Other major countries that had been sitting on the sidelines or showing solidarity with the US and UK, such as Germany, France and Italy have decided to follow the UK example. Australia and South Korea have also decided to join but Japan has declined, for the moment at least. The US, which has been standing aloof from the AIIB, accused its close ally of a “constant accommodation” of China – a stern rebuke. What’s all the fuss about?
China has been expressing its dissatisfaction with a US-shaped global financial system, particularly the fact that important reforms of the International Monetary Fund, designed to bolster its voting rights and those of other emerging markets, have been stalled in the Congress since 2010. China may now see the Bretton Woods system of global governance created after the Second World War as too inflexible to cope with the changing structure of the world economy. It has taken matters into its own hands.
Last year saw the birth of the New Development Bank, created by the BRICS economies as a sort of alternative to the World Bank. More significantly, perhaps, China took the initiative to set up and provide half the $100bn of capital for the AIIB, which is supposed have its Articles of Agreement in place by June and to be up and running by the end of the year. It also took full responsibility for launching a $40bn infrastructure development fund as part of the new Silk Road Economic Project, designed to ‘connect’ by land and sea the old trading routes from western China to the Mediterranean.
The UK’s commercial relationship with China is of rising significance. It was the largest recipient of Chinese foreign direct investment in 2014, which has gone into a variety of areas, including railways, energy and water. Thames Water, the UK’s largest water company, is 10% owned by Chinese interests. Some people estimate that about £100bn of new infrastructure investment could occur by 2025. The prime minister and the chancellor led the largest ever UK trade mission to China late last year in an attempt to boost the paltry 2% share of UK exports to China. And the chancellor has welcomed Chinese bank branches in the City, and moved to make London the most significant offshore trading centre for the renminbi instruments outside Asia.
SHAPING THE NEW
There is little doubt that the UK also sees potential commercial advantages, for example in exports and business and professional services, by being a founder member of an institution that looks set to shape the Asian financial system, regardless. A much-quoted 2010 report by the AIIB’s Bretton Woods rival, the Asian Development Bank, concluded that Asia’s infrastructure deficiency between 2010-2020 amounted to $8.2trn, equivalent to about 4% of Asia’s GDP. Much of this was needed in less developed parts of China, but also in India and other parts of South Asia. India’s new government has prioritised power generation and transportation as key areas in its economic strategy, and so would be a strong supplicant.
China’s motives are also not altruistic. It sees political advantage in the implementation of its own global and regional financial diplomacy, and wants to diversify away from bilateral financial lending programmes that haven’t worked out well. It also wants to move from resource access investments to opening up markets for its cement, steel and construction equipment sectors.
Ironically, the AIIB will most likely be a US dollar- centric institution, and it will have to resemble its Bretton Woods counterparts if it is to be a credible lender that checks the boxes on transparency, governance and creditworthiness standards. The spat over the AIIB, deep down, is about the rules, systems and institutions that are going to preside over future economic and political relations in Asia and beyond. China seems to be risking a fragmentation of global finance. The US seems to be petulant.
The one thing they agree about is that the AIIB symbolises a struggle over foreign policy, diplomatic kudos, and economic and military security.
George Magnus is an independent economist and former senior economic adviser at UBS