AIIB rise reflects new economies

by

Kyodo

A planned Chinese-led investment bank may not have been the major theme at a meeting of Group of 20 finance chiefs, but it drew significant attention amid the growing presence of emerging economies.

On the sidelines of the gathering, which ended Friday, Finance Minister Taro Aso and his U.S. and German counterparts agreed on the importance of encouraging the Asian Infrastructure Investment Bank to adopt the high standards of existing institutions, including the Asian Development Bank.

“We agreed on the importance of the AIIB securing fair governance and debt sustainability as well as being considerate of the environment and society to meet internationally established standards,” Aso told a news conference.

Despite concerns voiced by the U.S. and Japan, the new institution obtained support from many countries, with major European nations such as Britain and Germany joining the initiative in expectation of business opportunities amid robust infrastructure demand in Asia. A group of 24 emerging economies in regions including Asia, Africa and Latin America separately issued a statement in which they said they “look forward” to the establishment of the AIIB, which is aimed at funding projects to build roads and railroads.

“We stress the critical importance of infrastructure investments for increasing growth,” the statement said.

Though the bank could be a potential rival to existing financial institutions, World Bank President Jim Yong Kim welcomed the fact that 57 countries have become AIIB founding members.

“I first of all want to congratulate China for taking such a bold step in the direction of multilateralism,” Kim said at a news conference prior to the G-20 gathering, expressing a desire to “work very closely” with the new institution as the World Bank does with others like the ADB.

But he appeared cautious to some extent, saying his organization will continue the conversation with the Chinese-led bank after finding out “what the AIIB will be doing” and “what their products will look like.”

In an attempt to dispel such concerns, Chinese Vice Finance Minister Zhu Guangyao told a news conference on Friday, “We agree on high standards,” adding that this will be reflected in the “formal legal document” to be produced following negotiations with other members.

China, which is set to become the bank’s biggest shareholder, has said it hopes to agree on investment ratios and organizational structure by the end of June.

Analysts say that dissatisfaction among emerging countries, notably China, with the existing global financing framework is one of the reasons behind the creation of the AIIB. They say that, as seen in the latest G-20 statement, there is frustration that reform of the International Monetary Fund designed to give these countries more power has made no progress.

Despite the repeated disappointment expressed by the G-20 economies over this issue, the U.S. Congress has yet to ratify the IMF quota and governance reform. Expressing strong discontent, Zhu said “too much delay” has damaged the reputation of the IMF, G-20 and the image of the United States.

Takashi Kodama, head of Asian economic research at Daiwa Institute of Research, said the Chinese-led initiative is a reflection of China becoming a global power in both economic and political terms. “China is dissatisfied because it has not been given a position that accords with its rising power,” Kodama said.

“The global power balance has clearly changed from the time the Bretton Woods system (was created)” in 1944 by the major economic powers at that time, as China is now the second-biggest economy after the U.S., Kodama said.

Kodama said Tokyo should join the initiative soon to participate in forming rules, noting China’s dominance in the AIIB will be reduced if Japan, the world’s third-largest economy, invests in the bank.

A senior Japanese Finance Ministry official said the emergence of international banks such as the AIIB is an indication that the Bretton Woods system is not functioning anymore amid the growing presence of emerging economies.

“It is a natural and historical conclusion,” the official said. “We cannot continue to sit with our legs crossed and we have to start listening to their words instead.”

  • Liars N. Fools

    In some ways, the establishment of the AIIB represents the triumph of the G20 over the G7. Let us recall that the G7 invited Russia to participate under the notion that Russia was a democratic nation. We know how that worked out.

    Like it or not, the G20 was formed precisely to challenge the notion of G7 stewardship and to reflect that the global economy had changed so radically that the G7’s role became anachronistic. Even though a G20 is far more complex, it includes a core G7 but more importantly gives a seat at the table for emerging economies, particularly China, which quite properly should have been in the G8 even though it is not a democratic nation.

    Welcome to complexity, America and its G7 friends. Now you have to meet the challenges of leadership.

  • John Putnam

    China’s high standards??

    Minister Zhu Guangyao told a news conference on Friday, “We agree on high standards,” adding that this will be reflected in the “formal legal document”

    A contract in China does not offer the same assurances that one in America does or many other countries as well.

    • Zhuubaajie

      Yup. Just look at the American experience in the WTO, where the hegemon refused time and time again to abide by the adverse findings after trial. “So sue me” was and is the America stance. China, on the other hand, abided by every single WTO finding, even if against China.

  • Zhuubaajie

    None of that would happen if America acts less thuggish and more accommodating. The world benefits from a G2 of equals.

    The first thing that the American Treasury Secretary did after returning to the U.S. from his Beijing a couple of weeks ago, was to forceful propound (during an Asia Society speech) that the RMB is unfit to join the IMF’s SDR (basket of reserve currencies). It appears that Jack Lew got diddly squat in Beijing this week. The SDR tizzy fit is to firmly demonstrate who is boss, after seriously losing face in the AIIB debacle – America is telling the Chinese that “you still can’t play unless I let you.” Along the same vein, America excludes China from the TPP negotiations.

    But China has alternatives. Just as America continues to block IMF reforms (passed since 2010), China puts into action the BRICS bank, the various Silk Road funds, and now the AIIB. Despite the irrational ill-wishing from the hegemon, the world NEEDS and WELCOMES the alternatives.

    The reason for China to seek including the RMB in the SDR is to increase circulation of the RMB outside China. In context, there are $32 Trillion American dollar denominated debts outside America. China could render the SDR rather irrelevant in one stroke. China can extend up to 100 Trillion RMB (US$16 Trillion) in low interest RMB loans to central banks around the world, suitable for buying Made in China products and services (but not for cross border investments into China). Not to mention also the possibility of denominating oil payments in RMB. Such a “nuclear option” would leave capital controls intact, giant shot in the arm for exports, instant circulation outside the border.

    Impossible? implausible? Just this week it was announced that China is signing up for US$42 billion in projects in Pakistan. Multiple that by 100 countries, that is already US$4 trillion right off the bat.