Geopolitics and International Bank Flows

China provides us with an ideal setting to study this question for two reasons.  First, since China is an authoritarian regime, its administration has significant capacity to influence the lending decisions of its (largely) state-owned banking system.  Second, the Chinese government considers the status of Tibet as an internal affair and outside interference is not tolerated.  As a result, each time the Dalai Lama travels, as he frequently does, the Chinese government threats that engagement between the Dalai Lama and political officials in the host country will be met with animosity and ultimately harm economic relations.

We track the Dalai Lama’s footsteps between 1983 and 2013 and examine whether bank flows from China to 77 host countries varies with the timing of his visits.  Our estimates suggest that in the year following a visit where the Prime Minister or President personally meets with the Dalai Lama, bank flows from China to the host country fall by about 13% relative to otherwise similar countries.  Our results suggest that political tensions between countries can lead to implicit sanctions in the form of restrictions on capital flows.