Talking Point

The lender of last retort

UK’s decision to join China’s infrastructure bank is a major coup

China's President Xi Jinping meets with the guests at the Asian Infrastructure Investment Bank launch ceremony at the Great Hall of the People in Beijing

All aboard: China’s Xi Jinping with some of the members of the new Asian Infrastructure Investment Bank

One of the biggest battles of the Second World War was fought behind closed doors in Bretton Woods in rural New Hampshire in July 1944.

As the Allies made their final push to liberate Europe from Nazi Germany, 730 representatives from 44 countries gathered to write the rulebook for the post-war global economy.

There were two key issues: how to establish a stable exchange rate system, and how to pay for the rebuilding of Europe. Two rule-setting policy banks were created as a result. The International Monetary Fund (IMF) was set up to provide short-term help for countries whose currencies were struggling. The World Bank, meanwhile, would make longer-term loans for post-war reconstruction and development.

At Bretton Woods the Americans won the day, not least because they contributed the most money to both institutions, therefore enjoying the biggest say over policy decisions.

One result: the US dollar accelerated its ascent to the prime position in the international financial system.

Combined with the Marshall Plan (devised by Washington to offer additional American funds when the World Bank proved inadequate), a global economic recovery began. Trade among developed countries rose rapidly throughout the 1950s and 1960s, as did living standards.

The legacy of the 1944 deliberations was so important that in the wake of the 2008 financial crisis, both Bill Clinton and Tony Blair called for a “new Bretton Woods” to reform the world’s financial architecture.

And has it just emerged, this time courtesy of a new rising power: China. When Beijing offered assistance during Russia’s currency crisis last year, some saw it as usurping the IMF’s traditional role. And this month, the Asia Infrastructure Investment Bank (AIIB), China’s answer to the World Bank, has been embraced by a number of America’s long-time allies, despite Washington’s objections.

Commentators are asking: has China’s Bretton Woods moment arrived?

What is the AIIB?

Chinese President Xi Jinping first raised the idea of a new infrastructure financier back in October 2013 at the APEC annual summit. That meeting, of course, was best remembered for Barack Obama’s no-show. Today, the American president may regret that decision.

At the APEC meeting a year later China and 20 other Asian countries signed a memorandum of understanding in respect to the AIIB. With participants also agreeing to encourage private investment in infrastructure to spur growth, the new policy bank was mandated to offer financing for badly-needed transportation, telecommunications and energy projects in the region.

“If you want to get rich, you have to build roads first,” Xi told delegates after the signing ceremony last year, citing a Chinese proverb.

If all goes to schedule, the founding members will ratify the AIIB’s articles of agreement by the end of this year, and the lender will formally open shop in 2016.

The AIIB is to have initial capital of $50 billion, which may increase to $100 billion. Most of the funding is set to come from China. That being so, it is likely to be the biggest shareholder in the bank, which will be based in Beijing and chaired by Jin Liqun, a former vice finance minister.

Chinese officials including Xi have stressed all along that the AIIB welcomes all countries that want to participate, claiming it will complement the existing multilateral development agencies, rather than rival or replace them.

However, many observers argue that the AIIB is designed to counter the clout of the Washington-backed World Bank, and even the IMF, in a number of its functions.

That said, the AIIB is likely a more immediate threat to the Asian Development Bank (ADB). The Japanese-led ADB has estimated Asia would require $750 billlion each year through 2020 for infrastructure spending, but only lent $7.5 billion in 2012.

In the meantime China has been on a bank-creating spree, also taking the lead in forming the BRICS Bank, as well as the Shanghai Cooperation Organisation Development Bank.

“There is plenty of evidence that Western governments and Japan have used the multilateral development banks that they control in exchange for favours in the international arena (such as votes in the United Nations) or to influence the domestic politics of poorer countries,” a Washington Post op-ed notes. “Banks in which China exerts more influence will surely behave in similar ways.”

Who is in and who is not?

Developing countries in Asia – including India and all ASEAN states – made up most of the 21 earliest joiners. Developed economies in the region – namely America’s Pacific allies in Japan, South Korea and Australia – have been sitting on the fence. (Though Korea came off it this Thursday, by announcing it will join the AIIB too.)

The main reason for their indecision, understandably, has been Washington’s stance on the AIIB. Criticising it as a deliberate effort to undermine the World Bank and the ADB, the Americans have warned that the post-war international financial order is at stake.

A recurring line from Washington (and thereafter from Tokyo) has been that the AIIB will fail to meet the “high standards” – especially on governance, environmental protection and social safeguards – adopted by the Bretton Woods policy institutions and the ADB. As the New York Times has outlined, Washington’s view is that the AIIB is merely “a political tool for China to pull countries in Southeast Asia closer to its orbit, a soft-power play that promises economic benefits while polishing its image among neighbours anxious about its territorial claims”.

However, an announcement from the British, historically the closest American ally of all, seems to have changed the game entirely.

“We think that it’s in the UK’s national interest,” a Downing Street spokesman told reporters after the British government announced this month that it too wants to become a founding member of the AIIB. (British media has been speculating that, in exchange, London hopes to emerge as the West’s leading hub for the renminbi.)

Following the UK’s surprise decision, an unnamed US official took the unusual step of condemning Downing Street for breaking ranks. “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power,” the source grumbled to the Financial Times.

But after that France, Germany and Italy also confirmed they’ll join the new bank too. The news prompted a bit of gloating from Xinhua: “The brave yet rational move has laid bare the attractiveness and influence of the AIIB, given the difficulty for those leading EU members to reach a consensus over issues related to China inside their union, where they often kick the can down the road.”

“Washington, what are you waiting for?” the newspaper added.

At least 37 countries now appear ready to join the AIIB. ­

Why the sudden rush?

The European requests to join the AIIB seems to have come as a shock. For Asia’s developing countries, the decision is less surprising. There is a school of thought in the region that an Asian answer to the World Bank and IMF has been needed for a while. Much of this has to do with the region’s mistrust of the American-led development banks, a feeling that festered most during the Asian financial crisis. In South Korea, for example, the currency market turmoil of 1997 and 1998 is known locally as the “IMF crisis”. In exchange for its $57 billion bailout the IMF demanded harsh austerity that many Koreans viewed as humiliating (citizens famously lined up to donate their wedding rings to speed repayment of the IMF’s loans).

Other recipients of IMF funding such as Thailand have also complained about lending conditions that were forced upon them. The bitter prescriptions included the opening of key economic sectors, a move sometimes seen as benefiting firms from the developed world.

Beijing has promised a lighter touch in helping troubled nations and the Wall Street Journal reported this week that China has even offered to forgo veto power at the bank. The offer may have been the critical factor in coaxing European countries like the UK to join, although a spokesperson from the Foreign Ministry seemed to be deliberately muddying the issue this week when she told reporters that there is “no such proposition that China is seeking or giving up” its veto right.

“With the increasing number of countries joining the bank, the share for each member will drop down naturally,” she also said, presumably wanting to make the point that China’s influence will be diluted as more countries join.

Still, this would be a sharp departure from the long-standing practice at the IMF. There, as the Journal notes, the US has “a lock on some big decisions” despite holding less than 20% of the voting shares.

According to the Hong Kong Economic Journal, the AIIB is a win-win outcome for Asian countries and for China, which has been searching for a more prominent economic role internationally. This aspiration has often been held back by existing institutions. (A 2010 attempt to raise China’s IMF voting share from 3.8% to 6% has not passed the US Congress.)

Martin Wolf, writing in the Financial Times, has warned that it is folly to rebuff the AIIB completely, especially as the resources of the World Bank and the ADB are grossly deficient. “It would be good if the AIIB were as pure as the driven snow. But this is a fallen world. At the least, it would be better with a broad membership than without it,” Wolf says.

Stuart Gulliver, chief executive of HSBC, made a similar point in a speech in Hong Kong this week. “What is increasingly clear is that while some institutions have been slow to accommodate China’s status as the world’s second biggest economy, the rest of the world is getting on with the process of establishing closer financial and political links with China through its currency and institutions,” he said. “It is notable that the applications of the British, German, French and Italian governments to join the Asian Infrastructure Investment Bank are a striking acceptance of the principle that you improve institutions through participating in them, not by isolating them. This is a highly positive step for China’s global integration.”

Is China marshalling a bigger plan?

When Chinese media covered the APEC summit last year, it wasn’t the AIIB that grabbed the headlines. Instead it was Xi Jinping’s “one belt, one road” blueprint.

Essentially this is a concept that envisages a network of highways, railways, ports and other infrastructural projects that link China to central and south Asia, as well as further afield to the Middle East and Europe. The establishment of the AIIB (as well as a further $40 billion Silk Road fund) is viewed as a means to finance these plans.

These multibillion projects will also offer an outlet for a more efficient usage of the country’s $4 trillion foreign exchange reserves, as well as promoting wider circulation of the Chinese currency overseas.

Together, the proposals have been described as “China’s Marshall Plan”, although Beijing policymakers have avoided the term (the Marshall Plan was originally designed to thwart Communism, after all).

Instead, there has been some rekindling of a 1904 theory from British political geographer Sir Halford Mackinder about how to ‘control the heartland of the World Island’, by which Mackinder meant the landmass of Europe-Asia-Africa.

More than a century ago Mackinder suggested that the rise of technology such as railways would allow the control of this heartland by a single superpower.

“Surely Mackinder couldn’t have envisioned the high-speed train 100 years later?” the Economic Daily has noted. “The World Island finally won’t be a pure theory but a possible reality in the 21st century… It is the political economy of the ‘one belt, one road’ concept.”

Even if the AIIB isn’t really part of a sinister masterplan, Taiwan’s United Daily News says that the new bank is emerging as a “significant geopolitical event” by rattling the longstanding trans-Atlantic alliance between Europe and the US.

“China may not become the ultimate ruler of the World Island,” the newspaper suggests. “But it is possible to create a new divide between the World Island and the American Island.” Others played down the impact of the last few days, including Xinhua, which noted that the US has “seemingly outgrown its childish paranoia against the AIIB”.

But the news agency couldn’t resist a dig at Washington, calling for vigilance against any “Machiavellian ploy” to convert the fledgling bank into “yet another tool for exerting its influence and getting its own way”.

Still, for the proud patriots on the Tiexue forum (which is an online discussion group for those keen on military affairs and whose name means “iron blood”) these are chest-puffing times.

Many contributors were soon linking the bank directly with Chinese ambitions to counter American power, evoking strategic thinking that sounded similar to some of Mackinder’s geopolitical ideas.

“The first project I want the AIIB to finance is the Kra canal,” one insisted, referring to the proposed waterway through Thailand’s Kra Isthmus (see WiC242). Nationalist types want the waterway because a new canal would make it more difficult for a foreign navy to choke off China’s oil imports through the Straits of Malacca by providing an alternative route.

Others concentrated on the AIIB as a form of monetary diplomacy. “Alongside the ‘one belt, one road’ blueprint’, China is offering two enormous seams of gold to Washington’s former allies in the Pacific,” one celebrated.


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