The Year of the Ram could be witnessing the first tremors of a tectonic shift in global power structures. Despite US objections, some of its closest allies — Australia, the UK, Germany, France, Italy and South Korea — have signed on to the new Chinese-backed Asian Infrastructure Investment Bank (AIIB). Some 45 countries, including Brazil and Russia, have signed up and more may join soon. Even Taiwan has applied for membership. Japan is still holding back and the US, under intense criticism for staying out, is now pledging cooperation.
The BRICS Bank was the first shot across the bow to the established order. Now, the AIIB is an even bigger signal that global economic power is shifting — a majority of the G-20 is backing the bank. As China prepares to take over the presidency of the G-20, there is clear evidence of its global ascendancy.
But these new financial institutions are just the set pieces in a bigger “New Silk Road” strategy, which China is crystallising into the “One Belt One Road” policy. This policy, first announced by President Xi Jinping in 2013 in Kazakhstan, was initially meant for greater cooperation between Central Asia and China’s western provinces. But as Xi laid out at the 2015 Boao Forum, since then, it has evolved into a broader plan for China’s engagement with the world. The belt links China to Europe and to trade and transport corridors across Central Asia and Russia. The road includes maritime links through the Straits of Malacca to the Indian Ocean, Middle East and eastern Africa.
China is signalling that while it has imported technology and capital for over 30 years, since the Deng Xiaoping reforms, it is now ready to turn around and export know-how and capital. China’s “One Belt One Road” project focuses on trade, infrastructure and telecommunications. But it also talks about people-to-people connectivity, cultural exchanges as well as learning from other countries’ development experiences. It emphasises peaceful development and cooperation with existing organisations, such as the Saarc, Organisation of Islamic Cooperation and EU, to assuage fears that China is emerging as a global hegemon.
The idea is not just to build infrastructure. Trade facilitation is an important part of the “One Belt One Road” project. Local currency trading will be encouraged and currency swap arrangements will be put in place. China UnionPay cards are already issued and accepted in many countries — the latest is Turkey.
In addition to the $100 billion BRICS Bank and the $100 bn AIIB, the Shanghai Cooperation Organisation Development Bank and Silk Road Fund ($40 bn) are also being set up. These new institutions are partly a response to the slow pace of reform at the international financial institutions and partly a channel for China to utilise its vast forex reserves. This is in contrast to the oil-rich countries, which mostly rely on existing Western institutions to recycle their vast surpluses.
Badly needed reform of the US- and Europe-dominated IMF to give a greater say to emerging economies is stuck in the US Congress. Ironically, the US does not lose as much because of the proposed reform of the Bretton Woods institutions as European countries, which have bolted to back the AIIB.
Given Asia’s vast infrastructure needs, new financial institutions are badly required. The existing Bretton Woods system no longer has the financial capacity or even up-to-date engineering know-how. Moreover, if Europe can have a European Bank for Reconstruction and Development and a European Investment Bank, why can’t Asia have an Asian Development Bank and an AIIB working in tandem to meet its financing needs?
How China’s plans unfold will be determined by its dealings with individual countries. In Myanmar, environmental concerns as well as worries about China’s overweening presence led to the cancellation of the Myitsone dam project. In Sri Lanka, political change has put the brakes on several Chinese-backed projects, including the Hambantota port. India will judge China’s intentions based on how it solves the border dispute. The Asean countries will judge China’s peaceful intentions by how it plays its hand in the South China Sea. China has had some success but also several problems with its Africa strategy, including significant anti-Chinese feelings in some countries. Russia may be willing to cede influence to China in Central Asia — but only up to a point. The direction China intends to go is becoming clearer as the scope of its ambitious strategy is unveiled.
India missed its opportunity at the end of the World War to get a bigger stake in the UN Security Council and the Bretton Woods system. Today, with its rising economic clout, India must decide whether it wishes to participate intelligently and constructively inside this new tent or risk being left out and regret it later. The Narendra Modi government moved quickly and correctly to enter the BRICS Bank as a founding member but this game just got much bigger. India must increase its engagement or get left out once again. Waiting for reforms at the Bretton Woods institutions would be like waiting for Godot.
The writer is visiting scholar, Institute for International Economic Policy, Elliott School of International Affairs, George Washington University, Washington DC