London’s Beijing links could herald fresh strains
Risk of double standards as UK challenges Bretton Woods structure
by David Marsh
Mon 16 Mar 2015
Britain’s decision to defy the US and join China in the Asian Infrastructure Investment Bank is a harbinger of further UK moves to recognise Beijing’s growing financial and economic power that could place fresh strains on London-Washington links.
The British government has promoted the renminbi as a major transaction and reserve currency by deciding last October to carry out official borrowing in renminbi and hold the proceeds in the UK official reserves – the first national sovereign issuer to take such a step. The decision could influence Beijing’s potentially controversial attempt to bring the renminbi into the International Monetary Fund’s Special Drawing Right under a review later this year, a process viewed with suspicion by some in Washington since it marks a longer-term challenge to the dollar’s prime international role.
As in the initiative over the $50bn AIIB, a potential rival to the Asian Development Bank and the World Bank, London’s motivation for strengthening Chinese ties is to build up two-way investment and promote London as a hub for renminbi trading and Chinese international capital flows.
Another important milestone could be a possible joint effort by the UK and China, backed by other emerging market economies, to propose for the first time a non-European as IMF managing director to replace Christine Lagarde in July 2016. This would be a fresh step to lower traditional US-European influence over the IMF and the World Bank, the twin Bretton Woods institutions set up after the second world war, where China and other developing countries have been frustrated by American blocking of governance reforms in recent years.
However, the UK’s overt backing for Beijing could lay Britain open to charges of double standards. Although the UK supports IMF reform efforts, Britain still profits from an extraordinary place in IMF governance bequeathed by Anglo-American leadership in setting up the Fund in the 1940s. Britain’s quota in the Fund is 4.5% (the same as France, though less than Germany’s 6.1%), against 17.7% for the US, 4% for China, 2.5% for Russia, 2.4% for India and 1.8% for Brazil. All these quotas are due to be changed slightly under post-2010 reforms agreed by most countries but stymied by the US Congress.
The big question over Lagarde’s successor is whether the UK administration after the British general election on 7 May will make common cause with Germany and France in pushing a candidate from Asia, Latin America or Africa, or whether it will give preference to a bilateral front with Beijing. Since neither Britain nor China is interested in putting forward its own national candidate for the IMF post, the two nations may have a joint interest in forging a partnership here, even if this adds to irritation with Washington and distances London from the rest of Europe.
The announcement that Britain will be the first major industrialised country to become a founder member of the AIIB has drawn a frosty response from Washington. The administration of President Barack Obama said on Thursday it was worried about the UK’s ‘constant accommodation’ of China, a rare public breach in the special relationship.
The AIIB is due to be constituted in the next few weeks, one of several Beijing-backed organisations (including the New Development Bank or Brics bank, and a contingent reserve arrangement to provide balance of payments funding) that could rival western-dominated institutions set up after 1945. China has approached Australia, New Zealand, Japan and South Korea about joining, as well as Germany, France and other European countries. China has attracted into the AIIB 20 other countries, mainly from Asia, but leading industrialised nations have refrained from joining thus far.
The UK Yes marks a discreet success for Jin Liqun, former chairman of the China International Capital Corporation, the AIIB head, who has been carrying out behind-the-scenes diplomacy to persuade Group of Seven industrialised countries to join the AIIB. The former head of the supervisory board of China Investment Corporation, the country’s premier sovereign fund, played an important background role last year in bringing the secretariat to London from Washington of the International Forum of Sovereign Wealth Funds, of which CIC is a founder member.
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