In his latest book Henry Kissinger anticipated China’s initiative to create the first new international organization of the 21st century. He didn’t foresee the Asian Infrastructure Investment Bank (AIIB) as such, but argued that as China continued to increase its global economic weight, it would inevitably seek its security, in part, by building international organizations in which it sat at the center. And that this would rightly or wrongly be seen as a challenge to the post-World War II US-centric international architecture.
China and other major developing economies have long expressed their dissatisfaction with US and European dominated international institutions created at the end of WWII. China’s efforts to increase its contributions and hence voting power in the IMF, for instance, have been stalled for years in the US Congress. The reservation of the top job in each of the World Bank and the IMF for citizens of the US and EU, respectively, is offensive. The deal between the two that has stuck for over sixty years smacks of a global Tammany Hall racket.
That China would build its own international bodies, and will continue to do so, shouldn’t be a surprise. In response mainly to increasing US presence in Central Asia—especially after the American’s gained permission from Uzbekistan to base air force assets there for the Afghanistan campaign—China created the Shanghai Cooperation Organization (SCO). Since its inception in 2007, it has expanded its membership and increased its activities, including regular heads of state meetings and joint military exercises.
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The SCO is a multilateral organization that achieves three important strategic objectives for China: bringing Russia into a regional security forum that China leads; increasing China’s influence in Central Asia; and providing something of a bulwark against further US encroachment in Central Asia.
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China also initiated the BRICs Bank in 2012. The BRICS (Brazil, Russia, India, and China) had little in common at the time, other than an easily remembered label. China was most unlike its partners. Apart from its authoritarian political system, China has nearly $US4 trillion in foreign reserves and only a tiny amount of foreign currency denominated debt. China doesn’t have to fear capital flight in the event of an end to US quantitative easing when interest rates would start to rise. It’s likely that we may not hear much more of the BRICS Bank, especially now that the AIIB has been established.
In contrast the AIIB plays to all of China’s strengths. Over the past two decades, Chinese construction companies have demonstrated remarkable capacity to build infrastructure, be it power stations, expressways, ports or high-speed trains. To some extent, China’s infrastructure is becoming built out and Beijing is looking increasingly to exporting this capacity. On straight commercial grounds, China’s construction companies would be well positioned to grab the lion’s share of the bank’s funded business. But as China has founded the Bank and contributed the bulk of its capital, this is guaranteed.
Early proposals suggest that the AIIB’s initial capitalization might be in the order of US$100 billion, with China contributing about half. More recently, this seems to have been wound back to around $50 billion, with countries only required to contribute a small portion of their overall commitments, including China. China will still be the biggest contributor, but its approach is likely to be more measured than originally suggested, and as such will still carry the most weight in the new organization.
China also wants to recycle its foreign exchange reserve holdings and to reduce the share held in US treasury notes. Its experience in direct investment in major resource projects offshore has also been mixed at best with some investments resulting in massive losses. Increasing the use of the Renminbi for both international trade and capital transactions is also a high priority for the Chinese government, although the RMB’s status as reserve currency alongside the US dollar is a long way off.
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The Bank’s founding coincides with an important change in China’s foreign policy under Xi Jinping. Since the late 1970s, China’s foreign policy has been governed by Deng Xiaoping’s maxim of “hide your light, bide your time.” Foreign policy had one principal objective beyond China’s security and that was to support China’s economic development. Although China had begun to take a leadership role in international institution building and to adopt a more assertive policy under Xi’s predecessor, Hu Jintao, Xi’s incumbency marks a break with Deng’s approach and the adoption of a more muscular foreign policy. This can be seen in the South China Sea, in the Senkaku/Diaoyu Islands dispute with Japan, and in a number of initiatives from institution building to agreements with the US on greenhouse gas emissions controls.