China's Place in the New World Economic Order
All new roads lead to China.
Competition between the world's two greatest economic powers is both inevitable and (for the most part) beneficial. This is the case even when China and the U.S. are arguing over control of increasingly obsolescent international financial institutions.
China's effort to start the new Asian Infrastructure Investment Bank grows more popular by the day, despite U.S. resistance to the idea. The question is no longer whether the bank will fulfill an unmet need, but how best to ensure that it contributes to Asian growth -- and, not incidentally, draws China more deeply into the global financial order.
Now that the U.K. and several other European countries have joined the bank, holdouts such as Australia and South Korea are almost certain to jump in. This counts as a soft-power victory for China over the U.S., which reportedly lobbied allies not to sign up. But Washington largely has itself to blame. For years, the U.S. has called on China to bind itself to international norms and financial institutions -- without making room for it to do so. Congress persists in blocking efforts to dilute U.S. dominance of the World Bank or to increase China’s voting share at the International Monetary Fund, which stands at less than 4 percent, compared with almost 17 percent for the U.S.
That’s not to say the U.K. and others have joined the new bank out of altruism; London is clearly eager to establish itself as the main offshore trading hub for the renminbi. And the economic rationale for the bank -- in an era when the World Bank itself is facing something of an existential crisis and the global market for private capital is robust -- may be diminishing. Nevertheless, the region has huge infrastructure needs -- up to $800 billion worth every year, according to a much-cited study from the Asian Development Bank. American opposition to any new source of financing looks churlish and hypocritical.
Concerns that a Chinese-dominated institution might encourage lowered lending standards are overstated. If China wanted to hand out dodgy loans to buy loyalty, it could easily continue to do so on a bilateral basis. But that practice has largely backfired; Beijing faces souring debts from Myanmar to Sri Lanka to Ukraine. The whole point of working through a multilateral organization is for China to gain global legitimacy for its largess.
At this point, with much left to be decided about the new bank’s governance and lending practices, it should be advantageous to have U.S. allies at the table. To begin, they should work to ensure that decisions are made by consensus and collaboration. Given that China is expected to contribute almost 50 percent of the new bank's funds, it will no doubt expect to carry a prevailing influence. But European members will very quickly face pressure at home to pull out if the bank backs controversial projects against their wishes.
Then there's the question of which best practices the new bank should adopt. While several of these are being rethought even within existing international development banks, at least two should be non-negotiable: The new bank should adopt the debt sustainability framework promoted by the IMF and World Bank to prevent developing nations from taking on unsustainable debt loads. And it should commit to competitive tendering and universal access in procurement, to avoid the perception that its loans are meant to funnel business to Chinese companies.
None of this requires that the U.S. or Japan join the new bank. (Domestic politics in both countries would make that impossible in any case.) But if those countries are concerned about China’s increasing influence, they could do much more to strengthen the institutions they already dominate. American officials should be pushing harder, for example, to carry out financial reforms that would bolster the Asian Development Bank's ability to lend. If the U.S. really doesn’t want other nations following China’s lead, it will have to offer a stronger alternative.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at firstname.lastname@example.org.