Several major European countries — the UK, France, Italy and Germany among them — agreed last month to join the China-initiated Asian Infrastructure Investment Bank (AIIB), with hardly a thought of how the US might take this news. Surprisingly, the first to jump was the UK, with which the US is said to enjoy a “special relationship.”
The British chancellor of the exchequer, having resisted his US counterpart’s requests over the phone to think carefully before proceeding down this road, gleefully announced that the UK was to be the “first major Western country” to join the AIIB. This quick work was not very popular with France, Germany or Italy, all of which rushed to follow suit, leaving the US battered and bruised, having lost this particular battle in the international relations war.
Beijing’s unexpected international relations coup has raised questions whether this is an indication that major European powers are now thinking of expanding their trade relations with China in the hope of securing for themselves a larger slice of the Chinese market pie.
The beginnings of the AIIB go back to 2010, when an agreement to expand China’s voting rights in the IMF were opposed by the US Congress. On the surface, Washington says it doubts the AIIB will be able to meet international standards on human rights, the environment and workers’ rights, but in fact it is reluctant to see a further expansion of Chinese influence. Unfortunately for the US Congress, its boycott has backfired, giving Beijing the opportunity to gain the initiative.
When Chinese President Xi Jinping (習近平) visited neighboring Asian countries in September 2013, he floated the idea of setting up a “Silk Road economic belt” and a “21st-century maritime Silk Road,” together known as the “One Belt, One Road” initiative. The “belt” seeks to link China with Europe via a northern route through Russia and Central Asia, while the “road” is to link China to the southwest via a maritime route, down the Taiwan Strait, and passing India and East Africa and up into Europe.
China began implementing this strategy last year, signing agreements in Beijing with 20 countries to establish the AIIB with investment capital of US$100 billion. At the end of last year, it also set up a US$40 billion Silk Road infrastructure fund. Xi is hoping to find new momentum and outlets to drive economic development with this belt and road strategy, and to strengthen cooperation with other countries en route, to move away from the current US domination of international politics and economics. This is all in the interests of realizing its aspiration of becoming a superpower. The AIIB and the Silk Road fund are just financial instruments for the implementation of this “one belt, one road” initiative.
China is seeking to kill two birds with one stone by taking the lead with the AIIB. The “One Belt, One Road” initiative will not only enable Beijing to find an outlet for its unwanted production capacity — sending it to other nations along the Silk Road, which will solve its problems with excess production and funds — it will also drive economic development in its inland regions in central and west China. This will allow Chinese companies to develop, promoting economic restructuring and consolidating energy supply from Central Asia.
The AIIB and the infrastructure fund will not just be funded by China’s prodigious foreign currency reserves, they will also draw funds from other countries. This will be of benefit to the internationalization of the yuan and loosen the US dollar’s exclusive hold on international finance.
There is little doubt that the AIIB is part and parcel of this plan. The problem is that it is just pie in the sky. It is a classic piece of controlled economy planning, one that the Chinese communists have been utilizing consistently for more than three decades. This capital-accumulation development model leads to extremely worrying repercussions, not least excess production capacity and supply exceeding demand, with ghost cities and unused buildings using up funds. The hangover from these policies — environmental pollution, local government debt, corporate debt and economic bubbles — will only get more serious.
China’s rolling out of the AIIB and incentives such as major infrastructure projects all point to the seriousness of the economic crisis it is in. Its economic growth is shrinking, which even official figures say has fallen to 7 percent, although the government is trying to gloss over the situation by calling the low growth rate the “new reality”.
Bear in mind also that the Bank of Japan Governor Haruhiko Kuroda recently pegged the growth of China’s economy to only 5 percent, while pundit Gordon Chang (章家敦), writing in Forbes magazine, said that according to an IMF formula, the Chinese economy is actually growing at the modest rate of closer to 2.2 percent, or even as low as 2 percent. Add to this the Shanghai mayor’s announcement earlier this year of his intention to ditch the region’s GDP growth estimate. Beijing’s recent attempts at economic stimulus via policies such as continuously lowering interest rates have had precious little effect, not even in the short term.
The writing is on the wall for China, and this is becoming ever more apparent, especially now that experts who have previously praised China are changing their minds and have come up with less glowing assessments. Japanese consultant Kenichi Ohmae is a prime example; and last month, George Washington University professor of political science and international affairs David Shambaugh — who is generally positive about China — wrote an opinion piece in the Wall Street Journal entitled “The Coming Chinese Crackup,” listing five major reasons to support his argument. Shambaugh wrote of how Xi is doing all he can to resist becoming China’s Mikhail Gorbachev, and is busy shoring up power, but that this is contributing to the Chinese Communist Party’s current trajectory toward a gradual collapse.
From all appearances, there seems to be a general consensus that China is, indeed, on the way to cracking up. Chinese authorities are struggling, and they may well drag other countries under with them with the AIIB. It is very important that the governing and opposition parties in this nation understand what is going on in China, politically and economically, and respond accordingly, and not do anything inadvisable.
Wu Hui-lin is a researcher at the Chung-Hua Institution for Economic Research.
Translated by Paul Cooper
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