Since the aftermath of the global financial crisis, America’s overseas economic power has increasingly waned. Lower gross domestic product (GDP), expensive decade-plus wars, higher unfunded liabilities and anemic employment figures have negatively affected America’s economic reach. Larry Summers, who served two U.S. Presidents (Clinton and Obama), opined on the country stating that its “losing its role as the underwriter of the global financial system.” On the other hand, since inception, the United States continues to excel at becoming a destination for global capital thanks to relatively open markets, a sizeable middle class segment, private property rights, deep liquidity and an innovative populace.
In March, the U.K., a historical staunch U.S. ally, joined the Asian Infrastructure Investment Bank (AIIB), China’s counter to the U.S.-led World Bank.
Beijing is determined to augment its economic and political influence in global trade and finance, expanding into markets in Africa and Latin America, while deepening its financial firepower in Southeast Asia. A number of reluctant executives of these countries have inked deals with the Chinese (desperately needing the capital), usually exchanging money for natural resources. This is changing as securing natural resources is not a primary reason for China. Chinese developers are investing more capital into sub-Saharan Africa, creating urban developments such as Modderfontein New City project, a 1,600 hectare development in Johannesburg. China’s sovereign wealth fund, the China Investment Corporation (CIC), made a first major investment in South Africa when it bought a 25% stake into Shanduka Group – a major owner of McDonald’s franchises. The AIIB is headed by Jin Liqun, the man who was behind the CIC. Jin Liqun was the former vice president of the Asian Development Bank and China’s vice minister of finance.
In March, the U.K., a historical staunch U.S. ally, joined the Asian Infrastructure Investment Bank (AIIB), China’s counter to the U.S.-led World Bank. The U.K Treasury examined the structure and governance arrangements of the AIIB. An important note is that London is keen on becoming the largest offshore center for the renminbi. Other nations applying include the following countries: Saudi Arabia, France, Germany and Italy. South Korea and Australia also plan to join the AIIB, understanding that China’s influence is growing and U.S. influence is waning (at least economically speaking) in the region. In April, Israel announced its intentions to join the new bank. A lone key U.S. ally that has not committed to the AIIB is Japan. North Korea’s application to the AIIB was rejected.
Since 2010, the U.S. Senate refused to ratify governance reform at the World Bank, which would have bolstered the bank’s financial resources, but given expanded ownership weight to countries like China and Brazil versus proportionally shrinking European economies like France. The lack of reform at the World Bank and failure to boost commitments from its nation partners has solidified the case for alternative development banks. Not surprisingly, Brazil, Russia, India and China launched the BRICS Bank (now called New Development Bank) soon after. Furthermore, Asia’s massive infrastructure gap is too much for the World Bank to tackle alone. And by dissuading its natural allies to join the Chinese-backed institution, America cements greater isolation among major donor nations, endangering future investment access. The AIIB plans to invest US$ 100 billion in infrastructure projects across Asia.
Summers writes, “But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.”
Obama Administration’s Concerns
Since Bretton Woods back in 1944, the World Bank has been the global institution funding projects and lending. The U.S. argues that the AIIB may allow for looser lending standards versus the World Bank’s decades-long push into financial transparency and incorporating environmental concerns when investing in projects. Last month, U.S. State Department spokeswoman Jen Psaki told reporters that it is the U.K.’s “sovereign decision” to apply to join the bank. America continues to supports its efforts in the Pacific through its Trans-Pacific Partnership strategy.
AIIB Members and Applicants
|AIIB Members||Approval Date||Notes|
|34||United Arab Emirates||4/5/2015||Regional|
|Applying for AIIB Membership||Application Date|
|57||Chinese Taipei (Taiwan)||3/31/2015|
Source: Park Alpha research, fully-compiled April 6, 2015
The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
U.S. Senator Chuck Grassley, age 85, is leaving the Senate Judiciary Committee as chair. He will become Chairman of the Senate Finance Committee next year. The Iowa Republican has served as chairman of the Judiciary Committee since January 2015. Chuck Grassley served as Chair of the Senate Finance Committee in 2001 and from 2003 to 2007.
Grassley is replacing Senator Orrin Hatch (from Utah) who is retiring from the Senate. Replacing Orrin Hatch in Utah as Senator, is former Republican Presidential candidate Mitt Romney, who lost the 2012 election to Barack Obama.
“Looking ahead, at the Finance Committee, I want to continue to work to make sure that as many Americans as possible get to experience this good economy for themselves,” said Senator Grassley in a statement. “That means working to provide Americans with additional tax relief and tax fairness so they can spend more of their hard-earned money on what’s important to them.”
The Committee on Finance is one of the original committees established in the Senate and was first created on December 11, 1815. The committee deals with a whole matter of issues including taxation, revenue, customs, trade agreements, Social Security and more. It is considered to be one of the most powerful committees in Congress. In addition, the Committee on Finance has jurisdiction over both Medicare and Medicaid.
Liberty Mutual Insurance inked a special deal with the Overseas Private Investment Corporation (OPIC), the U.S government’s development finance institution, to help facilitate investment in challenging markets. The deal entails forming a US$ 1 billion risk-sharing agreement to facilitate private sector investment in developing markets. OPIC recently received a new mandate from Washington D.C., armed with more capital and flexibility.
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Keppel Infrastructure Fund Management Pte Ltd, in its capacity as trustee-manager of Keppel Infrastructure Trust, through its wholly-owned subsidiary, has entered into a share sale agreement with certain funds managed by Blackstone and certain management sellers for the proposed acquisition of a 100% interest in Ixom HoldCo Pty Ltd (Ixom). The enterprise value for Ixom is A$ 1,100 million. The equity value for Ixom is A$ 777 million.
Ixom is an industrial infrastructure business in Australia and New Zealand. The company supplies and distributes water treatment chemicals. The Ixom Group is the sole manufacturer of liquefied chlorine in Australia, as well as a major provider of manufactured caustic soda.
The proposed transaction will be initially funded via debt.
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