Structural shifts

Print edition : February 19, 2016

China Railway's Harmony Bullet trains at a maintenance base. China is banking heavily on infrastructure projects, one of which is the Hungary-Serbia railway. It will cut the travel time between Budapest and Belgrade from eight to three hours. Photo: REUTERS

The AIIB headquarters in Beijing. Photo: China Daily/Reuters

Jin Liqun, president of the AIIB. Photo: Andy Wong/AP

Suma Chakrabarti (left), president of the EBRD, with Chinese Premier Li Keqiang in Bejing on January 15. Photo: Mark Schiefelbein/Reuters

Three development banks—the AIIB, launched on January 16, the EBRD and the NBD—point to the emergence of new centres of power and influence in the global financial architecture.

Three development banks that HAVE emerged outside the post-Second World War Bretton Woods framework, including the newly formed Asian Infrastructure Investment Bank (AIIB), are drawing new structural linkages between Europe and Asia and changing the global geopolitical architecture, with Eurasia at the core.

China is at the heart of an evolving world financial architecture. On January 16, it led the launch of the AIIB. Chinese Finance Minister Lou Jiwei—the first chairman of the AIIB council—described the AIIB as a milestone in the reform of the global economic governance system.

Jin Liqun, a former Chinese Finance Minister, became the first president of the bank. India is on the 12-member board of directors of the AIIB, with Dinesh Sharma, Additional Secretary in the Ministry of Finance, representing it.

In his first press conference after the launch, Jin Liqun asserted that the bank would lend only in U.S. dollars, putting to rest speculation that Beijing would use the institution to promote the internationalisation of the yuan. Yet, the move is likely to channel China’s foreign exchange reserves, which have so far been invested mainly in low-yielding U.S. treasury bonds. The AIIB is expected to lend $10-$15 billion a year during the first five or six years of its existence.

Partnership with the EBRD

Notwithstanding its focus on the AIIB, the 57-nation lender, China also quietly became the 67th member of the European Bank for Reconstruction and Development (EBRD).

With China on board, the EBRD is rapidly redefining its role. It was formed in 1991 to reinforce the unipolar world that emerged following the Soviet Union’s collapse. Its focal interest was Eastern Europe, which was no longer under Moscow’s shadow and had to be rapidly integrated into the Western institutional network. But Suma Chakrabarti, the EBRD head who was present at the AIIB launch, acknowledged that China was deepening its presence as a major pivot of the global economy. China’s growing economic and political clout—it is currently steering a Eurasian Silk Road connectivity initiative—has been accomplished in a little over two decades after the Soviet Union’s collapse.

“Eastern Europe is an example of how the world has changed. Ten years ago, those countries would have been looking for investors from Western Europe; they are now widening their portfolio, and that includes China. It is a big win for our countries of operation to get China on board,” said Chakrabarti in an interview to Xinhua. He added: “In recent years, because of signs of weakness in the eurozone and so on, countries in Eastern Europe have been trying to diversify their sources of investment. They have looked at the Gulf, they have looked at Asia, looked at North America, and China has started investing much more in Eastern Europe. On top of that, there is Central Asia, Turkey and North Africa, where China is also investing.”

The state-run China Daily newspaper quoted Chakrabarti as saying that the EBRD would like to work with China in other multilateral financial institutions such as the AIIB. He also backed China’s Silk Road initiative.

Mitigating climate change

Earlier Jin Liqun had publicly advocated a potential EBRD-AIIB partnership to bridge the “infrastructure gap” and collaborate in the climate-change domain. Addressing a think tank summit in the middle of last year, he observed that the emergence of the AIIB was one of the several reasons why 2015 was proving to be a crucial year for multilateral development banks. He added that the renewed emphasis on infrastructure as a driver of economic growth, coupled with the adoption of new and sustainable development goals, was shaping multilateral lending.

Suma Chakrabarti, too, focussed on the importance of a EBRD-AIIB partnership to close the “infrastructure gap”, which stood at around $1 trillion a year. “We in the EBRD will be ready to present the AIIB with several projects next year, ripe for immediate co-financing,” he said.

He added that the “quality of infrastructure”, measured by the energy and emission intensity, and the resource efficiency of the investments, would also determine the joint collaboration of the EBRD and the AIIB. “Together, they will determine the level of the world’s emissions for a period much longer than the next 10 years. And hence our ability to mitigate the climate challenge for generations to come.”

Europe’s growing financial ties with China were also evident from the explicit support that European heavyweights—Germany, France and Britain—had given for the inclusion of the Chinese yuan in the currency basket of the International Monetary Fund’s (IMF) Special Drawing Right (SDR).

The launch of the AIIB formalises the deep cracks between the United States and Europe within the framework of the Atlantic Alliance. Notwithstanding U.S. objections, European countries, including Britain, France and Germany, joined the AIIB. Australia and South Korea, top U.S. allies in the Asia-Pacific, also decided to participate in the bank as its founding members.

Despite the AIIB’s focus on the development of Asian infrastructure, the new bank and the EBRD are likely to play a significant role in the development of the Eastern European and Central Asian legs of the Belt and Road Initiative—China’s mega connectivity project in Eurasia. China is actively pursuing the formation of a land corridor along the ancient Silk Road that would connect Asia and Europe with expressways, railways, and cyber-connectivity. The infrastructure push would lead to the formation of industrial parks, smart cities and tourism hubs, which, it is hoped, will become the new growth engines of a flagging global economy.

Much has happened between China and Europe over the last year, leading to the emergence of a credible foundation for future collaboration.

The 17th China-E.U. Leaders Summit in June 2015 agreed to fast-track the docking of the Belt and Road Initiative with the European Investment Plan.

Separately, China and Britain have decided to interlink China’s Silk Road initiative with the latter’s “economic centre of northern England” plan.

China and Germany will work on fusing the “Made in China 2025” initiative to upgrade Chinese industry with “German industry 4.0 plan”. In the German context, that means intelligent manufacturing, where information technology tools are used not only for smart mass production, but also for efficient production of customised goods.

In Eastern Europe, the construction of the Hungary-Serbia railway, steered by China, has already commenced. This is a flagship project of China Railway that will link Budapest and Belgrade. It will stretch across 350 kilometres, the Serbian leg being 184 km long. Once complete, it will slash travel time between the two capitals to three hours from the current eight. It will take two years to complete the project if the construction work goes according to plan. Chinese Prime Minister Li Keqiang has gone on record to say that the railway will not only boost infrastructure construction and regional interconnectivity but also speed up the European integration process.

Among Eastern European countries, Poland has already established its key position as a Eurasian logistics centre. For instance, the Zhengzhou Hub Development and Construction Company (ZIH), a state-owned enterprise, runs a train from Zhengzhou city in central China to the Italian city of Milan. It first heads towards Malaszewicze, a Polish town close to the border of Belarus. From there, it travels to Warsaw, Hamburg, Prague, Duisburg and Paris, finally terminating in Milan.

The summit of 16 Central and Eastern European (CEE) countries and China last year yielded a medium-term agenda affirming a link between China’s Belt and Road Initiative and the region’s development strategies. China has also proposed participation in the development of port areas in the Baltic Sea, the Adriatic Sea and the Black Sea. Besides, Beijing is considering establishing a $3-billion investment fund and a “16+1” multilateral financing channel, provided CEE countries purchase Chinese products and equipment.

The BRICS bank

A revamp of the global financial architecture, and with it the foundations of a Eurasian political assertion, will not be complete without the emergence of the New Development Bank (NDB) of the Brazil-Russia-India-China-South Africa (BRICS) grouping.

Asked whether the NDB would be ready for launch in early 2016, Vladimir Kabekov, the vice-president of the bank, told Frontline that most “of the policy has already been considered by the board of directors”. He added: “So, most of the paperwork, say 70 per cent, has been done. We have another question about contributions. That depends on every country. The Finance Ministers have confirmed that it is okay.” With an authorised capital of $100 billion and a $50 billion initial subscribed capital, the NDB will be capable of making a significant contribution to the economies of the global South, which have so far been dependent on the largesse of the World Bank and the IMF.

Significantly, far from being rivals, the NDB and the AIIB are expected to work closely together. NDB President K.V. Kamath has been quoted as saying that a “hotline” will be established between the NDB and the AIIB, which are “new institutions coming together with a completely different approach”. In a conversation with the resident Indian media in Beijing, Dinesh Sharma clarified that “formal and informal” channels of communication for coordination had been established between the AIIB and the NDB. He also acknowledged that the AIIB launch appeared to reflect a structural alignment between Europe and China.

Far from being just a monetary event, the establishment of the AIIB may provide the nucleus and the financial muscle that could lead to Eurasia’s breaking free from the confines of the Atlantic Alliance as an independent and influential player on the global stage.

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