Financialization vs De-Financialization

Networking Session

Friday 28th August 13:30 – 14:30

Chair: Ariane Agunsoye

Jenny McArthur – Infrastructure Debt Funds and the Growth of Shadow Banking in the Global Infrastructure Market

Infrastructure debt funds are one of a range of investment vehicles that finance infrastructure through securities-based lending, or shadow banking, instead of bank finance. Following the 2008 Global Financial Crisis, more restrictive banking regulations and increased capital requirements reduced the role for traditional banks in financing infrastructure projects, enabling a greater role for institutional investors in providing infrastructure debt. Since 2013, infrastructure debt funds have become increasingly popular to mobilise and deploy institutional investors’ capital, lending to infrastructure projects or companies. The sector has grown substantially, with the top ten debt managers raising a cumulative $US60bn by 2018. Infrastructure debt funds provide a valuable case to critically examine the confluence of three distinct phenomena in the global financial system: increased reliance on securitisation for the delivery of public goods (Gabor, 2020), excess liquidity driving asset price bubbles (Minsky, 1982), and the mismatch between investors’ risk and liquidity preferences and the material properties of infrastructure assets (O’Neill, 2013). This paper examines three comparative cases between 2010-2020 to evaluate how the investment vehicles enable the deployment of institutional investors’ capital into legible, long-term financial assets. The findings reflect on the way that these debt funds seek to extend the market for infrastructure finance, by mobilising institutional capital to lend to low-risk, stable assets or firms. However, the vulnerabilities of infrastructure debt funds are significant. The large mismatch between demand for, and supply of infrastructure investment opportunities puts downward pressure on yields, and the relative advantage of debt funds over other asset classes is contingent on the low-interest-rate environment that has prevailed since 2008.

Johannes Petry – State Capitalism vs Neoliberalism: Capital Markets in China and the Global Financial Order

Since 2009, China’s capital markets have developed and internationalised to an unprecedented degree, which has been subject to a lot of debates on China’s rise and its implications for the global financial order. Contributing to these debates, this paper analyses the development of capital markets in China and their integration into global finance between 2009-2019, focusing on three aspects: how Chinese capital markets are developing domestically; how they are integrating with global markets; and how Chinese capital markets are internationalising, i.e. expanding abroad. Thereby, the paper analyses the crucial role of securities exchanges who as organisers of capital markets are powerful actors that exercise considerable influence over these markets and their development. This empirical investigation reveals that while they share some characteristics with ‘global’ capital markets, Chinese capital markets function quite differently. The paper argues that China’s state-owned exchanges facilitate the development of state-capitalist capital markets – capital markets that follow an institutional logic derived from China’s state-capitalist economic system. Rather than giving in to a neoliberal rulebook, China’s capital markets represent an alternative to, resist and challenge the norms, principles and procedures of the global financial order. While different capital markets share some characteristics, they are institutionally embedded, and these institutional settings facilitate different institutional logics that underpin and inform the functioning of markets. Instead of viewing capital markets as homogeneous entities, the paper therefore proposes to investigate a ‘varieties of capital markets’ that are shaped by different institutional logics.

Lars Ahnland – Tides of Financialization

The present study argues that financialization is a historically recurrent phenomenon. By looking at three variables central to financialization – functional income inequality, private debt, and investment– this study finds that the era of finance-dominated capitalism between 1896 and 1929 was similar to the most recent period of financialization, between 1985 to 2016. During both these periods, rising profit shares led to higher debt-to-GDP ratios, because of larger collateral values and loanable funds due to the wealth accumulation among capitalists as well as interest rate changes due to inequality. The evidence further suggests that credit went to speculation in financial capital rather than to investment in real capital. In contrast to this, during the de-financialized period in 1945 to 1973, there was no significant association between the profit share and the debt-to-GDP ratio, but rather a significant positive relationship between credit and investment in real capital. The radically different workings of Capitalism during these “tides of financialization” can be explained by contrasting macroeconomic policy regimes. The 1896 to 1929 “Liberal regime” and the 1985 to 2016 “Neoliberal regime” was characterized by low inflation policy and with laissez-faire financial market policy while the “Regulated” regime during 1945 to 1973 was characterized by full employment policy and intervention in financial markets by the state. The results are supported by two cointegration methods and impulse-response functions based on weighted averages of the core variables of the study, representing at least 80 per cent of industrialized World GDP.