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China’s Asian Infrastructure Investment Bank: The Passing Of The Torch

220px-Shanghai_-_Nanjing_RoadAt first glimpse a new investment bank for infrastructure, would seem like a totally noncontroversial occurrence that will benefit Asian nations in desperate need of additional funding. In reality, is has become the latest challenge to American and Western hegemony over international finance and investment. The Asian bank is a massive new initiative by China to partially circumvent existing Western institutions like the World Bank, which is controlled by the United States and Europe.

The Americans have been attempting to dissuade other Western countries from joining the institution. Publicly the United States has offered tepid support for what the bank is attempting to do, but privately American diplomats are trying to get nations to either decline or delay their participation in the bank. The United States officials insist the concerns are all about international standards concerning environmental regulations, labor laws and banking transparency. However, the underlining reason is obvious. It will be a new global institution that the United States has little or no influence over.

Chinese President Xi Jinping Holds Hands With Fellow BRICS Leaders At The 2014 G20 Brisbane Summit In Australia

Chinese President Xi Jinping Holds Hands With Fellow BRICS Leaders At The 2014 G20 Brisbane Summit In Australia

The Asian Infrastructure Investment Bank (AIIB) is another challenge to the order established by the United States and to a lesser extent Western Europe and Canada at Bretton Woods in 1944. It was here where the dominance of the West particularity the United States, would be codified. American economic and financial supremacy would be maintained by the strength and global use of the United States Dollar.

It would be through the Bretton Woods Conference officially known as the United Nations Monetary and Financial Conference, that the institutions of the International Monetary Fund (IMF) and the World Bank originated. That the meetings were held in the United States was no mere coincidence. Through these institutions and other organizations the United States and European allies were able to control world markets for the next 70 years.

Shanghai China Skyline

Shanghai China Skyline

While China participates in these established financial structures, the role the country plays is nowhere near reflective of the growing strength of the economy. China is now the world’s second largest economy and the largest in purchasing power parity. The limited influence that China is permitted in the institutions designed by the Western powers, has become quite obvious and is no longer acceptable to the Chinese leadership.

Efforts to reform the IMF and similar organizations for example, have not gotten very far in the United States Congress. It is no wonder, since the Americans are reluctant to accommodate, the rising clout of the Chinese economy. On the part of the Chinese, they were simply no longer willing to wait and would prefer to establish new systems, that their own people will have a much greater role in. To be fair the Chinese insist that the bank will simply complement and not compete, with established institutions. That may well be true at first, but given the growing power of China, it is unlikely to remain so over the long term.200px-International_Monetary_Fund_logo.svg

The American diplomatic effort will be mostly futile. Countries around the world are looking after their own self interests and in this case they are in conflict with the United States. Even the IMF has given support for the bank, knowing fully well that the bank will become operational this year, regardless of the American position.

On the positive side there will be new money made available for countries in Asia, that are badly in need of additional funding. Developing countries in the region, will now have another option when looking for a way to finance new infrastructure. Burma, Cambodia, Vietnam, Laos, in Southeast Asia to name just a few, and others like Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan in Central Asia, have developed to a level where they desperately need additional investment. These financial inputs could bring very positive economic benefits, at this point in development. The investment needs of a number of these countries, far exceeds, what will be made available through existing Western institutions. It is estimated that Asia alone, will need in excess of $8 trillion USD (United States Dollar) in the next 5 years.

World_Bank_logoThe nations that have joined or are committed to join include major European countries like Denmark, the Netherlands, Italy, France, Germany and the United Kingdom as well as Australia, Brazil, India, Russia, Singapore, Turkey, South Korea and New Zealand.

Initial funding for the AIIB will be $100 billion USD. Half of the funding has already been pledged by China. Although this is rather a small amount, it is likely that it will continue to grow as the bank expands operations. The Chinese have deep pockets so if the bank is a priority, it will continue to receive funding.

Today is the deadline for becoming a charting member of the institution as set by China. For now, neither the United States nor Japan  have made any real moves to be part of the AIIB, but it will not matter. The bank will be operational by the end of the year and Chinese prestige and influence in Asia will continue to grow.China_Development_Bank(CDB)

It is not hard to fathom why China wants the bank up and running and why the United States and Japan are in opposition. The duo have not allowed greater Chinese input in the IMF, World Bank and the Asian Development Bank. They continue to fear the rise of China. However, as the economy of China continues to grow, even at a laggard rate of 7% as reported by the Chinese, adjustments will need to be made in a reflection of the growing wealth of the country. Spectacular economic growth sometimes even double digit from the 1980’s to the present, have totally transformed China. It is only natural that the Chinese would like some recognition of the changing reality of their circumstances.

The China Development Bank Tower in Shanghai.

The China Development Bank Tower in Shanghai.

A historical comparison can easily be made with Imperial Germany in the late 19th and early 20th centuries and the British Empire, in which the latter refused to accommodate the new rising power. That experiment did not end well. Both the United States and Japan need to recognize that the incredible wealth that has been generated from years of Chinese trade surpluses, needs some outlet for investment.

The economy of China is already distorted somewhat with an overheated real estate market and too much infrastructure investment in some sectors. The AIIB is a good place for the country to invest some of these surpluses. Better returns for China are then possible and the money will be put to good use in the countries aforementioned. Will this activity lead to even greater Chinese influence and power? Yes of course, but it is only a natural development. One that should have been expected as the Western world particularly the United States, bought lower priced Chinese goods in great abundance for decades.

It must also be noted that the United States itself has used international financial institutions in the past to further its own geopolitical objectives, with sometimes questionable results. The Chinese will be no different. There will be at times, political and strategic objectives that will be involved in the transactions of the bank. Such a development is inevitable, despite all protests to the contrary.

Stuart Gulliver, Executive Director Of HSBC Signs A "Memorandum Of Understanding" With Zheng Zhijie, Vice Governor Of China Development Bank, 10 January 2011.

Stuart Gulliver, Executive Director Of HSBC Signs A “Memorandum Of Understanding” With Zheng Zhijie, Vice Governor Of China Development Bank, 10 January 2011.

For many strategists, the transfer in power away from Europe and the United States towards Asia and China is a troubling development. It is a natural process that reflects the economic reality on the ground. There may often be some lag in time, but ultimately the new international arrangements must take into account the real world experience. A transfer of wealth, ultimately brings a transfer of power.

Another historical comparison can be provided for this transition. Again it involves the British and in this case the rising power of the United States. It was also difficult but a necessary development, as the Empire was forced to pass the torch on so many previous responsibilities, that had become no longer practical or affordable. The United States has been a profligate spender for the past few decades. Such behavior has serious consequences which Americans are just beginning to understand the results. The same is true with Europe. These two powers simply no longer have the financial resources necessary, to alone dominate the markets of the world, as has been the case for the last 2 centuries.

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