Liam Halligan in London -
The UK is guilty of “constantly accommodating” China, hissed an anonymous White House official in mid-March. The British government had just announced the UK would become a founder member of a new China-led financial institution that one day could rival the World Bank.
Ever since Beijing launched the $50bn Asian Infrastructure Investment Bank last October, US officials have insisted Western countries “could help shape the standards and rules” this institution will adopt “by staying on the outside”. The real reason for Washington’s lack of engagement, of course, actually lay in fears the AIIB will become an instrument of Chinese foreign policy. That, after all, is precisely the role the World Bank has played for the US for the best part of 70 years.
Despite its “special relationship” with Washington, though, the UK has defiantly decided to join the AIIB at the outset. “Forging links between the UK and Asian economies to give our companies the best opportunity to work and invest in the world’s fastest growing markets is a key part of our long-term economic plan,” declared British Chancellor George Osborne. “Joining the AIIB at the founding stage will create an unrivalled opportunity for the UK and Asia to invest and grow together.”
Since October 2013, when he made a high-profile visit to Beijing, Osborne has openly declared his determination to “change Britain’s attitude to China”. That very month, the UK conducted a renminbi-denominated sovereign bond issue, the first by a Western government.
British officials have subsequently toned down considerably their previously frequent criticism of Chinese human rights abuses. Ministers have also avoided chiding Beijing for its rough handling of Hong Kong’s pro-democracy protesters. Prime Minister David Cameron has made clear he has “no further plans” to meet the Dalai Lama, Tibet’s spiritual leader, after a 2012 meeting provoked Beijing’s scorn. The City of London, meanwhile, is actively promoting itself as a platform for overseas business in the Chinese currency as it starts to play a bigger global role, gradually challenging the dollar.
In early March, Prince William, The Duke of Cambridge no less, visited Beijing to launch a “UK-Chinese year of cultural exchange”. And then, just days after, the UK delivered its bombshell, becoming the first G7 member to take the AIIB plunge and provoking an extremely rare public spat between London and Washington.
All this shows how serious the UK now is about pursuing Chinese trading opportunities, even if that means upsetting the US. The UK is running an external deficit equal to 6% of GDP, the second-largest in over half a century, and the Eurozone – with which the UK currently conducts around half its trade – remains on its uppers. If not quite a “pivot to Asia”, this newfound AIIB solidarity shows a fresh determination by London to engage with the fast-growing emerging markets.
The Chinese, for their part, have long seethed about American influence over the World Bank and International Monetary Fund (IMF), the two so-called Bretton Woods institutions, set up just after the World War II, at the zenith of US power. Beijing also complains that Japan, still the US’ key Asian ally, has far too much control over the Manila-based Asian Development Bank – which anyway focuses on poverty reduction, lacking the financial firepower vested in the AIIB that will enable it to bankroll major infrastructure projects.
As such, Beijing is now assiduously building a Sino-centric global financial system to rival US hegemony. Along with AIIB, there’s also the New Development Bank – widely known as the “Brics Bank” – launched together with Russia, India, Brazil and South Africa and located in Shanghai.
Then there’s a planned IMF-style contingent reserve facility, together with another development bank linked to the Shanghai Co-operation Organization – a six-country Eurasian political, economic and military grouping dominated by China and Russia. At last November’s Asia-Pacific Economic Co-operation (Apec) summit, hosted in Beijing, the Chinese also unveiled a $40bn “Silk Road Fund” to finance a network of railways and airports linking China with Central Asia – another area where the US has long asserted political and military influence.
While it’s interesting the UK decided to defy Washington and join AIIB, what was really eye-catching was how quickly other European powers followed suit. Within days of Osborne’s announcement, France, Italy and Germany had confirmed that they, too, would become AIIB founding members.
China is already Germany’s biggest trading partner outside of the Eurozone. While the EU as a whole runs a substantial deficit with China, Germany runs a surplus in goods trade with the People’s Republic. Accounting for 5% of Germany’s exports, official estimates show a 10% German export share by 2030, as the relative importance of its EU trading partners declines. The UK, for its part, is lagging, sending just 2% of its far smaller export haul to China. Perhaps that’s one reason why, when it came to backing AIIB, London chose to go first.
Having watched the Europeans climb aboard, others are now likely to jump on China’s AIIB bandwagon. Australia and South Korea were close to doing so back in November at Apec, but were dissuaded by vigorous US lobbying. Both are now widely expected to join anyway – and again, for entirely understandable reasons, seeing as each countries’ biggest trading partner is now China.
That Beijing should seek to exercise power across Asia, and beyond, is hardly surprising. China, after all, is the world’s second-largest economy, a major global growth engine and bankroller-in-chief to the US government. The Chinese central bank currently holds an estimated $1.27 trillion of US Treasuries, up from just $50bn back in 2001.
While the likes of the UK and Australia see China mainly as a potential growth market, much of the US political elite sees instead a strategic and military adversary. Since the mid-20th century, the US Navy’s Pacific Fleet has guaranteed Asia’s security. While Beijing used to accept that, China is now increasingly kicking against US dominance. “China will make our due share of contribution to regional peace and stability,” President Xi Jinping said recently, challenging the presence of US military bases in South Korea and Japan. “It is for the people of Asia to… uphold the security of Asia,” Xi declared.
As military relations turn spikey, American efforts to contain China commercially are also provoking a response. Washington continues to push, for instance, the Trans-Pacific Partnership, a 12-country trade deal that excludes both China and Russia.
Beijing, in return, is promoting its own Free Trade Area of the Asia Pacific, which includes the US, but also has China and Russia at its heart. It would appear Beijing is winning. Until recently, the US refused to accept China’s treaty, blocking efforts to include the approval of an FTAAP feasibility study on the Apec agenda. As the summit closed, though, it was announced that Beijing’s trade deal was now supported “by all 21 Apec members” – and that includes the US.
The US has legitimate grievances towards China, not least when it comes to intellectual property rights. There’s also something to be said for trying to shape an embryonic institution from the sidelines, exerting pressure to establish governance and procedural norms, then joining only if such conditions are met. Certainly, there could be lax environmental and human rights safeguards for AIIB-funded projects.
The reality is, though, that the US is widely seen to have bungled the diplomacy not just of the AIIB’s launch, but the broader issue of granting the emerging giants of the East their due share of influence in the rule-setting bodies that govern the global economy.
Just days after ticking-off London, US Treasury Secretary Jack Lew warned Congress that the US would lose its remaining ability to shape international economic rules if lawmakers didn’t finally pass reforms, agreed back in 2010, to give the large emerging markets more say at the IMF and other leading multi-lateral institutions. “Our international credibility and influence are being threatened,” he said. “To preserve our leadership role at the IMF, it is essential these reforms be approved.”
Washington has long under-estimated the frustration – not just across the emerging markets, but elsewhere – at the lack of the reform to the Bretton Woods organisations, the governance structure of which reflects the world of mid-1940s, not the commercial realities of today. And when it comes to the AIIB, Washington now has no good option. A refusal to join would make the US look petulant; but if it does come in, the forced concession will be clear.
Liam Halligan is Editor-at-Large of bne IntelliNews
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