Inside global financial networks

Introduction

The words of Deng Xiaoping, chief architect of China’s economic reforms in the 1980s, highlight the importance of pragmatism and experimentation in Chinese policymaking. It is this emphasis on policy experimentation that has also characterized the Chinese approach to financial liberalization: a ‘trial-and-error’ process of mixing and matching central planning tools with market forces (Heilmann and Perry, 2011). The idea of policy experimentation was also the starting point for the state-led global financial networks (GFNs) framework developed in the anchor article of this forum (Töpfer, 2018). Using recent empirical findings on Chinese cross-border investment programs, the goal was to develop a politically sensitive framework of GFNs by shifting the attention from market agents to the frequently neglected channels of state power across multiple governance levels. By rethinking the state’s role as market-maker rather than market-mediator, the framework mapped how bargaining conflicts inside the Chinese party-state have a decisive impact on firms’ competitive hierarchies and behavior, both domestically and globally. The underlying premise guiding the discussion was thus that the global spread of neoliberal market ideas has not led to the retreat of the state; rather, it has given rise to more complex interdependent forms of governance, whereby the state shares authority with non-state actors (Büthe and Mattli, 2011).

The commentaries on the forum’s anchor article endorsed the premise that GFN governance needs to be understood as a negotiated outcome between foreign investors, domestic corporate interests, and different levels of the Chinese party-state. As Wójcik (2018: 274) notes, the state-led GFN framework ‘should remind us that GFNs are political, social, and cultural as much as economic’. The commentators also highlight important limitations. The purpose of this response is not to rehash these arguments. Rather, its objective is to zoom out from the specifics of each commentary and discuss common themes that bind them. The following three areas warrant closer inspection: (1) types of agency, power, and the rise of new fintech actors; (2) the methodology behind studying state-led GFNs; and (3) the question of ‘Chinese exceptionalism’ as a mode of capitalism. These themes have been selected because they cover both structural features of institutional governance (e.g. modes of capitalism) and agency-driven aspects (e.g. power resources). This article should therefore not only be read as a response to the forum’s commentaries; it also fulfills a representative function of the interplay between ‘structure’ and ‘agency’ within GFNs.

Alibaba and the rise of venture communism

The state-led GFN framework places the state at the center of how financial networks evolve. In contrast, Zhao (2018: 277) questions the role of ‘the Communist government in our theorizing about GFNs…[and] any theory of GFNs with the state at its center…[as] a useful…guide to international financial networks’. He references the cases of Alibaba and its mobile payment platform Alipay to support his reasoning. However, the rise of Chinese ‘lead firms’ in GFNs is not to say that state participation no longer has a role to play in the formation and governance of financial networks. For example, the Chinese financial services conglomerate HNA recently became the top shareholder in Germany’s biggest lender, Deutsche Bank. This prompted Germany’s financial regulators to launch investigations amid concerns over ownership control procedures and economic interests tied up in the deal (Arons, 2017). Furthermore, the Chinese state recently partnered with Alibaba’s Alipay and Tencent’s WeChatPay to launch an electronic identity card in three Chinese cities (SCMP, 2018). Leveraging facial recognition technology, users of these mobile payment apps can receive an e-identity card certified by China’s Ministry of Public Security and use it just like a physical identity card. Rather than undermining the ‘survival’ of the state in GFNs, we are thus witnessing the rise of ‘venture communism’. In other words, the Chinese government actively supports its emerging fintech darlings and national corporate champions to boost their competitive position within GFNs. Contrary to Zhao’s reasoning, the state thus shapes which firms emerge as network leaders in the first place.

Zhao (2018) further argues that the Chinese Communist Party abuses its rights to profits earned by Alibaba and other Chinese entities. He questions why any investor would invest in a company ‘they knew would have to use [the money] on social projects instead of their customers and products’ (Zhao, 2018: 278). As Alibaba’s own statistics show, the opposite is true: of the company’s shareholding structure, 44% is owned by foreign investors, split between Japan’s SoftBank and America’s Yahoo (Alibaba, 2017). Political interference may therefore be a risk factor in making investment decisions, but it has clearly not deterred foreign investors from allocating funds to China’s largest corporations.

The logic that the rise of Alibaba challenges the state-led GFN approach also remains ambiguous. Zhao’s core argument is that ‘the influence of the state in global financial networks (GFNs) is anything but clear’ (2018: 276). However, he later acknowledges that no one doubts the Communist Party's role and influence over [Alibaba]. Chinese financial companies like Alipay will continue to owe their position to government policy (Zhao, 2018: 277). This appears to contradict the core argument and leaves the reader wondering whether to endorse or reject the notion of state-led GFNs.

This ambiguity highlights the importance of addressing a more fundamental question: what counts as a financial network? According to Zhao (2018), constantly changing political preferences make the long-term ‘survival’ of a financial network difficult. The trouble is that this treats political preferences as separate from financial networks. This would lead us to assume that financial networks are a distinct space of market agents, disrupted by the occasional interference of the state. Recent empirical findings challenge such assumptions by showing that the Chinese state is a major architect of new financial hubs and firms’ competitive positions within GFNs (Hall, 2017; Töpfer and Hall, 2017). GFNs may therefore be best understood as systems of adaptive governance that bridge often-competing interests between different government levels as well as foreign and domestic corporate interests. Such adaptive governance is also the key to understanding the remarkable institutional resilience of China’s system of capital controls (Heilmann and Perry, 2011). Before the 2008 financial crisis, China’s investment quota system functioned as a foreign policy tool to address financial liberalization pressures, whereas it served as a major stability mechanism in the postcrisis period (Töpfer, 2017). Contrary to Zhao’s thesis, the government’s durability in GFNs is therefore conditional on adaptive state behavior. Such durability depends on the government’s pragmatism to orchestrate a functional transformation of market access restrictions, which allows for upholding formal institutional stability over time. The state-led GFN approach therefore challenges the assumption of the state’s demise or resistance to change and adds to neo-institutional debates on institutional learning and adaptation (Thelen, 2012).

How to study GFN governance

The importance of state–firm relations raises a number of important methodological questions. One question concerns how to integrate the many different actors that shape GFN governance. This includes key ‘nodes’ such as financial centers (Lai, 2018), financial and business services (Wójcik, 2018), and the rise of fintech players such as Alipay (Zhao, 2018). Part of the answer can be found in Hall’s (2018) commentary. She suggests that the state-led GFN approach can be mapped onto the broader GFN concept by providing a framework for understanding the ‘micro-materialities’ of behavior within financial centers and offshore jurisdictions. Rather than focusing on charting the growing number of actors, the notion of state-led GFNs adopts a ‘middle ground’ approach and zooms in on the exchange of power resources between actors. These theoretical insights are not limited to foreign investors, domestic state-owned enterprises, and different levels of government; they equally apply to accountancies and law firms as well as international financial centers and privately owned fintech players such as WeChatPay and Alipay.

The emphasis on ‘micro-materialities’ also has important implications for studying how agency shapes institutional change. On the surface, it is tempting to view the Chinese party-state as a ‘uniform’ agent given that financial regulation is centrally administered in China. This may lead us to assume that multilevel governance plays a limited role in shaping China’s financial market outcomes. Contrary to this logic, the state-led GFN approach highlights underlying conflicts of interests and policy entrepreneurship across different bodies of central government. It should therefore be read as a plea for adopting a multilevel perspective that remains sensitive to varying incentives and choices within the state. Ultimately, this means that a state-led GFN approach is limited in its endeavor. As Wójcik rightly notes, it provides a foundation for ‘understanding the multilevel governance of China’s GFNs, not for China’s GFNs as a whole or for a state-led GFN as a whole’ (2018: 274). This limited conceptual scope ensures that key concepts such as power resources are sufficiently specific to allow for empirical measurement. Overall, this limits the degree of interpretational freedom and thus reduces the risk of ‘grand theorizing’ and conceptual ambiguity.

More broadly, the ‘middle ground’ focus also enables us to move beyond the national scale of analysis and study institutional change within GFNs (Hall, 2018). GFNs may appear ‘stable’ as formal linkages between network layers remain intact. But they can still undergo substantial functional adaptation that changes the logic behind these linkages. It is therefore necessary to further disintegrate the motivations and incentives among seemingly homogenous actors such as ‘firms’ and ‘the state’. The literature on global economic networks has provided ample insight into the former. Future research should pay equal attention to internal differences of the state.

Power, agency, and state–firm relations

In her commentary, Lai (2018) calls for specifying how state agents exercise power and agency to shape the behavior of firms. She references the example of Singaporean banks, where the state ‘shape[s] firm behavior and business decisions via direct ownership…of banks’ (Lai, 2018: 286). This is a valid point and one that the anchor article examined based on empirical insights from China’s asset management companies (AMCs). The article showed that powerful government bodies such as China’s Ministry of Finance drive behavior and competitive positions of AMCs, domestic state-owned enterprises, and banks through direct legal ownership (Töpfer, 2018). Recent empirical work has furthermore applied insights from the state-led GFN approach to map different types of state agency both within and across jurisdictions. This includes high-level state visits and renminbi (RMB) working groups between Chinese and overseas policymakers (Hall, 2017). Others identify the strategic use of rhetorical framing practices across different governments as a tool for shaping competitive hierarchies of firms and financial centers alike (Töpfer and Hall, 2017).

The state-led GFN framework also refines the notion of agency in the business systems literature. This approach emphasizes the state’s provision of ‘collective competition goods’ such as access to capital and skilled labor (Whitley, 2007). Previous works argued that the rise of ‘global business regulation’ has reduced the importance of state-provided collective competition goods (Braithwaite and Drahos, 2000). However, competition goods are not limited to such conceptions. For example, providing privileged market access for certain foreign investors and international financial centers provided the Chinese government with politically relevant resources to achieve its domestic goal of driving financial reform. Such resources included foreign expertise and access to new financial territory (Töpfer, 2017). The rise of global business regulation has therefore not diminished the importance of state-provided competition goods; rather, it has led to a diversification of the channels through which the state supplies these goods to achieve domestic competition goals.

In sum, the state-led GFN approach makes two important additions to a more nuanced perspective on agency in business system approaches: It extends the domestic reach of ‘collective competition goods’ by identifying channels through which global agents feed into domestic economic organization and clarifies that space can function as a power resource in its own right.

The importance of state control then requires us to approach the idea of ‘power’ through a fundamentally geographical lens. Conventional definitions of power such as ‘the ability to get what you want’ and ‘to get others to want the outcomes you want’ (Nye, 2011) are too vague to capture how location-specific context shapes power relations. The state-led GFN approach proceeds with an understanding of power grounded in economic geography and two works in particular: Allen’s (2003) Lost Geographies of Power and Topologies of Power (2016). There are three specific insights from Allen’s work that inform how power is understood in the state-led GFN framework: (1) power comes in the shape of different key modalities, which include ‘hard’ features such as coercion or ‘soft’ features such as persuasion; (2) power is not a resource in its own right but a way of pooling resources through interaction with others; and (3) several power resources can be used simultaneously or in succession. Allen clarifies that ‘powerful’ agents can draw on resources both inside and outside of their own institutional context to achieve their goals.

By combining these elements, the state-led GFN framework defines power as an agent’s control over material and nonmaterial resources in bargaining processes that span different agents and locations. This conception of power reflects the empirical reality of China’s financial liberalization. This process has relied on the decentralized accumulation of, and experimentation with, new ideas and solutions from both domestic and foreign firms and governments (Heilmann and Perry, 2011). It is in this context that Allen’s approach provides a suitable foundation by directing the focus to how space functions as a resource that can be stretched in a topological sense to extend control over others in different territories.

Beyond Chinese exceptionalism

A common structural question raised by the commentators is whether the state-led GFN framework offers insights beyond the Chinese case. Zhang calls for future works to ‘go beyond Chinese exceptionalism and develop an integrated politico-institutional framework [to enable] comparative studies of territorially-variegated economic globalization’ (2018: 289). Similarly, Hall (2018) and Lai (2018) suggest that the label ‘with Chinese characteristics’ is too constraining and advocate for extending the geographical reach of the state-led GFN framework to other research sites. Indeed, the framework’s insights can be applied to other Asian economies such as Vietnam, Thailand, Malaysia, and Indonesia where the state also plays an important role in shaping financial sector outcomes. The focus on China should therefore not be confused with a call for a sui generis model of GFNs.

The theoretical and methodological clues on resource interdependencies between the state and firms also apply to any economic system. For example, the European Union’s recent Payment Services Directive II (PSD2) requires banks to grant third parties access to their customer accounts through application programming interfaces. This disrupts established competitive hierarchies in the payments space, in which banks have long benefited from oligopoly-like market conditions with high barriers of entry. PSD2 will force banks to open up their systems to new fintech companies who own mobile channels and therefore control a major part of the customer interaction. As the demand for real-time and seamless payment experiences increases among consumers, policymakers’ failure to respond to these shifts risks undermining supportive popular perceptions upon which government legitimacy rests. Liberalizing access to customer data for fintechs gives consumers more choice over financial products and services. Fintechs thus provide the EU Commission and member states with an important source of legitimacy by ensuring effective policy outputs and thereby citizen support.

As the example of PSD2 illustrates, the idea that institutional adaptation reflects an interdependent exchange of resources between the state and firms is not specific to China’s GFNs but applies to financial networks anywhere in the world. The state-led GFN framework therefore resists claims that ‘state participation undermines the long-term viability of these networks’ (Zhao, 2018: 278). Instead, state participation gives rise to new constellations of power within GFNs.

Finally, any global network framework remains a simplification of a complex world. Simplifying requires considerable abstraction and exclusion. While the state-led GFN framework is no exception, it does not change the fact that its insights provide a foundation for future research on financial networks. By simplifying the complex interrelationship between political, economic, and cultural drivers, the GFN framework is able to isolate specific mechanisms across different scales. To borrow from Zhang (2018: 292), ‘we are only at the beginning of developing a nuanced, in-depth, causal understanding, and this should also be the take-home inspiration from the case of China’.