Bank Alliance

Germany Banks on China, Angering U.S.

China's President Xi Jinping 4th Right meets with the guests at the Asian Infrastructure Investment Bank AIIB launch ceremony at the Great Hall of the People in Beijing October 24 2014 42358626
Germany has joined a banking club based in China, where the new Asian Infrastructure Investment Bank is located.
  • Why it matters

    Why it matters

    The new China-led development bank poses a long-term challenge to U.S. dominance of the world’s financial system.

  • Facts

    Facts

    • Asian Infrastructure Investment Bank was launched in Beijing last year, with China as its biggest capital contributor.
    • Germany, France and Italy have signed up to the new bank after Britain joined last week.
    • The new bank will promote investment in Asia in transport, energy, telecommunications and other infrastructure.
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    Audio

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The Asia Infrastructure Investment Bank, which plans to finance major infrastructure projects in Asia, has become a symbol of the global power struggle between the United States and China.

Now Germany, together with France and Italy, said they will become founding members, after Britain said last week it would join.

Washington criticized Britain’s move last week and urged its allies to think twice about backing what it sees as a Chinese strategy to challenge the dominance of the World Bank, which is based in Washington.

The Council on Foreign Relations in New York, a U.S. think tank, called the U.S. defeat a “debacle.”

The fear of a major new power on the world financial stage would be justified if the new development bank is lax on environmental, social and financial standards, something German officials said they would be better able to influence from within the institution.

The Council on Foreign Relations in New York, a U.S. think tank, called the decision by the European allies a “debacle.”

It was also a poor start for Germany’s presidency of the Group of Seven leading industrial nations. Berlin failed to keep the G7 in line.

But sources inside the German government said Berlin needed to take action after Britain rushed to join the Asian bank last week. The aim is now to cooperate with the other founding members of the Asian bank to ensure that best standards and practices are employed, the sources said.

Washington has questioned whether the new Chinese-backed bank will have high standards of governance and environmental and social safeguards. But behind those concerns is a different, strategic one: Washington fears China wants to use the bank to push political and military interests in the region.

China’s president, Xi Jinping, has made clear that he wants to reduce America’s influence on his doorstep — and that China shouldn’t have to ask for permission to launch regional projects like the new development bank.

German Finance Minister Wolfgang Schaeuble and China's Vice Premier Ma Kai attend a joint news conference in Berlin March 17 2015 Source Reuters 42461511
Germany’s finance minister, Wolfgang Schäuble, announced the country’s membership of the new Asian development bank in Berlin on Tuesday, when China’s vice premier, Ma Kai, visited him. Source: Reuters

 

Money is power, and providing development aid puts you in charge. If you offer finance, you’re strong, you can exert influence and earn gratitude. For Mr. Xi, this thinking was core to his plan for an own “Asian” — meaning Chinese — development bank.

It’s a clear attempt to weaken the World Bank, the International Monetary Fund and the Asian Development Bank — the Bretton Woods institutions with which the United States, China’s great rival on the world stage, founded the international financial architecture after the Second World War.

The United States isn’t just astounded at how readily its allies broke ranks: it’s outraged. In recent months it has spared no effort to fight the new bank and keep its partners in the fold. But its lobbying failed, and it lost its European allies. Even Australia, another close U.S. ally in the Asia-Pacific region, has shown willingness to take a different position.

“Washington is only focused on its own interests,” China’s state-owned news agency Xinhua, which often expresses government views, commented at the weekend. But, the agency argued, the new bank will put cooperation at the foreground, which is a nuisance to the United States.

Instead of fighting the new bank, the U.S. should sign up and exert influence with its allies from within, the Peterson Institute for International Economics advised.

The new investment bank will be based in Shanghai and an Indian will become its managing director. It’s seen as certain that China and India will have substantial voting rights, unlike in the World Bank.

The United States controls more than 16 percent of votes at the World Bank compared with less than five percent for China. This ignores the fact Beijing has become the world’s second largest economy and has enormous currency reserves, which could help finance infrastructure projects in neighboring countries.

A departure from the U.S.-centric system of financial development has long been under discussion. The United States itself admits that institutions like the World Bank are in need of reform. World Bank chief Dr. Jim Kim has launched a reform process, but the internal resistance is huge.

The modernization of the International Monetary Fund has also ground to a halt. Even though the Americans are keen to preserve the legitimacy of the institutions they back, the U.S. Congress has held up a reform of voting rights in the IMF that would give China and other emerging powers more say in global economic governance.

Now the Chinese are taking the initiative.

In doing so, Beijing wants to develop new forms of development aid, countering U.S. methods as China believes it has a better understanding of how emerging economies work.

Meanwhile, Washington is thinking about a change in strategy. Instead of fighting the new bank, the U.S. should sign up and exert influence with its allies from within, the Washington-based Peterson Institute for International Economics, a think tank, has advised. The Council on Foreign Relations has voiced similar thoughts.

So the old adage may soon apply to the United States as well: If you can’t beat them, join them.

 

Torsten Riecke is Handelsblatt’s international correspondent, reporting on international finance and economic topics. Finn Mayer-Kuckuk is based in Beijing where he covers East Asia for Handelsblatt. Moritz Koch has been the Washington correspondent for Handelsblatt since 2013. To contact the authors: riecke@handelsblatt.commayer@handelsblatt.com and koch@handelsblatt.com

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