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USJI Voice Vol.13

China, and Financial and Monetary Order in Asia: How Could the AIIB Be Viewed?

May 24,2016
Dr. Fumiharu Mieno
Kyoto University

The “One Belt and One Road” Plan and the Asian Infrastructure Investment Bank (AIIB)

The Asian Infrastructure Investment Bank (AIIB) was officially inaugurated, under China’s leadership, in December 2015, as an international financial institution. When its concept was first presented in early 2014, many countries were hesitant about supporting it. However, with the announcement of the participation of the U.K. in March 2015, the number of participating countries increased dramatically to the point where the situation at the present time is such that Japan and the U.S. are the only countries clearly distancing themselves from it by not participating.

It is said that at the time of foundation the investment burden was coordinated so that the breakdown was China, the largest investor – 29.8%, India – 8.4%, Russia – 6.5%, Asian countries – 75% and European countries and others outside Asian accounting for the remainder . Furthermore, it is believed that China also holds one third of the votes and veto power. Therefore, in spite of the AIIB taking the form of an international financial institution, since it was launched through the unilateral initiative of China, without coordination with the World Bank, the Asian Development Bank (ADB), etc., in the areas of existing international financial and monetary order, at the present time it is unclear what its nature as an international financial institution will be.

For China itself the AIIB is positioned as one part of the “One Belt and One Road” plan that China set forth in November 2014. The “One Belt” refers to the region extending from western China to Europe, through central Asia, that has been named the “Silk Road Economic Belt.” The “One Road” indicates the route that connects India, Africa and Europe via the South China Sea and Southeast Asia and has been designated the “21st Century Ocean Silk Road.” The plan regards both of these as strategic regions in the area of foreign economic relations and is a declaration of the intent to be actively involved in such matters.

Of the two regions, the AIIB is positioned as an organ for development cooperation directed mainly towards the “One Road” region. As for the “One Road” region, the “Silk Road Fund” was established in Beijing at the end of 2014, as the financial institution for it. This institution is a purely Chinese domestic organ.

The main role of the AIIB is said to be the supplying of funds for the development of infrastructure in China’s “One Belt” region, that is, southeastern and southern Asia. However, there are two areas of concern that people have as regards the impact that the AIIB will have on Asia’s financial environment. The first is, as per its name, the AIIB’s role as a supplier of funds for infrastructure investments, which are expected to grow increasingly hereafter. Concern has arisen as to whether the AIIB’s function will be to compete with the ADB, World Bank and other existing financial institutions, or, to complement them. The second area of concern regarding the AIIB is as the initiator pioneering the full-fledged circulation of the renminbi as a currency for international settlement. This has given rise to wariness of the possibility of the dollar-based monetary order of this region, which basically has been maintained in the region since the end of the Second World War, being shaken.

Each Country’s Respective Position

What is the situation of China, which came to set forth various strategies such as these in rapid succession in the years since 2010? Most notable more than anything else is China’s remarkable economic growth since the first decade of the 2000s. It achieved an average real growth rate of 10.5% for the first decade of the 2000s , and in 2012 China’s dollar-based GDP finally surpassed that of Japan. While its presence in this way heightened in the international economy, existing parties involved in international finance and the currency-related monetary order were unable to respond adequately to this too swift expansion of the Chinese economy. Repeated Chinese demands to be granted a greater investment ratio in the International Monetary Fund and ADB, had been denied due to concern about what China’s attitude would be regarding the established order . Probably thinking that if this was to be the way things would be, China, in response, began to challenge the existing order more explicitly by establishing an alternative institution.

The “One Belt and One Road” plan naturally included Chinese economic promotion as an objective. The expectation is that working as one mechanism to circulate savings, accumulated as a result of the current account surplus, into investments, the plan will lead to the promotion of exports and infrastructure project orders received for Chinese corporation. This aspect of the plan should come to the fore increasingly the more domestic business conditions decline, as they have been recently.

In the eyes of the U.S. and Japan, for the time being the idea of the AIIB is perceived as a challenge to the existing financial and currency-related monetary order over which they have exhibited leadership. Based on global financial and currency systems whose institutional bases are the World Bank and the International Monetary Fund and that essentially have been supported by U.S. economic might and the circulation of the dollar, the World Bank and the Japan-U.S. jointly led ADB have fulfilled the role of development fund supplier in Asia. In addition to this, amidst its economic growth since the 1960s, Japan expanded yen loans, which arose from postwar reparations, as its own form of economic assistance. Japan also became a single country supplying development funds to Asia to the extent of being comparable to the World Bank in the 1990s. This on the one hand constituted Japan’s part in the division of roles in the policy for Asia under the Japan-U.S. alliance since the Cold War period. Also, as the Chinese economy has become an enormous presence during the decade of the 2010s, Japan and the U.S. have developed a sense of wariness as to how China will involve itself in the existing financial and currency-related monetary order. It is for this reason that Japan and the U.S. were extremely cautious about raising China’s investment ratio in existing financial institutions.

Meanwhile European countries that have supported global order in both finance and currency following WWII have taken a somewhat different position. In Europe interest in how to incorporate China’s economic growth into its own respective economies has taken precedence over concerns. In part because of Europe’s geopolitical distance from Asia, and, at the same time, amidst tensions in the social and political climate caused by factors such as the debt crisis in southern European countries, the problems of refugees from Islamic countries and terrorism and the conflict with Russia, Europe has not viewed the expansion of the Chinese economy as a challenge to order, but perceives it as one of the few positive developments that have arisen. European countries have responded by seeking to deepen trade relations with China, willingly becoming recipients of Chinese investments and actively taking the steps to internationalize the renminbi. There is even competition within the region, such as the heated contest played out between the U.K. and German concerning which will be successful in luring the principal exchange for the renminbi market to its financial center, London or Frankfurt. It should be noted as well that the rapprochement between Europe and China is believed to also have as its backdrop a sense of wariness at the fact that as things stand now they both have been excluded from moves such as the TTP, a free trade agreement for the Asia Pacific Ocean zone, where economic growth is anticipated in the future. The “One Belt One Road” plan includes elements that resonate with Europe’s interests, and this point may be difficult for Japan and the U.S. to see. They found it truly unexpected that the U.K. would come to realize a crucial role in the final stage of the establishment of the AIIB.

Past Endeavors

On reflection, one can see that the principal countries involved to date in financial and monetary order in modern times have not been unchanging and at times have been challenged by emerging economies. One could also say that Japan can be viewed as representative of this during the period 1980-2000s. In the 1980s, when Japan amassed foreign assets through its trade surplus, it greatly expanded its presence as a supplier of development funds through bilateral development assistance loans, increasing its investment ratios in the IMF and multilateral development banks and establishing new funding organs. Furthermore, with this as the backdrop, in the area of currency Japan attempted to make the dollar relative as a settlement currency for the Asian region in order to achieve the “internationalization of the yen.” Following the Asian financial crisis of the latter half of the 1990s, Japan put forth the idea of the Asian Monetary Fund (AMF). When this was rejected by the U.S. and Europe, during the first decade of the 2000s Japan worked on building a swap network for the currencies of respective countries, which would be based on Japan-China currency swaps, and leading the debate with eyes fixed on a “common Asian currency” as the long-term goal.

In 1966, when the ADB was established, Japan accounted for 5% of the world’s GDP. This was equivalent to about one eighth of the U.S.’s GDP. Nineteen eighty-nine was the year in which Japan achieved the position of being the world’s largest ODA provider and began to pursue the “internationalization of the yen.” It accounted for 15% of worldwide GDP, equivalent to slightly more than half of the U.S.’s GDP. China’s GDP in 2014 accounted for 13% of worldwide GDP, equivalent to close to two thirds of the U.S.’s GDP. Looking at this as course of development of a country, one can say that it is actually only natural that China would become a development fund supplier by putting its foreign assets to use and, accompanying this, would also look for a way to continue to challenge the monetary order .

The Ambiguity of the AIIB

Japan and the U.S. cannot help but be wary of the AIIB and the “One Belt and One Road” plan because it cannot be foreseen clearly which areas that the existing order positions as the standard will be accepted and which areas will be challenged by the institution and the plan. For example, it has been said that the power of the AIIB’s Board of Directors will be weaker than that of the World Bank or ADB, in order to promote more rapid decision-making. In addition, it is feared that processes for environmental evaluation and residents’ consent may be disregarded in the procedures for loan decisions.

However, when one thinks about it, heretofore there has certainly been criticism of the slow pace of decision-making by existing institutions. Furthermore, if more efficient management can truly be achieved by maintaining fairness, then this would be helpful for existing institutions to know as well. If international standards will not permit the processes for environmental evaluation and residents’ consent to be overlooked, then it will probably not be possible to obtain the broad approval of investment countries and function as an international financial institution. Financial markets can be expected to show their reaction more directly. If there is insufficient confidence in the management system, the conditions for fund procurement and, more specifically, the conditions for issuing agency bonds will become costly. Leveraged through the financial market, it will be difficult to offer the kinds of low interest loans expected of an international development institution.

What is different about the system that the AIIB proposes? Would it really be possible to realize this? Both participating and nonparticipating countries and the ADB as well would like to ascertain this. However, in fact this point might not yet be clearly apparent to even China, the party most involved.

Is the AIIB truly striving to be an international institution? Is it its actual aim to be China’s development finance organ? The ambiguity of the character of the AIIB is related to this point. If the AIIB will be carrying out fund procurement itself as an international institution and seeking to advance its recognition by the international community, then it would be looking for points of compromise with the above mentioned restrictions and would not greatly exceed the function that the ADB has performed to date. The AIIB would build a cooperative relationship with the ADB and in essence the size of funds available from regional international institutions would nearly double.

Conversely, if China clings to retaining its leadership and the character of being China’s development bank becomes greatly apparent, then the AIIB may be able to persist in spite of some difficulty, with the Chinese government continuing to provide funds. In this case, the AIIB would essentially signify merely the appearance of a Chinese public financial institution providing development investment funds according to China’s means as a country with a current account surplus. This would be no different than the assistance policy that Japan executed in the 1980s. Therefore, in the long term the AIIB would be no more than an institution dependent on the growth of the Chinese economy and the environment related to the balance of payments.

Conclusion

When the matter of the AIIB is viewed calmly without being swayed by distrust or expectations towards China, there is a sense of déjà vu as regards the AIIB. A country with a current account surplus that has entered the stage of growth through industrialization begins to supply international development funds. At the same time this leads to a greater voice concerning the international economic order and such a country ventures to create a means that will lead to the promotion of exports and investments for its domestic corporations. Further on the country also tries to challenge the existing monetary order. Looking only at the economic aspect, this is virtually the same path that Japan took in 1980-2000s.

If one considers that China’s course of seeking a greater voice concerning global financial and monetary order is, to the extent seen to date, a natural progression, then it would be difficult to think that these moves will immediately become a full frontal attack challenging the existing order. The formation and preservation of order, which is an international public good, require bearing great cost that grows the more one becomes involved in key duties, and it does not appear that China has resolved to take on this cost burden right away. Similar to what Japan attempted, it is highly probable that China’s endeavor will be embodied in the existing order through the process of coordinating efforts, while changing the existing order as well to a small extent, reflected by the future orbit of China’s economic and diplomatic might.

As for the existing order, the basic stance that it should take is to strive to preserve its relationship with China so that the above is achieved. In the current phase where the U.S. and Japanese fund presence will decline relatively, how they will incorporate the might of China’s fund presence into the world order to their advantage will depend on their resourcefulness. This does not necessarily mean that it would be best for Japan and the U.S. to rush to participate in the AIIB. There are various levels and forms of involvement from inside as well as outside the AIIB. Furthermore, the situation is still very fluid, as even in the process of establishing the AIIB the unexpected increase in the number of participating countries has meant that China’s investment ratio has declined to about half of what it initially supposed it would be. In addition, a situation developed at the time of the signing ceremony for the inauguration of the AIIB in June 2015, in which seven countries put off signing on to participate. Therefore, one can foresee changes in the situation in the various stages ahead as well. Consequently, it is not haste that is required, but the firm resolution to deepen one’s involvement in the coming stages in due course.

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