Foreign Assets for Chinese Control: Capital Filtration, New Triple Alliance, and the Global Political Economy of China’s Information Industry (1995-2020)

Abstract

For late developing countries, using foreign capital to modernize its economy is akin to wielding a double-edge sword. It complements much needed funding and technology that laggards lack endogenously but presents risks of economic dependence or even political subordination. How to maximize the economic benefits meanwhile minimize the challenges thus presents a dauting challenge for political and economic elites in the developing world. An emerging herd of information companies that rise from contemporary China represents a fascinating case to explore how Chinese policy makers manage to resolve this tension. Economically, its third-world and post-socialist context means internal investment resources are scarce, thus hampering a capital- and technology-intensive industry to emerge. Politically, an authoritarian regime that is vulnerable and vigilant to the liberalizing potential of communicational popularization is by no means an advantage. My research investigates how China has managed to parlay foreign investment into a home-grown information industry between mid-1990s and 2020. I seek to explain how and why massive cross-border capital inflows into this sector, which potentially threats the regime, did not challenge Beijing’s authoritarian rule. Contrary to much of the scholarly literature, I find that the Chinese political elites apply a different mechanism of political control and censorship that targets the form of foreign capital inflow rather than informational content. Accordingly, I propose a theory of “capital filtration” to show how Chinese regulators “filter” foreign investment through an unarticulated, nationalistic, and two-pronged industrial strategy. On the one hand, Beijing allowed and supported China-based and Chinese-controlled firms to sidestep its inefficient and closed domestic securities market to seek financial investment from their counterparts in the Global North through shell companies registered in offshore financial centers. I call this new type of cross-border capital flow offshore domesticated foreign finance (ODFF). On the other hand, through stringent measures to restrict foreign direct investment (FDI) such as equity caps, approval red tape, national security review, and haphazard licensing and technology transfer requirements, Chinese regulators crippled foreign industrial investors’ market entry, operations, and competitiveness inside China. By bringing in ODFF while pushing out foreign corporate influence, capital filtration has ushered in a neo-triple alliance among policy makers in Beijing, China-based and Chinese-controlled information service companies, and transnational financial elites. It also minimized economic dependency and political subordination, which had hobbled previous late developers after liberalizing domestic capital markets, and made informational censorship easier.