Coverage: World Bank rival

Despite protests from the U.S., several European countries are planning to join the Asian Investment Bank, led by China. It’s a big move and signals that U.S. influence on the world’s monetary policy might be slipping.

The New York Times had this story by Andrew Higgins and David E. Sanger:

Ignoring direct pleas from the Obama administration, Europe’s biggest economies have declared their desire to become founding members of a new Chinese-led Asian investment bank that the United States views as a rival to the World Bank and other institutions set up at the height of American power after World War II.

The announcement on Tuesday by Germany, France and Italy that they would follow Britain and join the Chinese-led venture delivered a stinging rebuke to Washington from some of its closest allies. It also called into question whether the World Bank and the International Monetary Fund, which grew out of a multination conference in Bretton Woods, N.H., in 1944 and established an economic pecking order that lasted 70 years, will find their influence diminished.

The announcement by Germany, Europe’s largest economy, came only six days after Secretary of State John Kerry asked his German counterpart, Frank Walter-Steinmeier, to resist the Chinese overtures until the Chinese agreed to a number of conditions about transparency and governing of the new entity. But Germany came to the same conclusion that Britain did: China is such a large export and investment market for it that it cannot afford to stay on the sidelines.

American officials have fumed that China never approached the Group of 7 — the consortium of economic powers that the United States has led — but rather decided to pick off individual members, setting a deadline of the end of March for them to decide whether to join the new organization, the Asian Infrastructure Investment Bank, which many refer to by its initials, the A.I.I.B.

Matthias Sobolewski and Jason Lange wrote for Reuters that the rest of the world is joining despite U.S. concerned about governance:

European Union and Asian governments are frustrated that the U.S. Congress has held up a reform of voting rights in the International Monetary Fund that would give China and other emerging powers more say in global economic governance.

Washington insists it has not actively discouraged countries from joining the new bank, but it has questioned whether the Asian Infrastructure Investment Bank (AIIB) will have sufficient standards of governance and environmental and social safeguards.

“I hope before the final commitments are made anyone who lends their name to this organization will make sure that the governance is appropriate,” Treasury Secretary Jack Lew told U.S. lawmakers.

Lew warned the Republican-dominated Congress that China and other rising powers were challenging American leadership in global financial institutions, and he urged lawmakers to swiftly ratify stalled reform of the IMF.

German Finance Minister Wolfgang Schaeuble announced at a joint news conference with visiting Chinese Vice Premier Ma Kai that Germany, Europe’s biggest economy and a major trade partner of Beijing, would be a founding member of the AIIB.

The NPR story by Jackie Northam reported that Asia was in need of money for infrastructure and this was a quick way to achieve that goal:

But Fred Bergsten, a senior fellow with the Peterson Institute for International Economics, says there’s a huge demand for infrastructural investment in much of Asia.

“The lack of infrastructure – roads, airports, ports, power facilities – are among biggest barriers to development throughout Asia,” he says.

Bergsten says roughly $8 trillion dollars of infrastructure investment will be needed over the next decade, and that the AIIB will help fill that gap. It’s believed China is prepared to put up half of the initial $100 billion budget, probably giving it veto power, much the same as the U.S. has with the World Bank and the International Monetary Fund.

Ever since China floated the idea of a new development institution about two years ago, Washington has been against it. The administration says it has concerns about transparency, environmental safeguards and procurement practices. Bergsten says there’s a larger issue at stake.

“I think the fact that it is China and this is part of the broader competition for global leadership, economic leadership, broader political leadership, that is I think a central part of this equation,” he says.

Matthew Goodman, a senior adviser on Asian economics at the Center for Strategic and International Studies, says the Europeans have an incentive to deepen their economic ties with China. But he says their decision to join the new development bank is a blow to the Obama administration.

The Economist wrote that the AIIB could be just the beginning for China’s rise in world power:

The joiners argued that China was going to launch the AIIB anyway; better to be on the inside influencing its governance. The Europeans’ accession will encourage changes of heart among the refuseniks. Australia has already indicated it is reconsidering its decision to stay out; South Korea seems almost certain to join.

The AIIB is one of a number of new institutions launched by China, apparently in frustration at the failure of the existing international order to accommodate its astonishing rise. Efforts to reform the International Monetary Fund are stalled in the American Congress. America retains its traditional grip on the management of the World Bank. The Asian Development Bank remains based in Manila but directed by a succession of Japanese bureaucrats.

So China, flush with the world’s biggest pile of foreign-exchange reserves and anxious to convert them into “soft power” is building an alternative architecture. It has proposed not just the AIIB, but a New Development Bank launched with its “BRICS” partners—Brazil, Russia, India and South Africa—and a Silk Road development fund to boost “connectivity” with its Central Asian neighbours. All respond to the need for massive investment in infrastructure to support development.

There was a time when no one would go against the wishes of the U.S., particularly in terms of monetary policy. But these days, the fact the rest of the world is leaving the U.S. behind is significant. It could signal the beginning of the decline in power. Or it could be a temporary set-back. And the U.S. could be pressured into joining.