependence of Pakistan and China through CPEC (Afridi and Khalid, 2016), Chinese exchanges aim to facilitate financial connectivity as an important state objective. By shaping the investment opportunities, structures and rules of Pakistan’s capital markets, Chinese economic actors occupy another position of power within Pakistan’s political economy, integrating it more closely into China’s financial sphere.

AIX: creating a Chinese-backed International Financial Centre in Kazakhstan

A second important project is China’s investment into Astana International Exchange (AIX) which is the heart of the new Astana International Financial Centre (AIFC). AIFC embodies Kazakhstan’s aspirations of becoming a regional financial hub that connects Central Asia, the Arab World, Russia and China. Emulating Dubai, AIFC operates according to English common law, asset classes can be denominated in four currencies (Kazakh tenge, RUB, US$, RMB) and registered companies receive 50-year tax breaks (Auyezov, 2018). Envisioned by President Nazarbayev in December 2015, AIFC started consulting with potential external partners to develop the new exchange.

Importantly, Kazakhstan is a crucial part of China’s BRI strategy, both for geostrategic reasons and as a commodity supplier; hence, creating financial connectivity is an important government objective that informs the activities of Chinese regulators/exchanges. In a first MoU signed in May 2015, Kazakhstan’s central bank and CSRC envisioned ‘regulatory cooperation in the securities and futures sector [and] laying the foundation for cross-border regulation and two-way investments’ (CSRC, 2018). This was followed by several cooperation agreements and meetings with Chinese actors, including SSE, Silk Road Fund and AIIB during events like the ‘One Belt, One Road Summit’. Thereby, both sides emphasised how financial connectivity could facilitate cooperation between China’s BRI and Kazakhstan’s ‘Bright Road’ economic policy. This series of delegation visits culminated in May 2017 when SSE acquired a 25.1 percent stake in AIX (undisclosed amount), becoming its largest shareholder, which for China provided an ‘additional impulse for the successful implementation of the Silk Road Initiative’. ⁵⁶ In a slightly different setup than PSX, AIX and SSE approached Nasdaq to become a junior partner. They agreed on a tripartite cooperation with Nasdaq implementing market technology, while SSE would engage with strategic consulting, business planning, product development and market expansion.

However, while Nasdaq’s role is relatively limited and purely commercially driven, ⁵⁷ SSE’s involvement is much more encompassing and strategic. Whereas Nasdaq does not have any representatives on AIX’s board/management team, SSE’s Executive Vice President is on the board of directors, the former Deputy Director of SSE’s Global Business Development became AIX’s deputy-CEO and SSE has three staff members in Astana ‘to help AIX build its market’ ⁵⁸ and develop Chinese–Kazakh cross-border financial infrastructures. ⁵⁹ As AIX’s CEO Tim Bennett noted, ‘[SSE] are contributing staff and resources but more importantly they are providing a gateway for us to talk to Chinese funds, Chinese brokers’ (Auyezov, 2018) and that together with SSE, AIX wants to create a marketplace that will allow the trading of BRI-linked securities. This is especially important with respect to RMB internationalisation where AIX could serve as an important offshore financial centre and ‘the ability to trade, clear and settle in RMB’ was noted by Bennett as ‘one of the big opportunities’ (Auyezov, 2018). When AIX launched in July 2018, it was announced that China’s Silk Road Fund also acquired 5 percent of AIX, tightening China’s grip on this important piece of BRI financial infrastructure. From this position, they were able to exercise influence over AIX’s market.

Importantly, Kazakhstan’s government aims to utilise AIX for the US$70 billion privatisation programme of its SOEs, such as KazMunayGaz (oil/gas), Kazatomprom (40% of global uranium production), Samruk Energy (electricity), Kazpost (postal services), TemirZholy (railway), Kazakhtelecom (telecommunication) and Air Astana (airline) all currently owned by its sovereign wealth fund Samruk-Kazyna (Fitzgeorge-Parker, 2018). While in theory, everyone could invest into these companies, due to its Chinese ownership, AIX is especially pitching these companies to Chinese investors. During several industry events, for instance, AIFC/Samruk-Kazyna presented Kazakh investment opportunities to Chinese investors, ⁶⁰ while AIFC’s Governor together with SSE President Huang Hongyuan jointly presented investment opportunities in the context of Kazakhstan’s privatisation programme at China’s Boao Forum in April 2018. As Forbes noted, the ‘AIX-SSE partnership makes investing in Kazakhstan that much easier for Chinese stakeholders waiting for Nazarbayev’s privatisation plans to kick in’ (Rapoza, 2018). In 2019, this led to the establishment of a new, RMB-denominated BRI market segment on AIX whose ‘proceeds should be used’ to facilitate the financing of ‘Bright Road’/BRI projects, China–Kazakhstan economic cooperation programmes and Kazakhstan’s privatisation programme. ⁶¹ As discussed during the ‘AIX BRI Investor Day 2021’, AIX is also awaiting regulatory approval for a priced Qualified Domestic Institutional Investor (QDII) investment quota which would create a direct financial channel with Chinese capital markets (next to RMB-denominated foreign direct investment (FDI) flows) as it strives to become an RMB offshore centre. Between May 2017 and August 2019, RMB transactions worth RMB 675.7 million had been conducted through AIFC. This volume is bound to increase through the listing of the iX China Equities BR Exchange Trades Notes (ETNs) which enables Kazakh investors to directly invest into China’s stock market. ⁶² Here, the importance of owning financial infrastructures has been crucial again (investment opportunities).

After SSE’s intensive activities to connect Kazakh assets and Chinese investors, other Chinese financial institutions ‘followed SSE into Kazakhstan’s market’, ⁶³ highlighting how exchanges shape investor structures: with China Development Bank opening one of the first representative offices at AIFC, CITIC acquired Altyn Bank, a Kazakh universal bank, CICC became AIX’s first non-Kazakh member, and China Construction Bank listed AIX’s first RMB-denominated bond in April 2020, raising RMB1 billion to finance BRI infrastructure projects in Kazakhstan. By April 2021, three Chinese brokers had become AIX members, forming the largest foreign group of members. With the exchange acting as the ‘anchor’ of the financial system, by November 2021 a cluster of 94 Chinese financial firms, including insurance companies, law firms, clearing/settlement, investment and policy banks, had formed at AIFC. ⁶⁴ Utilising this new connectivity to Kazakhstan’s financial markets, these Chinese financial players started facilitating non-financial cooperations between Chinese and Kazakh companies, for instance, securing Chinese resource access in the nuclear energy sector and enabling the acquisition of Kazakhstan’s largest car manufacturer. ⁶⁵ In the words of Forbes magazine, ‘Chinese finance currently dominates the scene’ (Rapoza, 2018). The creation of this China-centred, BRI-focused financial ecosystem would have been unlikely without SSE’s active role in AIX (Figure 1).

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Figure 1.

AIX as an emerging BRI financing centre.

Despite the involvement of Nasdaq as minority shareholder, AIFC/AIX seems to be oriented decisively eastwards. Through its investment into AIX, SSE aimed to contribute to the state policy of facilitating financial connectivity between BRI countries. By forming part of the management team, directing AIX’s strategy towards BRI and forging ties with other Chinese financial institutions, China’s investment into AIX has considerably shaped the development of Kazakhstan’s new financial hub in line with the BRI initiative, facilitating Chinese economic statecraft.

DSE: China, India & the battle for financial infrastructures in Bangladesh

Sometimes, ownership of financial infrastructures is also a contested process as highlighted by SSE’s and SZSE’s investments into the Dhaka Stock Exchange (DSE), thus becoming the largest shareholders. After Bangladesh partially demutualised its exchange in 2013, Bangladesh’s regulator was looking for a strategic partner (25%) to facilitate its further development. Following a tender invitation in July 2017, the Chinese exchanges prevailed against a counteroffer lead by India’s National stock Exchange (NSE) that had partnered up with Nasdaq. Essentially, the Chinese exchanges offered much higher payments, offering 22 taka/share plus technical support (US$157 million), while the Indian consortium only offered 15 taka/share without additional support (US$82 million). This highlights China’s strategic rather than commercial motives, as the acquisition aims to support the Bangladesh–China–India–Myanmar Economic Corridor (Xinhua, 2018b).

The geopolitical importance of these investments should not be underestimated. India tried to aggressively lobby DSE’s decision, even sending NSE CEO Vikram Limaye to convince Bangladesh’s financial regulator to reconsider the deal. As one DSE member noted, ‘we have accepted the Chinese bid, but the Indians are lobbying our regulator very hard, . . . the issue seems to have become as much political as financial’ (Stacey, 2018). One person familiar with the talks was quoted by the Financial Times saying that ‘India is trying to create a ringfence against Chinese aggression. Nepal and Myanmar have already gone, and if China wins this bid, it will be one step closer to dominating South Asia’ (Stacey, 2018). In a similar vein, Pakistan’s former US ambassador was quoted stating that ‘[China’s] strategy includes seeking economic pre-eminence in South Asian countries and the bid for bourses is part of that plan’ (Devnath et al., 2018). By extending its reach from physical to financial infrastructures that connect China with BRI countries, China also increased its power vis-à-vis its regional rival India, underlining the link between financial infrastructures and foreign policy.

Similar to PSX and AIX, the Chinese exchanges gained influence over DSE’s operation and aimed to facilitate the development of Bangladesh’s capital markets and to forge financial ties between Bangladesh and China. ⁶⁶ They now have a say in DSE’s governance with Xie Wenhai, Head of SZSE’s IT Management, joining the Board of Directors. As the President of the DSE Brokers’ Association noted, ‘changes have been made in the stock exchanges’ operational structures [and] brokers are no longer in control of the stock exchange’ (Mahmud, 2019a). From this position of power, the Chinese exchanges started to influence DSE’s market infrastructures.

As DSE’s managing director Majedur Rahman noted, with its Chinese shareholders ‘DSE is looking for massive development in its trading platform, surveillance system and internal management’ (Habib, 2019b). Through events such as the China–Bangladesh Capital Market Cooperation Seminars the Chinese exchanges train DSE staff and local financial institutions in how to ‘best’ organise capital markets, while they are also looking to introduce a new financial data exchange platform (Mufazzal, 2019). The logic behind these infrastructural arrangements, however, contradicts liberal norms of market organisation. As SZSE’s Director Liu Fuzhoung noted, ‘our exchange is working like a manufacturer of data’ and ‘preserves personal data related to beneficiary owners’ accounts, bank accounts and national identification number of all sponsors and officials’ (Habib, 2019c). This is a level of oversight unthinkable in global markets where the focus on market data is not monitoring/surveillance but utilising information asymmetries to generate profits (e.g. facilitating HFT, creating dark pools). In contrast, the Chinese exchanges aim to facilitate state objectives such as directing investments towards real-economic activities and monitoring markets by requiring access to vast amounts of data or implementing investor ID/segregated-account systems. At DSE, the Chinese exchanges are working to introduce such arrangements, not least as SZSE will implement a new trading and surveillance system (the same system that PSX adopted) once DSE’s existing contract to use Nasdaq’s trading system expires in 2023 (TBS, 2020). The Chinese exchanges also facilitated the establishment of a joint venture between Shenzhen Kingdom Technology, a leading Chinese financial technology provider and Bangladesh’s Asian Tiger Capital Partners to facilitate the further dissemination of Chinese market infrastructures. Similar to the case of PSX, the rules according to which trading on DSE takes place are influenced by Chinese standards of market organisation (investment rules). ⁶⁷

Next to the rules of the game, Chinese exchanges also facilitate the creation of new financial products in Bangladesh (investment opportunities). In January 2019, SZSE and DSE jointly designed the CNI-DSE Select Index, the first in a series of indices that aim to attract Chinese portfolio investment (Habib, 2019a; Mahmud, 2019b). The Chinese exchanges thereby promised to promote these indices, displaying these data feeds in their domestic systems and engaging Chinese asset managers to develop investment products based thereon. ⁶⁸ Furthermore, similar to AIX’s BRI market segment, the consortium plans to list long-term infrastructure bonds on DSE to support BRI investments and SZSE also created a new platform for listing small and medium-sized enterprises on DSE (Habib, 2019b), with an initial six listings in October 2021. Importantly, DSE’s new investment opportunities are aimed to facilitate long-term BRI/Chinese investments into Bangladesh rather than short-term/speculative trading activity through encouraging HFT or derivative trading.

These are complemented by additional infrastructural arrangements to facilitate this process (investor structure). The aforementioned data/indices, for instance, are crucial to ‘present the opportunities of the Bangladesh market to Chinese investors’ (Habib, 2019c), while DSE’s new SME platform is linked to SZSE’s V-Next platform (see ‘Casting a net? An emerging patchwork of financial infrastructures along the BRI’). As SZSE’s CEO Wang Jainjun remarked, ‘[this] Bangladesh window will facilitate Bangladeshi listed companies to explore strategic partnership, seek business collaboration, and diversify business and technology channels in China’ (Habib, 2019a). Thereby, DSE is actively ‘working to woo qualified Chinese investors with the aim of boosting the county’s capital market’ (Rahman, 2019b) by offering ‘preferential trade benefits and friendly investment policies’, according to DSE Chairperson Abul Hashem (Mahmud, 2019b). According to DSE’s Managing Director, the infrastructures implemented by the Chinese exchanges ‘[are] expected to facilitate market connectivity between Bangladesh and China, linking up the financial institutions in the two countries to forge a cross-border financial community’ (Rahman, 2019a).

Overall, it becomes clear that the Chinese exchanges work alongside Bangladesh’s regulators, market participants and DSE ‘to further deepen Sino-Bangladesh capital market cooperation and promote the building of a Sino-Bangladesh “Financial Corridor”’. ⁶⁹ Through defining DSE’s investment rules, opportunities and structures, the Chinese exchanges create financial connectivity that aims to facilitate BRI as an important state policy.

Casting a net? An emerging patchwork of financial infrastructures along the BRI

The Chinese exchanges’ investments into Pakistan, Kazakhstan and Bangladesh (Table 2) showcase the potential for the construction of financial infrastructures as ‘offensive’ and ‘bilateral’ tools of economic statecraft (Armijo and Katada, 2015: 52–53). By shaping local investment opportunities, structures and rules in those countries, Chinese exchanges create financial connectivity that subtly alters power relations between China and the respective BRI countries and contributes to BRI as an important Chinese foreign economic policy (Ho, 2020).

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Table 2.

China’s acquisition of financial infrastructures along the BRI (author’s table).

	PSX	AIX	DSE
Ownership pattern	40 percent stake (2016)	30 percent stake (2017)	25 percent stake (2018)
Investment opportunity	ETF cross-listing (KSE-30), M&As (K-Electric), Chinese IPOs (CSAIL; planned), infrastructure bond issuance (planned)	BRI market segment (bond issuance), privatisation programme, offshore RMB centre	Index creation (CNI-DSE Select Index), financial data platform, infrastructure bond issuance (planned)
Investor structure	China Connect, road shows, Sino-Pakistani brokers (CLSA-Alfalah), Habib Bank as CPEC	Dominance of Chinese financial players, Sino-Kazakh banking (CITIC-Altyn), road shows	SME/V-Next platform, Sino-Bangladesh Financial Corridor (planned), road shows
Investment rules	adoption of Chinese trading and market surveillance system, front-line regulator status, staff training	Trading on AIX can be conducted in RMB	Adoption of Chinese trading and market surveillance system (planned), staff training

PSX: Pakistan Stock Exchange; AIX: Astana International Exchange; DSE: Dhaka Stock Exchange; CSAIL: China Three Gorges South Asia Investment; BRI: Belt and Road Initiative; CPEC: China–Pakistan Economic Corridor.

But while these cases are the most advanced BRI cooperations, they are part of a broader development of BRI financial infrastructures. While they may have started as individual experiments, we can observe a steady growth of financial infrastructure–based connectivity arrangements over time (Figure 2). Thereby, Chinese exchanges have engaged in (1) the acquisition/establishment of exchanges, (2) advanced inter-exchange cooperation/connectivity, (3) created mechanisms to attract Chinese investment and (4) signing MoUs or cooperation agreements.

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Figure 2.

The steady growth of BRI-related financial infrastructure arrangements.

Importantly, as Bach and Newman (2010: 520–521) demonstrated, engaging in such cooperations significantly increases a countries’ likelihood of converging with the powerful countries’ preferences. Similarly, Zeng Zheng, Director of the NDRC Market Research Institute, noted, ‘BRI helps you to set standards’. ⁷⁰ Like global exchanges’ diffusion of liberal norms of market organisation and facilitation of US-centred financial networks, Chinese cooperations around BRI financial infrastructures create an alternative network of financial relations into which it partially exports its domestic market organisation practices.

First are other (planned) BRI exchange acquisitions/establishments. After a familiar pattern of on-site visits/engagement with key stakeholders in both markets, in May 2018 Abu Dhabi Global Market (ADGM) opened an office in Beijing and together with SSE announced to jointly establish a ‘Belt and Road Exchange’ in Abu Dhabi which aims ‘to use Abu Dhabi as an offshore financial centre, as a sort of conduit, [which] would enable China to conduct foreign indirect investments’. ⁷¹ Similar to AIX, the stated goal of this cooperation is to

Serve as a key international capital-raising platform supporting Chinese enterprises, foreign companies and global organisations to finance their investments, including along the Silk Road Economic Belt network [and] is a testament to ADGM’s commitment to China and further cements the deep mutual respect and existing long-term relationships between ADGM and various Chinese authorities and stakeholders. (Andreasyan, 2018)

Furthermore, Deutsche Börse, SSE and CFFEX established CEINEX, a Sino-German exchange which aims to bridge European and Chinese capital markets. BRI is thereby, for instance, supported by listing the first Silk Road green bond in 2017. As one interviewee noted, in the medium term ‘more joint exchanges are planned in other parts of the world and discussions with several of them are under way’. ⁷²

Second, Chinese exchanges have also been very active in promoting more advanced cooperations with BRI exchanges. This includes the joint development of indices or sharing of market data to create investment opportunities and the creation of cross-border capital market service platforms that facilitate cross-border financial flows. SZSE and Laos Securities Exchange, for instance, agreed ‘to deepen capital market collaboration through information sharing, personnel exchanges, experience sharing, and personnel training and mutual visits’ ⁷³ which was followed by the creation of the Sino-Laos Cross-Border Capital Market Service Mechanism. Similar cooperation agreements exist with exchanges across Southeast Asia. In many of these instances, Chinese exchanges would also engage in training/education activities, sharing their vision of operating markets with exchanges, investors and regulators in BRI exchanges. By May 2021, at least 22 of such trainings had been conducted. Some European exchanges, especially from offshore RMB centres such as Luxembourg (LuxSE) or London (LSE), are similarly active in facilitating BRI as part of ongoing cooperations with their Chinese counterparts. ⁷⁴ To aid this inter-exchange cooperation, the CSRC even advocated establishing a Shanghai-based industry forum to promote BRI exchange cooperation (Xinhua, 2018a). While (partial) ownership of financial infrastructures is an important channel to facilitate BRI, inter-exchange cooperation with smaller exchanges is equally important to create financial infrastructures (and power relations) that connect Chinese and BRI capital markets.

Third, Chinese exchanges are creating evermore mechanisms that enable Chinese investment into BRI markets. While there are multiple bilateral efforts to achieve this, the most important infrastructure is SZSE’s V-Next cross-border capital service platform that was established in 2016 to accelerate ‘the integration of high-quality industries and capital between China and other BRI countries’. ⁷⁵ By December 2020, V-Next had held 300 roadshows with 15,000 companies for 23,000 investors and secured over RMB53 billion financing for 1,600 BRI projects in 45 countries. ⁷⁶ Reversely, many Chinese and other exchanges started encouraging bond issuance to finance BRI projects, raising US$60+ billion by December 2021. Here again, financial infrastructures facilitate an integration of BRI markets into Chinese financial circuits.

As previously noted, this process is still in its formative stages. The effects of these infrastructural arrangements ‘will not [materialise] overnight’ as ‘this is a gradual process’ to paraphrase, Kam Majedur Rahman, Managing Director of DSE (Habib, 2019b). Importantly, however, rather than slowing down (like Chinese credit issuance) we can observe a steady increase of such financial infrastructure connectivity activities. This might be indicative of a shift within BRI away from public debt financing (see also Carmody et al., 2022). China’s 14th Five-Year Plan (2021–2025), for instance, explicitly calls for a diversification of BRI financing away from bank lending (‘多元化投融资体系’). Financial infrastructure connectivity is a necessary condition for such a change.

Overall, these observations outline the gradual emergence of a patchwork of Chinese financial infrastructures largely aimed at facilitating BRI as an important foreign policy (Figure 3). These financial infrastructures create new connectivities that place China within the centre of an emerging parallel system of capital markets with Chinese characteristics – facilitating Chinese investment opportunities, investor structures and investment rules.

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Figure 3.

An emerging patchwork of Chinese financial infrastructures.

The emergence of such a parallel system of capital markets also has potential implications for the liberal, US-dominated GFO, as collectively these infrastructures can potentially shield BRI from US financial power. This is especially visible in ongoing Sino-Russian financial infrastructure collaborations which – while discussed as contributing to BRI – are also motivated by what Carla Norlöff (2021) calls ‘dollar deterrence’. To shield themselves from a US-dominated/US$-denominated global financial system, the two countries facilitate RMB/RUB cross-currency trading and develop a unified RMB/RUB liquidity pool and alternative financial payments infrastructures. These collaborations have important material effects as the US$’s share in Sino-Russian trade settlement dropped from 90 percent in 2015 to only 40 percent in 2020 (Simes, 2020), while RMB-RUB currency trading surged by 1,067 percent between February and May 2022 (Bloomberg News, 2022). As Cavanna (2021) notes, such ‘alternative channels’ created by China could in time ‘gradually reduce Washington’s ability to weaponize interdependence in the financial domain’ (p. 229). These financial infrastructures can therefore also be characterised as ‘defensive’ and ‘systemic’ economic statecraft – collectively shielding Chinese foreign policy (i.e. BRI) from external pressures and preserving Chinese policy autonomy.