Mon, Apr 20, 2015 page14

• China flexing economic muscle

  BRETTON WOODS: Despite the BRICS bank, the AIIB and a move to internationalize the yuan, Beijing is sticking to the Western system of multilateral development banks

  • AFP, WASHINGTON
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  With its huge new infrastructure bank and its ambitions for a globalized yuan, China is leading the upending of a 70-year-old global order built on US economic power.

  Beijing’s rise was confirmed last week at the meetings of the World Bank and IMF in Washington, the two institutions by which the economic vision of the US has been propagated across the world since their founding in 1944.

  The US-selected president of the World Bank, Jim Yong Kim, applauded China’s “bold step in the direction of multilateralism” for its new Asian Infrastructure Investment Bank (AIIB), even as many view it as a rival to the World Bank.

  However, Kim stressed that he expects the World Bank and the AIIB to work “very closely” together.

  That appeared to pull the World Bank away from its major shareholder: Together with ally Japan, Washington has refused to join the AIIB even as nearly five dozen other countries have applied to Beijing to take part.

  Beijing moved on the AIIB, which aims to support infrastructure development across Asia, as another China-backed project announced last year, the BRICS bank, stalled.

  However, that institution — planned with fellow emerging economic powers Brazil, Russia, India and South Africa — was also designed as a challenge to the World Bank and the IMF, where the old powers the US, Europe and Japan dominate.

  Critics fear the new development banks will challenge the World Bank in lending to poorer countries by offering them easier terms and fewer restrictions governing the social and environmental impacts of large projects, undermining standards established to protect vulnerable populations.

  However, the Chinese approach is more pragmatic, with each institution filling a need, said Christophe Destais of CEPII, a French international economics think tank.

  Countries are searching for new opportunities in public works and energy, and also for their banks, he said, adding that the latter possibly explains why US ally Britain rushed to join the AIIB.

  For its part, China is seeking “an outlet for its industrial overcapacity” while at the same time aiming “to weaken US influence,” Destais said.

  However, China is not abandoning the US and Europe-dominated Bretton Woods system of multilateral development banks set up in 1944, however imperfect it is, he said.

  “China finds it useful. It has the means to influence it, though still not to shape it,” especially since the US dollar remains the world’s core currency, he said.

  However, China’s growing power keeps Washington nervous. Even as new institutions like the AIIB emerge, US Secretary of the Treasury Jacob Lew on Saturday said in a statement: “I would like to underscore that the IMF remains the foremost international institution for promoting global economic stability.”

  Nobel Prize-winning economist Joseph Stiglitz said US hostility to the AIIB is a new sign of insecurity over its global influence.

  However, Washington is also at fault in the erosion of its Bretton Woods-based power.

  US Congress has refused to ratify crucial reforms at the IMF laid out in 2010 that would double its funding and recognize with higher shareholder quotas the rise of economies such as China and India.

  As the IMF’s largest shareholder by far, Washington has now blocked the reforms for four years, to great criticism from allies and rivals in the world economy.

  “This remains an impediment to IMF credibility, legitimacy and effectiveness,” lashed the G24 group of emerging economies at the IMF-World Bank meetings last week.

  The AIIB is not the only front in China’s challenge to the old US-centered global economic structure.

  After decades of closely controlling its currency, the yuan, China is now moving to internationalize it, asking that it be included in the IMF’s benchmark basket of major currencies, known as SDRs, or special drawing rights.

  That move, which could happen as early as next year, would officially elevate the yuan to world status and boost China’s prestige inside the IMF.
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