For those who might not have noticed or for those who, for whatever reason, haven’t yet put the pieces together, the ground beneath Washington’s feet is shifting. A new world order is being established without America’s consent - indeed, against America’s wishes and contrary to the best laid plans of previous administrations.
Russia and Iran’s response to the war in Syria has, at the micro level, sabotaged Washington’s plan to destabilize and ultimately oust the Assad government, but more broadly, Moscow’s assertive role in the region and close cooperation with Iran, represents nothing short of a Mid-East coup (read more here) wherein Russia will replace the US as superpower puppet master and Tehran will replace Riyadh as regional power broker.
Meanwhile, Beijing’s land reclamation efforts in the Spratlys have been cast by Washington’s regional allies as an example of Chinese aggression. The construction of some 3,000 acres of new sovereign territory amounts to belligerent military posturing The Philippines claims and the US was painfully slow to respond, suggesting that Washington no longer has the will to play global police officer. While that may indeed be a good thing, it represents a remarkable break with historical precedent and presages a new era characterized by the disappearance of US hegemony and the emergence of bi- or even multi-polarity.
Of course this same dynamic can be observed outside the realm of military conflicts and nowhere is it more apparent than in the establishment of the BRICS bank and the Asian Infrastructure Investment Bank.
The establishment of new multilateral institutions represents a response to what some view as a failure on the part of the IMF and the ADB to provide the world’s most important emerging markets with representation that’s commensurate with their growing influence, and respond adequately to Asia’s development needs, respectively.
Underscoring the extent to which the AIIB represents nothing less than a coup and a break with the economic order that’s remained dominant for decades is the refusal on both Washington and Tokyo’s part to join, even as nearly all of America’s Western allies have thrown their support behind the China-backed lender.
Although Washington claims the US has concerns about underwriting and environmental standards, the real reason for America and Japan’s opposition is that both countries fear China will use the AIIB has a tool of foreign policy on the way to establishing , i) a kind of Sino-Monroe Doctrine and ii) yuan hegemony.
Now, with just months to go before the AIIB begins making loans, Shinzo Abe is scrambling to keep the ADB relevant. As Bloomberg reports [17], Abe “aims to halve the time it takes to get a development loan and make it easier to obtain funds [in a] push [that] coincides with preparations by China to soon open the coffers of the AIIB.” Here’s more:
Prime Minister Shinzo Abe is beefing up Japan’s role as a provider of infrastructure and finance in Asia just as the Chinese-backed Asian Infrastructure Investment Bank prepares to make its first loans.
Abe reiterated that Japan and the Asian Development Bank -- which the country backs -- would seek to provide $110 billion of infrastructure funding in Asia over the next five years.
Like its U.S. ally, Japan declined to join the AIIB even as the countries including the U.K., France, Australia and Germany signed up to become founding members.
Japan and China are vying to bolster their political influence in Asia by becoming the infrastructure providers of choice.
There is plenty of demand, according to Abe, who estimated it could rise to as much as 100 trillion yen ($814 billion) a year. While China is a member of the ADB, Japan and the U.S. are the biggest shareholders and the institution’s chiefs since it was founded in 1966 have been Japanese.
Abe’s vision is to enhance Japan’s role as an infrastructure provider by playing on the perception of quality and safety associated with most Japanese engineering.
“The pursuit of short-term profits through only sales without support is not the way Japan conducts itself,” he said.
“We will also not spare any effort to share Japan’s sophisticated technologies or know-how, or the reliability of ‘Made in Japan.”’
Again, we see Japan attempting to undercut the AIIB by making amorphous claims about “standards” and “quality” and indeed, it would appear that the reference to “Made in Japan” is a blatant attempt to evoke “Made in China” which, right or wrong, has become synonymous the world over with “poor quality.” Back to Bloomberg:
ADB President Takehiko Nakao said earlier this month the Manila-based lender is in talks with the AIIB to jointly finance projects in the region next spring. The ADB said in May it would boost its total annual lending and grant approvals by 50 percent to as much as $20 billion.
To help give Japan an edge, the country aims to cut the time it takes to get a loan from three years to between 18 months and two years, and end its practice of requiring government guarantees for each loan.
Needless to say, this is likely to be too little, too late to derail the AIIB's momentum. Additionally, it's worth noting that the AIIB will have a leg up on winning projects thanks to the fact that China isn't likely to stick to the IMF/World Bank "religion" that some countries find cumbersome. As Reuters outlined [18] in September, "The AIIB will require projects to be legally transparent and protect social and environmental interests, but will not ask borrowers to privatize or deregulate businesses for loans [and] by not insisting on some free market economic policies recommended by the World Bank, the AIIB is likely to avoid criticism leveled against its rivals, who some say impose unreasonable demands on borrowers."
It's also imortant to remember that the AIIB is only part of the story here. The bigger picture revolves around Xi's "One Belt, One Road" initiative which will essentially allow China to play an outsized role in financing infrastructure development the world over on the way to expanding Beijing's economic influence and further embedding the yuan in global trade and investment.
Here's what we said back in June [19]: Although highly publicized, “One Belt, One Road” isn’t well understood (which partly reflects the sheer size and scope of the initiative). The program has been cast, by some, as a Chinese Marshall Plan, an interesting characterization, given that we’ve cast the AIIB as an implicit attempt by Beijing to institute a kind of Sino-Monroe Doctrine.As an aside, this also demonstrates an overwhelming tendency (and we may be guilty here as well), to view the world through glasses tinted by the unipolarity that has dominated global politics for more than six decades. Or perhaps it’s a reflection of the fact that China is indeed a rising hegemon, and as such its policies and programs resemble those of the US at critical historical moments when Washington seized opportunities to expand American influence.
And here's Barclays with a rundown on the progress so far and on how it all fits together:
With an authorized capital of US$100bn, AIIB was at the center of China’s push on YDYL as it represents one of the funding vehicles to support YDYL projects and it was also an indirect indicator of which countries support YDYL. Up to 57 countries have signed up to become prospective founding members of AIIB, including countries from Europe which were originally viewed to oppose AIIB. The US and Japan did not join as founding members as they have their own development banks, namely the IMG, World Bank, and ADB.
As of November 2015, 54 countries have signed the Articles of Agreement out of the 57 prospective founding members, and all prospective members should have their legislatures ratify the agreement before the end of 2016 to formally become a founding member. Myanmar ratified the agreement on 1 July 2015 to become the first official founding member of AIIB, while China ratified the agreement in early November 2015. On 24 August 2015, Mr Jin Liqun was elected to head AIIB. He has previously worked at both the World Bank and the ADB, and was also the top official at China Investment Corp (CIC), China’s sovereign wealth fund.
China will be the largest AIIB shareholder with about a 30% stake, giving it veto power over the choice of president, which requires a 75% majority to be elected. According to Mr Jin Liqun, the bank has an authorized capital of US$100bn, and is scheduled to start operations by the end of 2015 and will have its first batch of projects by 2Q16.
Meanwhile, the US$40bn Silk Road Fund, which was created to finance the China-proposed YDYL projects, continues to make investments in YDYL countries. After investing in Pakistan’s hydro power project in April 2015, the fund in September 2015 bought a 9.9% stake in Novatek, which owns a liquefied natural gas project in Russia. Bloomberg has reported that the fund will invest US$100mn in CICC’s planned IPO in Hong Kong.
The first steps are starting to be made in the journey of a thousand mile that the “Yi Dai Yi Lu” (YDYL) initiative is turning out to be. In the past half year, China has won a bid to build a high-speed railway in Indonesia, has signed deals worth around GBP35bn with UK companies, and has signed around US$25bn worth of infrastructure deals with Central Asia, among other deals that have been signed to promote China’s strategy to increase cooperation with the international market. Meanwhile, China is facing competition from Japan, who has also been offering ultra low-cost financing to build infrastructure projects, creating competition for China’s export plans. The institutional framework for funding these projects seems to be falling into place with the Asian Infrastructure Investment Bank (AIIB) due to start operations in late 2015 and the Silk Road fund having made its first investment in Russia and Pakistan.
YDYL opportunities in South and Southeast Asia:
[20]
Finally, here's Barclays on the competition with Japan:
Japan has been a major investor in Central and Southeast Asia for the past two decades, and the entrance of China as a foreign investor in the region is heating up the competition between the two countries. Both China and Japan are trying to offer solutions to target countries at the lowest cost possible, and often times provide funding options to pay for the projects as well. Advance technology is often not an important determining factor as emerging countries do not need the fastest or the most efficient systems, while the primary concern for YDYL countries is often cost. Hence, cost of the project and funding options are the fighting grounds between Japan and China, in our view.
As you can see, the idea that Abe will be able to lure needy countries away on the promise that Japan offers more "sophisticated technologies" (as mentioned above) seems dubious.
Perhaps Japan can compete on cost, but it certainly appears as though the sheer scope of Xi's ambition will ultimately mean that Beijing will do whatever it takes to become the regional (and perhaps global) development lender of choice.
Coming full circle now, all of this must be understood in the context of the shifting global order wherein Russia and China are set to return the world to multipolarity both in terms of military might and economic influence. The wheels are already in motion - not even Donald Trump can stop it now.
