AIIB: Will China's Use of Financial Muscle Reshape World Order for the Better?

The formation of the Asian Infrastructure Investment Bank (AIIB) was one of the most recent developments in the active merge of international finance, diplomacy and geo-strategy. Deep-pocketed forces, aligned with these merging elements and perceived by the United States as harmful to the AIIB, are rattling Washington and gradually re-shaping world order. China conceived and created the AIIB supposedly to finance Asia’s massive and fast-growing infrastructure needs. However noble the initiative, many fear that China will use the AIIB as a tool to extend China’s influence in the region. This fear stems from China’s previous usage of quiet diplomacy, investment, trade, and military might to its advantage. The wealthy new bank, which has an authorized capital of $100 billion —of which, $50 billion is initial subscribed capital— has become a sought-after darling. As many as 57 countries cunningly rushed to join the financial institution as founding fathers before the March 31, 2015 deadline to ensure their influence in AIIB’s implementation. Although downplayed by Beijing, AIIB may evolve from a regional player outclassing the Asian Development Bank (ADB) to a global body rivaling the World Bank's capabilities. The ADB has 67 members and a $175 billion capital base dominated by Japan and the U.S. with 15.7 percent and 15.6 percent shareholding respectively, against China's 6.5 percent. Alternatively, the World Bank has 188 members and a $223 billion capital base that is heavily influenced by the U.S.’ 16.05 percent share. Meanwhile, China's share in the World Bank is a mere 5.76 percent. However, China will have a majority stake in AIIB. Amid growing acceptance of the new kid in town, Washington suffered embarrassment following its disastrous diplomatic efforts against AIIB. In a not-so-subtle foreign policy paradigm shift, even some of America's closest allies; including Saudi Arabia, the UK, Australia and South Korea; sought to join AIIB. These coalitions were forged despite the U.S.’ covert discouragement of joining the financial institution and fear that the regional body may not follow the highest standards of governance nor transparent lending policies (sans corruption), leading to the misuse of money. Washington unofficially expressed concern that the bank may disregard environmental safeguards (such as promoting renewable energy projects instead of coal-based ones) and social issues (i.e. no forced land acquisition and child forced labor). Additionally, the U.S. feared that AIIB would ignore policies of procurement of goods, works and services—open and competitive—all of which are crucial for growth that is inclusive and environmentally friendly for sustainable development. Significantly, the AIIB's founding member applicant list includes all four European countries in the G7 group (France, Germany, Italy, and the UK), leaving just Japan and Canada on the U.S.’ side in opposing the financial institution. Even Tokyo and Ottawa indicated their potential interest in joining AIIB. Countries joining AIIB are likely using this opportunity to gain China's trust and respect. These countries are likely reckoning that Beijing's continued use of raw financial power may eventually weaken the U.S.’ hegemony in running the world. The U.S.—trying to expeditiously conclude the Trans Pacific Partnership, a mega free-trade agreement with Asian Pacific nations, to bolster its ties with the region—cautiously welcomed the AIIB's formation. The International Monetary Fund (IMF), the World Bank and ADB also promised to support and collaborate with the AIIB. Eight trillion U.S. dollars is necessary for investments in infrastructure to make Asia seamless, according to a much-quoted ADB study. ADB asserts that this money needs to be spent before 2020 to improve connectivity, integrate the region into a single market, boost trade, and reduce poverty. ADB’s recommendation relies on an advised average annual investment of around $800 billion. Considering that various estimates report that significantly less than $100 billion is spent annually, there is a huge shortfall every year. Governments and international financial institutions will have to bear most of the costs (worth $8 trillion), since the private sector is often wary of the substantial risks involved in such mammoth funding. The World Bank and the ADB have not consistently assumed proactive roles to fill this enormous investment gap to help Asia develop, despite the region's immense potential to heighten global growth. The stringent lending policies of the World Bank and ADB decrease the likelihood of many infrastructure proposals getting cleared (by the World Bank and ADB). Adding to these complications is the inordinate delay in the IMF’s governance reforms due to the Obama administration's failure to convince and obtain the required Congressional approval. These reforms would have promised emerging economies, such as those in China and India, greater voting powers in the IMF in proportion to their growing stature in the global economy. These factors enticed a previously reluctant China, sitting on foreign exchange reserves of around four trillion dollars, to assume the leadership role in the creation of two new institutions — the AIIB and the New Development Bank (NDB). China has pledged $50 billion for AIIB, amounting to half of the bank's authorized capital base. The NDB will have an initial capital of $50 billion, with equal contribution from its members (essentially Brazil, Russia, India, China and South Africa), resulting in another $10 billion from China. China has additionally guaranteed $40 billion towards the New Silk Road Fund, which connects the Silk Road with Europe, Africa and Southeast Asia. So far, Beijing has been very serious about its massive plans for the 21st Century Maritime Silk Route Economic Belt, in addition to strengthening the Shanghai Cooperation Organization by increasing its membership and activities, to counter the U.S.’ sway in Central Asia. Experts have been quick to claim that all these developments could lead to the beginning of the end of the U.S. domination of international finance. China—which seems to have already overtaken the U.S. as the world's largest economy in terms of 'purchasing power parity' (in nominal GDP terms, the U.S. is still the largest)—is slowly but surely expanding its sphere of influence in global affairs. For starters, China is pitching for renminbi (RMB) to soon be made part of the IMF's Special Drawing Rights (SDR) basket of currencies (including the dollar, euro, yen, and pound sterling) used by the global body for lending, mainly to help stabilize struggling economies. According to the latest SWIFT—Society for Worldwide Interbank Financial Telecommunication—data, the RMB was ranked the world's fifth most used currency for payments. SWIFT statements assert that the RMB's usage by more countries indicates its growing internationalization, adding that China's position as a foreign trade leader supports the increasing use of the Chinese currency. AIIB is expected to propel RMB's ranking further up. RMB-denominated loans are likely to be pushed for AIIB-funded projects. Inclusion in the SDR will help RMB gain greater clout as a currency for global investment and trade. However, Washington has thrown a wrench in Beijing's works, asserting that China needs to implement tough reforms (meaning, ensuring RMB is fully convertible) to help RMB gain entry into the exclusive SDR. The IMF indicates that in many emerging markets and developing economies infrastructure bottlenecks decrease growth. The IMF further asserts that increased public infrastructure investment raises output in the short-term by boosting demand and in the long-term by raising the economy's productive capacity. If the right projects are chosen and investment is made in an efficient manner (through better project appraisal, rigorous cost-benefit analysis, etc.), infrastructure investment can be a powerful impetus for growth and jobs. As a result, the IMF has—citing the need to overcome the 'current global environment of sub-par growth’—made a strong case for an infrastructure 'push'. And if any country has the muscle to finance this 'push', it is China, which has the world's largest forex reserves. Beijing, of course, wants to ensure a more efficient use of its forex reserves. So far, their reserves were contained in U.S. government bonds. To avoid the risks of lower future yields from U.S. Treasury securities (due to the expected interest rate increase by the U.S. Federal Reserve), China has already begun drastically cutting down such holdings. It can now channel more of this money into mega infrastructure initiatives. The U.S.’ concerns on AIIB are not without reason. In the recent best-selling book The Death of Money, author James Rickards notes the lurking dangers within the Chinese juggernaut. He writes, “China's infrastructure investment involves massive waste...this investment has been financed with unpayable debt. This...wasted capital and looming bad debt makes the Chinese economy a bubble about to burst." Interestingly, Rickards observes, "The rise of a parasitic elite (in China) is closely linked to the prevalence of mal-investment. The need for the Chinese economy to rebalance from investment to consumption...has run headlong into the self-interest of the elites who favor infrastructure because it keeps the profit flowing at their...enterprises. The new financial warlords are addicted to the profits of infrastructure, even as economists lament the lack of growth in services and consumption." He goes on to warn, "China has fallen prey to the new financial warlords, who loot savings…and send the loot abroad. The China growth story is not over, but it is heading for a fall. The ramifications will...ripple around the world." The world is waiting to find out if such opinions are mere scaremongering or if they will turn prescient.