America’s predictable defeat on infrastructure bank
China goes for statesmanship over US ‘blunder’
by David Marsh
Tue 31 Mar 2015
The defeat, when it came, was foreseeable. The US has spectacularly failed to block the incorporation of the Asian Infrastructure Investment Bank with a sizeable number of western countries as founder members. US disarray is underlined by weekend news that Australia will sign up as an adherent, joining the UK, Germany, France, Italy and Switzerland along with other American allies in defying Washington’s wishes.
The signs are that China, the instigator of the development institution that will challenge the World Bank and the Asian Development Bank in some key spheres, will take a sophisticated and statesmanlike line on what Beijing sees as a major American diplomatic miscalculation.
China is likely to hold out an olive branch by saying it wishes Washington to come on board the AIIB in future years, drawing a discreet veil over the likelihood that the US congress would refuse the administration’s request to join even if it wanted to. Beijing appears to understand the divergent views within the administration of President Barack Obama, with the US Treasury much less heavy-handed than other factions which have been making the running in publicly opposing the emergence of an institution most people knew was difficult to stop.
China will do its best to scotch American and other western concerns over the AIIB’s governance by recruiting top-notch international management and policing a firm line on environmental and social standards for the bank’s lending. The AIIB’s starting arrangements, with over 40 members, are likely to be to be confirmed at a two-day meeting of prospective adherents in Almaty, Khazakstan, which ends on Tuesday.
There is an intriguing link between the AIIB and Chinese efforts to become part of the Special Drawing Right, the International Monetary Fund’s composite currency unit, under a review to be concluded by the end of the year. A key component of China’s bid for the renminbi’s SDR inclusion, despite the renminbi’s lack of full-scale formal convertibility, is that the SDR could be reinforced by bringing in the relatively strong Chinese currency. The renminbi has matched the dollar’s gains over the past 12 months against the weak euro and the yen, two of the SDR’s four components (along with the dollar and sterling).
Enlarging the SDR to include an emerging market currency could promote the SDR’s adoption as the AIIB’s unit of account, extending the SDR’s use by other international organisations such as the Bank for International Settlements and the African Development Bank.
Momentum to forge the AIIB has risen sharply since it was first broached in 2013. One strong reason for the inception is Asia’s frustration over the US congress’s refusal to ratify modest reform of the IMF decided by member countries in 2010, which would give China and other leading emerging economies slightly more say in running the Fund. In addition, more financing is plainly needed in the light of Asia’s large backlog for infrastructure development since the Asian financial crisis of 1997-98. The ADB says the Asia-Pacific region needs $8tn in infrastructure funding up to 2020 to overcome these shortcomings.
Initial capital for the AIIB is planned at $100bn, with operations starting by the end of 2015. Non-Asian countries’ race to join as founding shareholders reflects western governments’ desire to gain infrastructure contracts for their companies, as well as efforts by countries like Britain, Germany and Luxembourg to win renminbi trade, investment and other financial market business as the Chinese currency’s cross-border use grows.
Wrangling over governance looks set to continue. Australian Prime Minister Tony Abbott announced on Sunday that Australia would be signing up to the AIIB after months of hesitancy. Australia wants a hands-on board of directors representing shareholders that would control main investment decisions. China wishes most decision-making to be devolved to management – likely to be based in Beijing, even though Indonesia is holding out for Jakarta as an alternative.
These issues are secondary, however. The US and China, the world’s two main economic powers, have locked horns over establishing a major development bank that could rival the twin Bretton Woods institutions – and Beijing has emerged, for the first time, as the clear winner.
Tell a friend