China’s dynamic thrusts to enlarge its global presence, with its abundant reserves and breath-taking intra-regional ‘Belt and Road’ initiatives, are pushing to the fore the long-sought reform of the international economic order to reflect growing weight of emerging market and other developing countries. China makes no secret of its economic super-power status in <g data-gr-id="77">a world</g> which it sees as no longer unipolar.
By promoting an Asian Infrastructure Investment Bank (AIIB), China has thrown a direct challenge to the <g data-gr-id="90">West-sponsored</g> financial institutions like IMF and World Bank, founded 70 years back, though Beijing is careful to emphasise that this institution, and the New Development Bank (NDB) of BRICS, would supplement the role of existing global and regional multilateral financial institutions.
The United States’ failure to approve the 2010 IMF’s voice and representation reforms, giving greater <g data-gr-id="74">weightage</g> to China and other emerging economies and developing countries has propelled China to go ahead with the AIIB. The Congress had not approved <g data-gr-id="98">necessary</g> legislation, and no reform of IMF is possible without backing of USA, the largest <g data-gr-id="75">quota-holder</g>.
The Obama Administration remained helpless even though the President had agreed in 2010 to raising China’s stake to 6 per cent from 3.8 per cent corresponding to its global <g data-gr-id="79">weightage</g>. Economists in Washington aver that the new institutions – AIIB and NDB – signal a loss of US credibility and its stewardship of the global economic system.
China has also been up against the US-Japan dominance in voting shares in ADB. As the second largest economy and with reserves at 4 billion dollars, China began making substantial investment commitments for building infrastructure across Asia and Africa. At the <g data-gr-id="94">geo-political</g> level, China under President Xi Jinping has been asserting its sovereignty over the south China seas in the midst of territorial disputes with Japan, Vietnam and the Philippines.
It is sternly opposed to America’s “pivot” to Asia. US-China relations come under strain every now and then but both attach high importance to cooperative relations. President Xi will be making his second official visit to Washington in September after two years, in China’s quest for “special relationship” between two leading powers of the world.
At home, China is now well reconciled to the “new normal” – of rebalancing its economy, shifting from investment-led growth to one based on <g data-gr-id="81">raising</g> domestic consumption. This has entailed growth moderation and China is slated to grow 7 .1 <g data-gr-id="82">per cent</g> in 2015 and even lower in 2016 and beyond.
Meanwhile, China also looks forward to its currency, <g data-gr-id="95">renminbi</g>,(RMB) being included in IMF’s SDR basket of currencies to earn reserve currency status. SDR basket now comprises the euro, Japanese yen, pound sterling, and U.S. dollar. The value of SDR - the unit of account for IMF - is determined daily on the basis of quoted exchange rates for these currencies.
IMF has said it would take the Chinese plea for RMB inclusion in the next review of SDR basket, due in December 2015. Although RMB is no longer regarded as “under-valued”, it must satisfy certain criteria including whether it is “freely <g data-gr-id="80">useable</g>”. China may have to further liberalise its capital account to qualify for inclusion in SDR basket.
China’s ‘Silk Road’ initiatives, revived by President Xi Jinping in 2013, are designed as “new model of South-South and regional cooperation” but they are also seen as well-designed to advance China’s larger image and global stature. The Silk Road (belt) covers broadly the ancient ‘silk route’ across Asia and Europe via Middle East while the 21st century Maritime Silk Road links China’s coastal region to countries in the south extending to the Asian-Pacific region.
A 40-billion dollar “Silk Road Fund” (SRF) is in place as <g data-gr-id="102">financing</g> mechanism for the “Belt and Road” initiatives, which seek common development of countries for improved connectivity. That is considered to bring in its wake regional prosperity. In muted reaction, India has broadly indicated cooperation in initiatives to promote development and prosperity of the region.
India certainly looks for large Chinese investments for its own development programmes (railways, - high-speed trains, smart cities etc). China had earlier announced it would invest 20 billion dollars in India in the next five years on co-operative projects. Irrespective of India’s concerns over the unresolved boundary dispute, trade and investment ties would bind the two Asian majors over the medium term.
When China announced AIIB, India became one of its earliest founder-members in October 2014. Its Ministry of Finance has finalised the total of founding members of AIIB at <g data-gr-id="73">57</g> but the bank will continue to accept new members. Britain, France and Germany are among major European countries signed up to <g data-gr-id="72">AIIB</g> but USA and Japan have reservations.
The Obama Administration has concerns whether AIIB would meet the high standards of the World Bank and the regional development banks, in matters of governance and environmental and social safeguards. Washington could not persuade its allies like Australia and South Korea to keep off AIIB.
In a countervailing move, Japan has unveiled <g data-gr-id="107">a 110</g> billion dollar plan for aiding high quality and innovative infrastructure, throughout Asia over a period of five years. There are thus hopeful pointers for the FDI-based development model of Prime Minister Modi, both from China - through Shanghai-based NDB and Beijing-based AIIB, to be hopefully operationalised by end of 2015, and likely solid investments from Japan, the first port of call in the Modi ‘safaris’ in his first year of office.
China has welcomed the nomination by India of Mr K V Kamath, former Chairman of ICICI, as President of the New Development Bank of BRICS, with an authroised capital of 100 billion dollars but with initial subscribed capital of 50 billion dollars, equally shared among the five founding emerging economies. It has four vice-presidents from the other four BRICs members.
The NDB has now an interim board of trustees to oversee the establishment of the Bank whose aim is to foster financial and development cooperation within BRICs. Primary focus will be on lending for infrastructure projects. The bank’s starting capital of $50 billion can be increased to $100 billion over time. But no member can raise its share of capital without all agreeing. With one vote for each country, none will have veto power.
The Asian Infrastructure Investment Bank (AIIB), on the other hand, is more of an international financial institution. The Articles of Agreement (AOA) are being drawn up for signatures of 57 founding members by July. With China providing 30 billion for the 100-billion dollar capital <g data-gr-id="125">base,</g> or about 30 <g data-gr-id="118">per cent</g> of votes, it can, theoretically, exercise its veto on any major decision.