BEIJING: As top leaders met at a lush Bali resort in October 2013, President Xi Jinping of China described his vision for a new multinational, multibillion-dollar bank to finance roads, rails and power grids across Asia. Under Chinese stewardship, the bank would tackle the slow development in poor countries that was holding the region back from becoming the wealth center of the world.
Afterward, the US secretary of state, John Kerry, caught up with Xi in the corridor.
“That’s a great idea,” Kerry said of the bank, according to Chinese and US aides briefed on the encounter.
The enthusiasm didn’t last long, as the Obama administration began a rear-guard battle to minimize the bank’s influence.
The United States worries that China will use the bank to set the global economic agenda on its own terms, forgoing the environmental, human rights, anti-corruption and other governance standards long promoted by its Western counterparts. US officials point to China’s existing record, of loans to unstable governments, construction deals for unnecessary infrastructure, and villagers abruptly uprooted with little compensation.
But the administration suffered a humiliating diplomatic defeat last spring when most of its closest allies, including Britain, Germany, Australia and South Korea, signed up for the bank. Altogether 57 countries have joined, leaving the United States and Japan on the outside.
The calculation for joining is simple.
China, with its vast wealth and resources, rivals the United States at the global economic table. That was confirmed this week when the International Monetary Fund blessed the Chinese renminbi as one of the world’s elite currencies, alongside the dollar, euro, pound and yen.
Countries are finding they must increasingly operate in China’s orbit. And backing the new bank would bring financial advantages, as well as curry favor with Beijing. While many countries had similar doubts as the United States, they figured they could shape the organization from the inside.
The new bank “is an instrument for China to lend legitimacy to its international forays and to extend its sphere of economic and political influence even while changing the rules of the game,” said Eswar Prasad, former head of the China division at the International Monetary Fund and a professor at Cornell University. “And it gives the existing institutions a kick in the pants.”
The Chinese-led institution, the Asian Infrastructure Investment Bank, is picking its first projects. The choices, expected to be announced in the coming months, will provide insight into how China plans to wield its power.
Either China is serious about taking a leadership role in the global economy and prioritizing projects that broadly benefit Asia, or it plans to use the bank as a conduit to further its own ambitions.
So far, China appears to be navigating between the two extremes. It is assuaging critics by compromising on issues like board makeup, project oversight and procurement. But China is hardly yielding control, raising concerns about where the bank will land on issues like climate change and labor rights. The bank, for example, is still weighing whether to approve coal-fired power plants.
China is taking direct aim at the current development regime, the Bretton Woods system established under US leadership after World War II to help stabilize currencies and promote growth.
Beijing officials say they want to take a faster approach than their counterparts at the World Bank, the International Monetary Fund and the Asian Development Bank. The new bank, China promises, will not be bogged down in oversight.
The Chinese-led bank will also focus solely on infrastructure. To China, the World Bank and the Asian Development Bank failed to deliver on big projects meant to transform backward parts of Asia.
As a complement to the new bank, China is rolling out the “One Belt, One Road” program for the construction of a network of roads, rails and pipelines along the old Silk Road route through Central Asia to Europe. A maritime equivalent calls for ports from Southeast Asia to East Africa to the Mediterranean.
“The US risks forfeiting its international relevance while stuck in its domestic political quagmire,” Jin Liqun, the president-designate of China’s bank, wrote in a chapter for a recently released book, “Bretton Woods: The Next 70 Years.” He added, in reference to the United States: “History has never set any precedent that an empire is capable of governing the world forever.”
At the signing of the agreement for the bank in June, Jin and Xi posed for a photo alongside officials from the other 56 founding member nations in the Great Hall of the People.
An unexpectedly large group, it included countries as diverse as Iran and Israel, Russia and Poland and an array of US friends. The total capital commitment, $100 billion, was double the amount originally envisioned.
Having underestimated the interest, the Obama administration is now starting to soften its stance.
Three months after the signing, Xi met with President Barack Obama at the White House, in the Chinese leader’s first state visit. At the summit meeting, Obama urged the existing banks to cooperate with the new institution. The United States, though, would still not join.
Birth of the Bank
In late 2007, an influential Chinese official visited remote villages along the Mekong River in Laos.
The official, Zheng Xinli, a senior figure in the policy research office of the Communist Party’s Central Committee, noticed communities pockmarked with stilted huts and fertile ground that failed to produce. Any crops were difficult to sell, because farmers were far from markets and transportation was scarce.
Zheng saw an opportunity for China, which has faced similar infrastructure issues.
“Economically, it was complementary to China,” said Zheng, who is referred to as the bank’s godfather.
He initially proposed the bank plan to aides of Hu Jintao, the president then. But they were not interested, and the idea languished. Zheng left the party committee for an economic think tank.
When Xi was named president in 2013, Zheng and his new colleagues saw a chance to revive the plan. The think tank, the China Center for International Economic Exchanges, believed the bank played to Xi’s nationalistic strategy.
A newly assertive Beijing felt that it had been unfairly treated for years by the United States. Obama did not invite China to join the US-driven Trans-Pacific Partnership trade pact, insisting that Beijing should not be allowed to write the rules for 21st-century commerce.
During the 2008 financial crisis, China’s economy had continued to perform well, serving as a stabilizing force for the world when the United States was on the verge of a collapse. Yet Congress blocked an IMF proposal, backed by the Obama administration, to make China the third-most-powerful country at the fund after the United States and Japan.
“The US Congress was delaying its approval of the IMF reform, and we had a different view,” said Xu Hongcai, head of the economic studies department at the China center. “The US agreed to the conditions when the economy was in the downturn, but it backed down on its words when things got better.”
To corral vastly disparate countries, China knew it needed to look beyond its usual slate of Communist officials, an often-insular group.
They turned to Jin, an economist fluent in English who had worked at the World Bank in the 1980s and served as China’s first vice president at the Asian Development Bank. A former chairman at China’s sovereign wealth fund, Jin had a passion for Shakespeare and Australian novelist Patrick White.
Courting China’s Asian friends was easy, with smaller countries like Singapore readily signing up. The major developed countries were a little more reluctant.
In May 2014, the grandees of British and European capitalism gathered in London, where Jin spoke to representatives of several hundred wealth funds.
“We all thought it was pie in the sky,” said David Marsh, managing director of the Official Monetary and Financial Institutions Forum, an advocacy group for public-private finance.
Jin also tried to woo the Japanese, calculating that the Europeans would be impressed if the country, a Group of 7 member, joined. But the Japanese prime minister, Shinzo Abe, had his own plans to promote development.
Undeterred, Jin decided to tackle Washington instead.
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