China Shakes up the Status Quo
Apr. 1, 2015
China's leaders are preparing to launch the Asian Infrastructure Investment Bank, which they hope will give Beijing a bold new role in the global financial system. And now they've got a good idea who the founding members will be. They have closed the initial applications, after 50 countries and one territory asked to join.
Major economies, including Britain, Germany and France, have asked to join, as have emerging economies such as Russia and Brazil. Norway, Iceland, Taiwan, Portugal and Israel submitted applications just before the deadline. The Chinese government is calling on nations which missed the deadline to pledge, even though they won't be founding members.
Analysts say nations signed up in hopes of improving ties with the world's second largest economy. And they say some leaders may be trying to keep China's influence in check. Founding members will have a say in the bank's lending practices, and other policies.
Noticeably absent are Japan and the US, which declined to pledge. They've questioned the way the bank will be run and how transparent it will be.
Japan's Chief Cabinet Secretary Yoshihide Suga says the government is concerned about whether the institution can "establish fair governance." "Leaders in Beijing haven't provided a clear explanation," Suga said. "It's impossible for Japan to announce joining the AIIB at this stage."
Chinese President Xi Jinping has tried to ease such concerns, and reassure people that the bank won't upset the global financial order. "The bank will lie within the framework of the existing international financial system," Xi has said. "It will not compete with, destroy, or replace the system. Rather, the bank will complement it."
Officials in Beijing are aiming to have the bank ready by the end of the year, and are hoping it will boost also their economy. They've been seeing growth slow, and have been struggling to turn things around. They know the bank will provide new opportunities for Chinese companies to sell their services abroad.
Officials in Beijing are building what they have dubbed "The New Silk Road." The upcoming Asian Infrastructure Investment Bank will fund transportation, energy and communications projects in an effort to create a modern version of the historic trade route, which linked China with Europe by land and sea. Work is already well underway in parts of inland China.
Chengdu is the provincial capital of Sichuan, a region known as the home of giant pandas. Now it is positioning itself as a new trade hub. The city has served that role in the past. It began thriving two thousand years ago as the starting point of the Silk Road.
New shopping centers are sprouting up across the city. Some of them blend a traditional atmosphere with a touch of modern architecture.
Local authorities aspire to turn the city into a hub for the electric car industry. Electric vehicle pioneer Tesla has already set up its largest sales and customer service center in Asia. A local company is producing a compact electric motor, with all parts manufactured locally.
Authorities are using tax breaks and other incentives to attract more electric car companies. They also want to increase the number of electric vehicles used in public transportation. Their plans involve setting up charging stations across the city.
But the city's ambitions go even further. A high-speed railway to transport cargo to Europe via Central Asia was recently launched. And the airport was given a brand new terminal in 2012 in order to boost the number of international flights.
"Chengdu has become an important hub connecting Asia and Europe," says Tang Yiwei, who works for the airport. "The government is pushes on with its policy to develop China's inland regions. The city will gain more significance by making use of its superb location, fast economic development, and rich potential."
For centuries, the Silk Road has played a crucial role in China's economic development. Authorities are now hoping that investing in the very same route will help them carve out a new path to prosperity.
Ke Long from the Fujitsu Research Institute spoke to Sho Beppu and Aki Shibuya on the implications of the new development bank.
Beppu: Almost 50 countries have said they'll join the AIIB. Do you think China is satisfied with this?
Ke Long: Yes, I think that, at this stage, China is satisfied. The US and Japan haven't decided whether to join the bank, and China will continue to talk the two countries into participating in the new financial institution.
Beppu: China says the bank is designed to promote development in Asia. But some people have suggested it's much more self-serving than that. What's your view?
Ke Long: I understand that context, but the game must be a winning game, not only for China but for the international community. First of all, I think the bank must contribute to regional infrastructure investment. And meanwhile, I have to point out that we have such a huge amount of foreign reserves, around $4 trillion, which we cannot use inside China. We need to use the money to invest more effectively. So for China to set up a multi-national institution at this time is a very good decision.
Shibuya: The US dominates global finance at the moment. Is there any chance the new bank will change that?
Ke Long: There is no doubt that it will pose a challenge to the Bretton-Woods system. It's like the United States once mounted a challenge to the Bank of England's pound system. But the Chinese yuan will not immediately replace the dollar, and the yuan and the dollar are expected to co-exist over a long period of time.
China is the world's second biggest economy and has the largest foreign reserves in the world. It's not in China's national interest to invest just in U.S. Treasuries and other bonds. By establishing a new financial institution, it wants to enhance its international influence.
Beppu: Japan and the US have both raised doubts about how transparently the bank will be run. Do you think an AIIB without these two countries can be a truly global institution?
Ke Long: China has already said it would not exercise any veto power at A-I-I-B board meetings. Transparency is something they can establish while the bank is being managed. I think Japan considers China more of a rival than the United States does and is becoming a bit emotional. Japan is the only country in East Asia which hasn't joined the A-I-I-B.
Neither Japan nor the United States is powerful enough to contain China, and they have no choice but to cooperate with Beijing. That's why senior US officials have been repeatedly calling on China to work with the World Bank and other international financial institutions.
Beppu: They say the bank will be operating by the end of the year. What are the issues they have to resolve by then?
Ke Long: We have to see how China will resolve a variety of remaining issues, for instance what kind of laws it will apply to govern the bank. The A-I-I-B will be based in Beijing, but will its official language English or Chinese? And it's important that international financial institutions like this serve not only as financial intermediaries but as creators of information. We have to see what kind of research capability the new bank will have.