April 13, 2015
Beijing’s plans for a new multilateral Asian Infrastructure Investment Bank (AIIB) have put Washington on edge. More than 40 countries, including major United States allies in Europe, have signed up to join it, despite the Obama administration’s objections and warnings.
However, the US government has nothing to fear from the AIIB; its opposition is misguided. The bank’s creation will not enhance China’s global power at the expense of the US. If anything, Beijing’s attempt to go multilateral is a step backwards: It is a concession that China’s established practice of promoting bilateral initiatives in the developing world has backfired.
Once more, anxiety about China supplanting the US as the world’s leading power is undermining cool-headed analysis. When China set up its sovereign-wealth fund in 2007, many feared that it would take control of strategic resources, acquire sensitive technology and disrupt global financial markets. But the China Investment Corporation, which controlled US$575 billion (S$787 billion) last year, has been struggling with losses, partly because of mismanagement, according to China’s National Audit Office.
In 2008, as the US financial system was crashing, China surpassed Japan as the biggest holder of US Treasury securities, setting off predictions that Beijing might one day dump them to force the US into economic and political submission. Instead, China’s holdings of US Treasuries have more than doubled, from about US$493 billion in early 2008 to more than US$1.2 trillion at the beginning of this year.
DOES DOMINATING A MULTILATERAL ORGANISATION PAY?
Again and again, the alarmists have been disproved. One reason is that they have often overlooked the real impetus for China’s outward investment. Beijing set up a sovereign-wealth fund and bought US Treasuries because it needed to find a safe and profitable way to invest its vast foreign-exchange reserve, which kept expanding thanks to the country’s growing exports. China’s move today to set up the AIIB is yet another rational response to the economic challenges it faces at the moment.
For more than a decade, Beijing used part of its massive reserves to support the activities of Chinese companies — mostly state-owned enterprises — around the world, in infrastructure development, mining and other industries. To facilitate that, it pledged to give out enormous amounts of bilateral loans and grants to developing countries — a total of US$671 billion in 2001 to 2011, according to a 2013 RAND Corporation report.
The Chinese government awarded much of this financial assistance with little interest in influencing local politics, but often on the condition that the projects it backed use Chinese contractors and Chinese-made products. Such terms were designed to serve the interests of Chinese companies. And they did, perhaps only too well.
For example, though China’s assistance to Africa brought new economic opportunities to the continent, it also created inequalities and, in turn, a political backlash. During the 2011 election in Zambia, where China invests heavily in copper mines, voters elected the candidate who ran on an anti-China platform. In 2013, Mr Lamido Sanusi, then the governor of the Central Bank of Nigeria, warned that China’s approach to Africa was a new form of imperialism.
This wariness exists in Asia too, including among Beijing’s long-time allies, such as Myanmar. Over the past few years, the Myanmar government has moved closer towards Washington, partly to overcome its dependence on Chinese assistance. It has also suspended a massive Chinese dam project that had sparked local unrest. Such pushback against China’s bilateral initiatives is the reason that Beijing now wants to create multilateral vehicles for its investments.
The AIIB’s capitalisation may reach US$100 billion, with China providing up to US$50 billion. Last year, Beijing also pledged US$40 billion to a new Shanghai-based BRICS (Brazil, Russia, India, China and South Africa) bank. That, too, was seen as a challenge to America’s leadership in international financial institutions. But such concerns overstate just how much power any given government can reap from dominating a multilateral organisation.
The US became the 20th century’s superpower thanks to its bilateral economic assistance, rather than its clout in multilateral bodies. The World Bank was created in 1944, but was soon overshadowed and sidelined by the Marshall Plan and other US bilateral assistance programmes. It was revitalised only in the 1970s, when America’s global power had weakened.
Multilateral institutions are inherently restricting. When a country lends on its own, it has total control over the terms of the arrangement. Lending via the AIIB or the BRICS bank will mean being constrained by other stakeholders. And this is precisely Beijing’s point. As Mr Shi Yaobin, a Chinese Deputy Finance Minister, said recently: “Every member’s share (of decision-making power in the AIIB) will decline commensurately with the gradual increase in the number of the member countries.”
In other words, China is deliberately forgoing some of its leverage, including in the very organisation it is setting up. And it is doing so because it wants the cover and legitimacy that will come from the participation of other countries.
Creating the AIIB is not Beijing’s attempt at world domination; it is a self-imposed constraint and a retreat from more than a decade of aggressive bilateral initiatives. And the more China channels its international investments through multilateral institutions — even ones of its own making — the lesser the risk that it will become all-dominant.
ABOUT THE AUTHOR: Ho-fung Hung is associate professor of sociology at Johns Hopkins University and the author of the coming book, The China Boom: Why China Will Not Rule the World.