Dragon Power on Display

With even U.S. allies scrambling to get on board the AIIB, China looks set to lead the global economy.

Posted on 04/7/15
By Jayan Jose Thomas | Via The Hindu
(Image via The Hindu)
(Image via The Hindu)

China appears to be on course to reset the existing global economic order dominated by the West. The setting up of the Asian Infrastructure Investment Bank (AIIB), a multilateral financial institution, is a significant step in this direction, challenging the long-held dominance of the Bretton Woods system.


Formed largely with Chinese capital and initiative, AIIB aims to fund infrastructure projects across Asia. Indications are that this new multilateral bank could rival the World Bank and other long-standing international institutions established by the U.S. and its allies.


AIIB will have a subscribed capital of $50 billion, which will eventually rise to $100 billion. In comparison, the subscribed capital of the World Bank and the Asian Development Bank (ADB) are $223 billion and $165 billion respectively.


Dramatic turnaround

AIIB was formally inaugurated in Beijing on October 21, 2014 with 21 founding-members including China, India, Pakistan, Singapore and Vietnam. Many other countries had initially declined the Chinese invitation to join the new bank, with U.S. allies such as Australia and South Korea allegedly under pressure from the U.S. to keep away from the initiative.


A dramatic turnaround for the bank occurred in recent weeks, as the deadline to apply to become a founding member of AIIB, April 1, 2015, came close. The U.S. was dismayed when the U.K. announced its decision to sign up on March 12, 2015, but in the days that followed, many other countries including France, Germany, Italy and South Korea joined as well. Latest reports indicate that AIIB has now received applications from 47 countries to become founder-members. These include Israel and Taiwan. China will remain the biggest shareholder in the bank, while the shares of non-Asian countries will be restricted to 25 per cent of the total.


The U.S. and Japan continue to remain firm about not joining AIIB. The U.S. Secretary of the Treasury expressed concern about whether the new bank would be able to meet the “highest global standards” of governance or lending. However, it is notable that even close American allies queued up to join the China-backed bank despite stiff U.S. opposition. This is a clear acknowledgement of China’s growing economic influence in the world.


China’s rise

China’s large foreign exchange reserves, which stood at $3,880 billion in 2013, provide it the financial muscle to be on the driver’s seat in the global economy today. From 2001 onwards, China’s exports, especially of manufactured goods, have been growing at a much faster pace than its imports. As a result, China’s current account surplus — mainly, the surplus of the value of exports over imports of goods and services — has climbed sharply upwards. Its foreign currency receipts have soared too, due both to the large export earnings and the net inflow of foreign capital into the country.


Click here to read the complete article at The Hindu.

The Hindu is a leading English language daily of India.

(Jayan Jose Thomas is an Associate Professor of Economics at the Indian Institute of Technology, Delhi.)

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