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AMERICA PULLS BACK: China Moves to Fill Economic Void



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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.

Losing Face

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
1 Bangladesh 10/24/2014 Regional
2 Brunei 10/24/2014 Regional
3 Cambodia 10/24/2014 Regional
4 China 10/24/2014 Founding Member
5 India 10/24/2014 Regional
6 Kazakhstan 10/24/2014 Regional
7 Kuwait 10/24/2014 Regional
8 Laos 10/24/2014 Regional
9 Malaysia 10/24/2014 Regional
10 Mongolia 10/24/2014 Regional
11 Myanmar 10/24/2014 Regional
12 Nepal 10/24/2014 Regional
13 Oman 10/24/2014 Regional
14 Pakistan 10/24/2014 Regional
15 Philippines 10/24/2014 Regional
16 Qatar 10/24/2014 Regional
17 Singapore 10/24/2014 Regional
18 Sri Lanka 10/24/2014 Regional
19 Thailand 10/24/2014 Regional
20 Uzbekistan 10/24/2014 Regional
21 Vietnam 10/24/2014 Regional
22 Indonesia 11/25/2014 Regional
23 Maldives 12/31/2014 Regional
24 New Zealand 1/5/2015 Non-Regional
25 Saudi Arabia 1/13/2015 Regional
26 Tajikistan 1/13/2015 Regional
27 Jordan 2/7/2015 Regional
28 Luxembourg 3/27/2015 Non-Regional
29 Switzerland 3/28/2015 Non-Regional
30 United Kingdom 3/28/2015 Non-Regional
31 Germany 4/1/2015 Non-Regional
32 France 4/2/2015 Non-Regional
33 Italy 4/2/2015 Non-Regional
34 United Arab Emirates 4/5/2015 Regional
  Applying for AIIB Membership Application Date  
35 Hong Kong 12/1/2014  
36 South Korea 3/26/2015  
37 Turkey 3/26/2015  
38 Austria 3/27/2015  
39 Spain 3/27/2015  
40 Brazil 3/28/2015  
41 Denmark 3/28/2015  
42 Georgia 3/28/2015  
43 Netherlands 3/28/2015  
44 Australia 3/29/2015  
45 Egypt 3/30/2015  
46 Finland 3/30/2015  
47 Russia 3/30/2015  
48 Azerbaijan 3/31/2015  
49 Hungary 3/31/2015  
50 Iceland 3/31/2015  
51 Israel 3/31/2015  
52 Kyrgyzstan 3/31/2015  
53 Norway 3/31/2015  
54 Poland 3/31/2015  
55 Portugal 3/31/2015  
56 Sweden 3/31/2015  
57 Chinese Taipei (Taiwan) 3/31/2015

Source: Park Alpha research, fully-compiled April 6, 2015

Michael Maduell

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.

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Emerging Markets

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Public Equities

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