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April 8, 2015

Lessons from the AIIB saga

The AIIB saga is an evolving story and hence the lessons too will keep evolving.

The story of how Britain, overruling objections from the United States, announced its intent to join the Asian Infrastructure Investment Bank (AIIB), being promoted by China, ahead of other European nations is so fascinating that it should be made into a case-study for students of foreign policy and realpolitik. Britain appears to have forgotten some elementary rules of wooing. If you are desperate, you are bound to lose respect and be taken for granted. That is what is most likely to happen to Britain.

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No wonder its once-colonial subject-country India follows such an approach in foreign policy too. It rarely projects power. It projects abject inferiority complex. That a once-proud superpower has been reduced to such a state must be the subject of much mirth, amusement and ridicule in Beijing. That this elementary inference has escaped the British Treasury (not the Foreign Office, one gathers) is, at once, both befuddling and yet unsurprising.

Class is enduring but very few have it when it matters. Difficult economic times are exposing class and sophistication (or, the lack of them) in Western capitals. No surprise that the Brits are ahead of others.

Jamil Anderlini, as usual, is filing terrific reports for the FT on this. The last paragraph of one of his reports sums up the matter rather well: When asked about the rationale behind Britain’s decision to break ranks, several British diplomats and officials have responded identically: “What did we have to lose by joining?”

The response from one person involved in negotiations around AIIB accession: “What did they have to lose? Only credibility with their allies, respect from the Chinese and bargaining power when it comes to negotiations on anything in the future.”

That China has adopted the old British tactic of dividing and ruling is a delightful irony here. It is interesting to observe the European (British, in particular) desperation to be part of the emerging Chinese architecture when the Chinese economic story is, itself, about to undergo a shift for the worse. In a recent note, Morgan Stanley Investment Management wrote that their estimate of Chinese GDP growth is about 2 to 3 percentage points below the official estimate of around 7 percent. On top of this, China now has a stock market bubble that has replaced the real estate bubble that has crashed. The PE ratio of a median stock in the Shanghai Composite index is 44, similar to the PE ratio of the S&P 500 stock index before it peaked and crashed in March 2000.

What are these guys smoking? Do they really expect China, which nurses big wounds of its humiliation by the West, to play by the rules of the game that they have devised? What is their take-away from the last two years’ of China’s aggressive tactics in the South China Sea?

Of course, there are many related issues in this: One, Was the US right to hold out? Many have said that the US has made a mistake, including Robert Zoellick who was in Singapore recently. I am not so sure. From its point of view and interests, the US is right to draw some markers and make it clear to its allies and others as to what it holds non-negotiable and what it does not.

Two, For the US, does it make sense to get in and influence or stay out and isolate the new entity – that is, from a geo-political standpoint? This is related to the first point above. The advice to get in and influence is theoretically correct but has practical limitations. China would make it clear that the AIIB is its institution and its rules shall dominate. Staying out and isolating the new institution and starve it of debt funds needed to augment its lending prowess would have been the best way to go, for the status quo powers. Clearly, many European nations did not see – right or wrong – that their interests were aligned with America. That speaks volumes about America’s real economic clout and powers of persuasion.

Equally, it is a reflection of the poor judgement of America’ European friends’ assessment of the prospects for China when it faces an uncertain economic and political outlook. More than China replacing the US as the global economic hegemon, the likely outcome is that it is a ‘free-for-all’ and leaderless world with its own unpleasant consequences.

Three, for potential borrowers, will the AIIB really be different from the Asian Development Bank and the World Bank or will it be worse? After all, China blocked the ADB funding of a hydroelectric project in Arunachal Pradesh in India some years ago. It is one thing to rile about US dollar and American hegemony and another thing to pause and think about the counterfactual. What kind of a world would we have had in the last seven decades had China (or, the Soviet Union) been that hegemon, instead of the US?

However, there is also a lesson for the US. If it failed to make even minor concessions on trade and on power-sharing in multilateral forums, it risks losing more than it would under such power-sharing arrangements. Its end-result is worse because it might be misjudging the strength of its hand. I will stick my neck out and say that it -this diminishing prestige and clout – is not just because of the incumbent at the White House. The Republicans do not get it either.

The US economy – with QE, asset bubbles, dominant financial sector and a weak real economy with stagnant wages and shrinking middle class – is more an object of curiosity, amusement, pity and ridicule rather than of respect. The Republicans do not get it. They are in denial.

All this being said, one has to give it to the Chinese. There are plenty of lessons in this for a wannabe super-power like India. Notwithstanding their economic troubles at home, they are punching hard, punching well above their weight and getting away with it. They are calling the bluff of the West very well while Europeans think that they are calling America’s bluff. Indians can only stand back and admire the Chinese chutzpah even as it meekly complies with American demands on engaging with a rogue-state like Pakistan.

Look at how the Chinese Central Bank Governor changed the topic of a panel discussion with Christine Lagarde to discuss the role of yuan in the IMF SDR and as a global reserve currency rather than talk about ‘sound monetary policy in the new normal’.

For beginners, this Bloomberg article on what China hopes to gain from being part of the SDR basket and being a global reserve currency will be very useful. Alan Beattie has a counter-narrative to these conclusions, here. China did not really want the additional responsibility that would come with a higher capital share and voting rights in the existing multilateral institutions. Second, China has realised the limits of bilateral debt deals in securing influence and resources. Hence, it is going the multilateral route.

It is quite possible that China did not want the responsibility that went with higher capital share and voting rights in a multilateral institution which, after all, remains a western construct. Second, its desire to build an Asian multilateral institution preceded the recent evolution of problems with its debtor-client states. Nevertheless, it is highly possible that reality contains shades of Beattie’s analytical painting.

The AIIB saga is an evolving story and hence the lessons too will keep evolving. Indeed, the Corbett Report dated 25 March 2015 on the topic of AIIB leaves us with the question of “why and how China has been allowed (or, more accurately, actively aided) to rise to “emerging power” status by the very same kingmakers and oligarchs who have presided over the age of Pax Americana.” We should await his answers and use them to find ours too.

Photo: corbettreport.com


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