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The Chinese game of Go in the international financial system

The rallying of major Western countries to the Asia Infrastructure Investment Bank provides yet another illustration of the relevance of the analogy between China's diplomacy and the game of Go aimed at placing pawns patiently to stifle one’s opponents and conquer territories.
By Christophe Destais
 Post, May 12, 2015

The recent rally of all the major Western countries, with the notable exceptions of the United States, Japan and Canada, to the China sponsored Asian Infrastructure Investment Bank (AIIB) provides yet another illustration of the relevance of the analogy between China's diplomacy and the game of Go - aimed at patiently placing pawns to stifle one’s opponents and conquer territories.

The rallying took place despite the opposition of the US authorities. The latter voiced their disapproval of the decision to join made by the United Kingdom, a rare public expression of disagreement in international affairs between the two countries.

The United States motivated this opposition on two grounds.

The first is that the bank promoted by China will compete with the IMF and the World Bank, or their regional cousin in Asia, the Asian Development Bank.

The second is that the financing AIIB is to provide will not meet satisfactory standards of governance or environmental protection.

To the extent that the institution was not yet formally established, it was in both cases a trial of intent, which significantly weakened the scope of US claims.

In addition, infrastructure financing needs in developing Asian countries (estimated at $ 8,000 billion by the Asian Development Bank) is such that there is room for several multilateral institutions.

Finally, it was easy for the Chinese to invite Western countries to participate in the negotiation of the of the AIIB founding treaty to influence the outcome, even though the unconditional financing that has been granted by some Chinese agencies to developing countries is questionable.

It is likely that the decision to participate in the Chinese project was made by the Europeans on the ground of political and mercantile considerations. The Chinese could also play on the fear of diplomatic or economic retaliation. Had the European countries not participated in the AIIB project, the European companies might not have been able to participate in AIIB financed projects and European financial institutions might not have been able to participate in the issuance of AIIB bonds. The same companies might have feared the risk of discrimination on the Chinese domestic market.

Will this master stroke played by the Chinese weaken a global financial system that is still largely dominated by the United States? The answer needs to be nuanced.

First, AIIB is not the only pawn in China’s game. The Middle Kingdom can play on a variety of tools whose degree of conflict with the US varies.

In the early 2000s, China participated with Japan to the two regional financial initiatives which followed the Asian crisis. The main one aims at sharing part of the member countries’ foreign exchange reserves (the Chiang Mai Initiative which later became the Chiang Mai Initiative Multilateralized or CMIM). The other one was designed to help the development of local bond markets (Asian Development Bond Initiative).

Last year, China played an important role in the decision of the BRICS to create their own development bank, the New Development Bank, and a mechanism of foreign exchange reserves sharing, the Currency Reserve Agreement (CRA ).

The economic and financial power acquired by China and the asymmetry between the latter and the other partners of the BRICS will contribute to make the NDB and the CRA tools of Chinese influence, should they actually deploy, which is not certified yet.

Faced with these changes, the Bretton Woods institutions are weakened, the IMF, in particular. The increase of the latter's resources and the moderate improvement of the role of emerging countries in its governance, agreed at the G20 in Seoul in 2010, have not yet been ratified by the US Senate. The Fund has concentrated much of its funding capacities to the crisis in the Eurozone which had the means-but not the will- to treat its own problems. The IMF even granted Greece exceptions to rules that were applied in their entire rigor during the Asian crisis in the late 90s. Moreover, Europeans and Americans still have to cancel the 1944 power sharing agreement pursuant to which a European has been Director General of the IMF since then (and an American Director General of the Worldbank).

A Go game ends when one player cannot move a pawn without being directly threatened by the enemy.

This is not the situation of the US who still dominates international finance through its currency generously issued by the Fed and distributed all over the world by (among others) its large global banks.

For its part, despite its considerable resources, China is still very far from having all the attributes of a global monetary and financial power. It proceeds to the internationalization of its currency, the Yuan, in a proactive but cautious manner. China knows, it seems, that brutally challenging the existing order could be a source of instability that would cause harm including to itself.

China is a member of the IMF, the World Bank, the Bank for International Settlements (BIS) and the Financial Stability Board (FSB). Together these institutions contribute to an international monetary and financial order the necessity of which is certainly acknowledged in Beijing.

In such context, the aim of the AIIB is for China to consolidate its interests in the region (notably to contribute to its "Silk Road" ambition, which would result in a better integration of the Chinese economy with Central and South Asian economies), and make it possible to finance overseas projects that will help creating new opportunities for its infrastructure industry which suffers from overcapacity. The fact that the AIIB will also help to weaken the dominant position of the US in international financial institutions comes as a plus.

Rather than fighting a losing battle, the West has no choice but to show China a willingness to move forward together while remaining at the same time vigilant. This would start with an approval of the IMF governance reform, of which the US holds the keys, and the establishment of a clear timetable for the integration of the Chinese Yuan to the basket of currencies used to calculate the special drawing rights (SDRs) which is the monetary unit account used by the IMF. Eventually, encouraging co-financing between AIIB and the World Bank or the regional development banks would be a good way to test China's policies as far as the choice of projects and the governance standards are concerned.
Emerging Countries  | Money & Finance 
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