As regular readers know, we’ve variously described the China-led Asian Infrastructure Investment Bank as representing both an attempt by China to cement its regional dominance by implicitly adopting a sino-Monroe Doctrine, as indicative of Beijing’s desire to supplant to US-dominated multinational institutions that have been a fixture of the post WWII economic world order, and, perhaps most importantly, as a not-so-subtle indication that dollar hegemony may be on the way out and yuan hegemony may be around the corner.
Essentially the AIIB will (either intentionally or unintentionally depending on who you believe) serve as an instrument of Chinese foreign policy and any hope of keeping this between the people who are privy to the country’s various hidden agendas (because all countries have agendas), went out the window early last month when the UK staged a coup by breaking with Washington and joining the development bank triggering a flood of applications from Western countries and culminating in membership bids from US “allies” Australia, Israel, and even Canada. Adding insult to injury, the AIIB is now looking to hire officials away from the World Bank and rival ADB.
Amid the March membership frenzy, Beijing sought to play down the degree to which the venture would serve to help establish a new world economic order with China at the helm. An article which appeared in The Global Times (a paper run by the state-controlled People’s Daily) very specifically denied any notion that China has designed on establishing a yuan-based global economic system. Here’s an excerpt:
The establishment of the Asian Infrastructure Investment Bank (AIIB) has been depicted by a few overseas media outlets as if China is building its own version of the Bretton Woods system...
Some foreign observers claim that the AIIB is the beginning of the Chinese yuan's hegemony. What they are actually trying to imply is that "China is another US."
This kind of statement is nonsensical, which uses historical experience to fool readers. It is divorced from the truth and shows no common sense and doesn't stand up to any scrutiny.
Through the Bretton Woods system, the US was able to wield supreme influence over its allies which had been severely battered during the war. China today is in a totally different position.
The AIIB will not confront the WB or IMF, nor will it turn the current international monetary order upside down. The spirit of the AIIB is diversity and justice.
Perhaps, but as we noted at the time, it was on the very same day that the following came across the wires: “China plans to push for yuan to take prominence in loans under the Asian Infrastructure Investment Bank and the Silk Road Fund, people familiar with the matter said. China may encourage $100b AIIB and $40b Silk Road Fund to issue loans directly in yuan or set up yuan-denominated funds under the two institutions, according to the people, who ask not to be identified because deliberations are private.” This prompted us to suggest that “actions speak louder than words.”
Today, The South China Morning Post reports that the bank will establish an AIIB currency basket with China set to push for the yuan to take a prominent role and for “special currency funds” to be established in order to issue yuan-denominated loans through the fund. Here’s more:
Beijing will push for the yuan to be included in a basket of currencies used to denominate and settle loans from the Chinese-led Asian Infrastructure Investment Bank (AIIB), according to think tank sources.
Beijing will also encourage the AIIB and the Silk Road Fund to set up special currency funds and issue yuan-denominated loans through both institutions, the sources said.
If the US dollar is used, it weakens China’s bid for the yuan to be a global currency.
The efforts are part of a drive to internationalise the Chinese currency and come as the International Monetary Fund prepares to discuss the possible inclusion of the yuan as its fifth reserve currency and as part of the basket that forms the IMF's Special Drawing Rights.
The sources' claims appeared to be confirmed by a state media report, which said that a basket of currencies called the "AIIB currency" would most likely be adopted as the bank's currency of settlement…
Hao Hong, chief economist and managing director of research at Bocom
International, said the AIIB's grand vision for infrastructure investment came with challenges but China should do its best to establish the yuan as a currency for settlement and denomination.
"If the US dollar is used instead, it weakens China's bid for the yuan to become a truly global currency and to challenge the hegemony of the US dollar," Hong said.
Yifan Hu, chief economist with Haitong Securities International, said it would be too hard to reach a consensus on an AIIB currency basket...
"In my view, the US dollar will be used in the early stages of the AIIB, and then [the bank] will gradually move to a mix of the yuan and US dollar," Hu said.
The sources said China would push for broader use of the yuan at the AIIB and the Silk Road Fund, as part of efforts to promote the yuan as an international currency…
The sources said that there was still a long way to go in the internationalisation of the yuan and the greenback would continue to dominate the global financial system for the next few years.
Yes, “for the next few years,” which really isn’t that long, especially when compared with how long the dollar has dominated the global economic order. Perhaps even more interesting — and more alarming for Washington — is that the move by China to expand the yuan’s influence via a fund that is now backed by nearly every major country on the planet save the US and Japan, comes just as petrodollar mecantilism, which has been perhaps the driving force behind dollar dominance for decades, crumbles in the face of slumping oil prices. As we’ve reported on several occasions, 2014 marked the first year in nearly two decades that oil producers' petrodollar exports (i.e. the recycling of oil proceeds into USD assets) turned negative. In other words, falling oil prices mean producing nations are now removing liquidity from the system rather than adding it, a process Goldman estimates will will sum to nearly $900 billion by 2018.
The combination of these two forces could serve to cause a dramatic shakeup in a world that heretofore functioned on a unilateral system, both politically and economically.