China’s Influence Set to Climb as US Thwarted on New Bank

Jakarta Globe, Bloomberg, Mar 25, 2015

US President Barack Obama, left, poses with Chinese President Xi Jinping as
 he arrives for the Asia-Pacific Economic Cooperation leaders meeting at Yanqi
Lake, north of Beijing on Nov. 11, 2014. (AFP Photo/Greg Baker)

Seven decades after the end of World War II, the international economic architecture crafted by the US faces its biggest shakeup yet, with China establishing new channels for influence to match its ambitions.

Three lending institutions with at least $190 billion are taking shape under China’s leadership, one of them informally referred to as a Marshall Plan — evoking the postwar US program to rebuild an impoverished Europe. Also this year, China’s yuan may win the IMF’s blessing as an official reserve currency, a recognition of its rising use in trade and finance.

China’s clout has been expanding for decades, as its rapid growth allowed it to snap up a rising share of the world’s resources, its exports penetrated global markets, and its bulging financial assets gave it power to make big individual loans and purchases. Now, the creation of international lending institutions is leveraging that economic influence closer to the political and diplomatic arenas, as US allies defy America to back China’s initiative.

“This is the beginning of a bigger role for China in global affairs,” said Jim O’Neill, UK-based former chief economist at Goldman Sachs Group, who coined the term BRICs in 2001 to highlight the rising economic power of Brazil, Russia, India and China.

Power vision

Chinese President Xi Jinping’s vision of achieving the same great-power status enjoyed by the US received a major boost this month when the UK, Germany, France and Italy signed on to the Asian Infrastructure Investment Bank. The AIIB will have authorized capital of $100 billion and starting funds of about $50 billion.

Canada is considering joining, which would leave the US and Japan as the only Group of Seven holdouts as they question the institution’s governance and environmental standards.

Australian Prime Minister Tony Abbott’s cabinet approved negotiations to join too, according to a government official who asked not to be identified as the decision hasn’t been made public.

“China’s economic rise is acting as a huge pull factor forcing the existing architecture to adapt,” said James Laurenceson, deputy director of the Australia-China Relations Institute in Sydney. “The AIIB has shown the US that a majority in international community support China’s aspirations for taking on greater leadership and responsibility, at least on economic initiatives.”

Development bank

The new China-backed institutions — the infrastructure bank, a $50 billion development bank in conjunction with fellow BRICS nations and a $40 billion fund to revive the ancient Silk Road trade route — are being set up after years of frustrated attempts by China and other emerging nations to revamp the existing international financial institutions to better reflect the shape of the global economy.

A key sticking point is the US’s failure for more than four years to approve shifts in the International Monetary Fund’s ownership structure, which would give emerging markets more influence and install China as the third-largest member nation, up from sixth. The changes have been held up by the refusal of the US Congress to ratify them, even though the White House and governments around the world support them.

The US still has veto power on major decisions made by both the IMF and the World Bank, and a lock on selecting the president of the World Bank. Both institutions are increasingly unrepresentative and undersized compared with demands they face.

‘Chump change’

“The real tragedy is, compared to the billions we spend on defense to support US global leadership, Congress undermined it by refusing to provide the chump change needed to reform the IMF,” said David Loevinger, former US Treasury Department senior coordinator for China affairs and now an analyst at TCW Group in Los Angeles. “Congress can abdicate its international responsibilities. What it can’t do is stop China from playing a bigger role in managing the global economy.”

Regarding the new infrastructure bank, US Treasury Secretary Jacob J. Lew told lawmakers last week the administration is concerned that the institution may not adhere to the same standards as other international financial institutions.

Worker protection

“Will it protect the rights of workers, the environment, deal with corruption issues appropriately?” Lew said at a House Financial Services Committee hearing in Washington. “Anyone joining needs to ask those questions at the outset. And I hope before the final commitments are made, anyone who lends their name to this organization will make sure that the governance is appropriate.”

Part of China’s international-development push stems from economic self-interest. With much of the nation’s almost $4 trillion in foreign-currency reserves earning little, “they see this as an opportunity to improve their rate of return over Treasuries,” said Nicholas Lardy, who’s studied China for more than three decades and is a senior fellow at the Peterson Institute for International Economics in Washington.

Andrew Polk, Beijing-based economist at the Conference Board, said China’s push to set up these new institutions is driven by its desire to “stoke markets” to which it can export industrial overcapacity.

China plans to spend $40 billion to revive the centuries- old Silk Road trade route between Asia and Europe, an idea raised by Xi in a 2013 speech in neighboring Kazakhstan.

Silk road

Some analysts have likened the plan to the postwar effort to help Europe that helped establish the US as a regional economic power. A detailed plan may be unveiled at China’s Boao Forum conference starting Thursday, where Xi is scheduled to speak, according to Australia & New Zealand Banking Group.

Announced in July, the BRICS’ New Development Bank, to be based in Shanghai with initial capital of $50 billion, is the third building block of a China-centered international economic architecture. In addition to the original four BRIC nations, the fifth country is South Africa.

The increasing influence of the world’s second-largest economy has extended to the existing institutions. The IMF in late 2015 will conduct its next twice-a-decade review of the basket of currencies its members can count toward their official reserves. IMF chief Christine Lagarde said in Beijing this week that the yuan “clearly belongs” in the basket and the fund would work with China to that end.

Higher contribution

China in recent years has gained several high-ranking jobs for Chinese nationals at the World Bank and IMF. At the World Bank, China last year almost doubled its contribution to a fund for the poorest nations to help support a low-interest, $1 billion loan to the unit.

To lure countries to join, China has offered to forgo veto power at the new development bank, the Wall Street Journal reported this week.

The German government and its European partners are insisting on transparency standards in the talks, and a Chinese veto wouldn’t be compatible with the transparency the Europeans want, according to a German government official who asked not to be named because the negotiations are private.

Making the institutions run successfully will be tougher than starting them, said George Magnus, a senior independent economic adviser to UBS Group in London. Recent audits of many Chinese overseas ventures have “left a catalog of misallocation, waste, poor administration and weak commercial standards and returns,” he said.

Peterson’s Lardy said those concerns are overblown, and China is likely to stick with high standards. “They want this to be a success,” he said. “They don’t want to take $50 billion out of their reserves and flush it down the toilet by funding projects with a high degree of corruption.”

Yu Yongding, a former adviser to China’s central bank, said that “Americans must learn to behave in a humbler way” to maintain their leadership in global economic circles.

“The world has changed,” Yu said.

Bloomberg

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"The Timing of the Great Shift" – Mar 21, 2009 (Kryon channelled by Lee Carroll) - (Text version)

“… Here is another one. A change in what Human nature will allow for government. "Careful, Kryon, don't talk about politics. You'll get in trouble." I won't get in trouble. I'm going to tell you to watch for leadership that cares about you. "You mean politics is going to change?" It already has. It's beginning. Watch for it. You're going to see a total phase-out of old energy dictatorships eventually. The potential is that you're going to see that before 2013. They're going to fall over, you know, because the energy of the population will not sustain an old energy leader. Remember where you heard it... in a strange, esoteric meeting with a guy in a chair pretending to channel. [Kryon being factious... Kryon humor] Then when you hear it, you'll know better, won't you? "Maybe there was something really there," you'll say. "Maybe it was real," you'll say. Perhaps you can skip all the drama of the years to come and consider that now? [Kryon humor again]

These leaders are going to fall over. You'll have a slow developing leadership coming to you all over the earth where there is a new energy of caring about the public. "That's just too much to ask for in politics, Kryon." Watch for it. That's just the beginning of this last phase. So many things are coming. The next one is related to this, for a country in survival with sickness cannot sustain a leadership of high consciousness. There is just too much opportunity for power and greed. But when a continent is healed, everything changes. .."

".. Many years ago, the prevailing thought was that nobody should consider China as a viable player on the economic stage. They were backward, filled with a system that would never be westernized, and had no wish to become joined with the rest of the world's economic systems. Look what has happened in only 30 years. Now, look at Africa differently …”