Three China-related events caused the world’s political and economic axis to shift in March and April. Taken separately, each event has its own importance, but taken together they add up to a sum greater than their parts.
The issuance of Chinese local government bonds, the evacuation of hundreds of foreigners by the Peoples Liberation Army (PLA) from Yemen and the confirmation of founding members for Asian Infrastructure Investment Bank create a subtle but profound change in the way the world turns.
First the local governments, many governing territories and populations bigger than most European states, were given the green light in March to exchange 1 trillion yuan ($160 billion) of high-interest debt (about one third of their debt) for cheaper bonds. This will probably be expanded to cover their full debts, estimated to be at least 3 trillion yuan as of June 2013 (the latest figures available). Much of this debt had been borrowed through third parties to avoid restrictions on direct regional and local government borrowing and to shore up falling revenue from land sales, about 25 percent of their previous income, from a property slump. However this pans out – and risk and opportunity are seen as bedfellows in China – global financial markets have a bond issuance scheme that will have a growing influence on global money markets.
The evacuation of hundreds of foreigners from 10 countries earlier this month (April) from Yemen marked the first time that the Chinese military had carried out such a mission. It will not be the last.
But it is the Asian Infrastructure Investment Bank that has already had an impact, before a single loan has been approved. Washington considers the AIIB a four-letter word. It also considers it a challenger to its financial hegemony. On both counts, Washington is right, but what should concern those in the corridors of power in the Capitol is not the new bank, but the circumstances that have necessitated its creation.
Asia is suffering from an infrastructure deficit and existing global financial institutions cannot fund the necessary construction. Estimates are that from now to 2020, Asia will need some $8tn for infrastructure.
China has more than $3 trillion in reserves (roughly the same amount as the estimated local government debt). Money buys options and China has options, but the most sensible, from Beijing’s point of view, is to set up a bank with others boasting start-up capital of $50bn to build sewage projects, ports, clean energy platforms, roads and railways to oil the wheels of trade. Beijing’s stated goal is to enhance land and maritime routes to markets in Asia and Europe under the Silk Road initiative. But the lack of adequate infrastructure is a problem that has to be tackled. To reinforce the point, the bank, which had a March 31 deadline for potential founding members to apply, has the word infrastructure in its name.
In the 19th century and 20th century, Britain recycled its reserves by building the world’s railways and securing the sea lanes, in the days before the Somme and Ypres carnage and crippling war debt. The US rebuilt Europe in the 1950s through the Marshall Plan.
Instead of grasping its significance, Washington’s response to the bank verged on the petty as it tried to warn off potential suitors. For 70 years, since Bretton Woods, by droit de seigneur, World Bank chiefs are always American. IMF chiefs are European. The US clings steadfastly to its IMF veto and Capitol Hill has yet to endorse reform of the IMF quota system that gives the US four times as much power as China, and is stalling on an expansion of IMF funding that would allow for major global infrastructure projects. Hence the need, seen from Beijing, for the AIIB. And Washington’s attempts to browbeat friends and allies into not joining misfired. Britain, Germany, France and many others have signed up. What Washington should have done is quickly issue a statement along the lines of “we welcome working with the AIIB in its attempts to bolster further development and economic growth in a part of the world that is growing ever more important for world trade.” That message has now been delivered – but it arrived too late and with the credibility of an expired check.
The last decade has seen the phrase “China’s growing clout” enter the financial and political lexicon. It is not without an element of irony that China has now displayed its clout in the financial and military spheres with relatively little fanfare.