- The Washington Times - Wednesday, March 18, 2015

The battle of wills between Beijing and Washington over a China-sponsored development bank for Asia is turning into a rout, and the Obama administration has found itself isolated and embarrassed as its top allies lined up this week to join the proposed Asian Infrastructure Investment Bank.

In what one analyst dubbed a “diplomatic disaster” for the U.S., Britain became the first major European ally to sign on as a founding member of the Shanghai-based investment bank, joined quickly by France, Germany and Italy, which dismissed public and private warnings from the U.S. about the bank’s potential impact on global lending standards and the competition it could provide to existing institutions such as the U.S.-dominated World Bank.

Luxembourg, a major global financial center, revealed this week that it would sign up. China also is also wooing Australia and South Korea, two of America’s closest Asian allies, to join before the March 31 deadline. A South Korean wire service reported Wednesday that Seoul was “seriously considering” the offer.

The reason for the stampede is clear: China’s market and its huge hoard of cash to invest override any concerns voiced by the U.S. Treasury Department and State Department over Beijing’s half-ownership stake in the bank.

“Simply put, if you partake, you have a stake,” Thomas Koenig, a policy analyst with the European Union Chamber of Commerce, told the German broadcast service Deutsche Welle.

With 32 countries on board and more expected in the coming days, Chinese state media have begun to gloat about the failure of the Obama administration to rally even its closest allies and trading partners to shun the Asian Infrastructure Investment Bank. They noted that U.S. officials have long lectured China, now the world’s second-largest economy, to take a more active “stakeholder” role in global economic affairs, but then tried to undermine the investment bank almost from the time Chinese President Xi Jinping floated the idea of an Asian development fund during a trip to Indonesia in October 2013.

“Welcome Germany! Welcome France! Welcome Italy!” the official Chinese Xinhua News Agency wrote in a commentary published Wednesday.

“Despite a petulant and cynical Washington,” more and more major countries are joining, the commentary noted. “Holding sour grapes over the AIIB makes America look isolated and hypocritical.”

Chinese officials noted Wednesday that the Asian Infrastructure Investment Bank will be on the agenda for the summit of top Chinese, Japanese and South Korean diplomats Saturday in Seoul. Chinese Deputy Finance Minister Shi Yaobin told reporters in Beijing that the U.S. would still be welcomed as a founding partner.

Saying Asia’s booming infrastructure financing needs — estimated at a staggering $700 billion annually — aren’t being met by institutions such as the World Bank and the Asian Development Bank, China is putting up half of the planned initial $50 billion financing to launch the Asian Infrastructure Investment Bank. India, another U.S. ally, is the second-biggest investor, and a group of developing countries from Asia and the Middle East quickly signed on.

The Obama administration has been skeptical of the idea from the start, arguing that the proposed bank could prove redundant and could undercut lending standards on such issues as worker protections and the environment. China’s large stake also raised red flags, U.S. officials said, about whether the bank would favor Beijing’s economic and strategic priorities.

Clash over clout

Underlying the public debate was a clear clash between Washington and Beijing over clout in the globe’s leading financial infrastructure, set up largely by the United States in the wake of World War II and still largely dominated in the senior ranks by U.S., European and Japanese officials.

“We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power,” an unidentified U.S. official told the Financial Times newspaper after news broke that Britain would join the bank.

Rising powers such as China, Brazil and India also have expressed mounting frustration that a proposed overhaul of the International Monetary Fund to reset voting rights to reflect the new global pecking order has been blocked because the Obama administration and the Republican-dominated Congress have been unable to pass it.

Analysts say Chinese officials have skillfully tried to meet concerns that Asian Infrastructure Investment Bank members will be drawn into a power clash. During a visit to Australia last month, Zhou Qiangwu, a point man for Beijing’s selling efforts, noted that the Asian Infrastructure Investment Bank would be run by a multinational secretariat and use the same management structure as the Asian Development Bank and World Bank.

The proposed bank would “follow the international practice and give highest attention to environmental impact and resettlement” issues, he said, with strong safeguards against corruption.

Treasury Secretary Jacob Lew tried to moderate the U.S. line against the Asian Infrastructure Investment Bank in testimony on Capitol Hill this week, insisting that the administration’s primary goal was to ensure that the bank did not undermine lending standards.

“I hope before the final commitments are made anyone who lends their name to this organization will make sure that the governance is appropriate,” Mr. Lew said.

But the White House and the State Department said this week that it was the “sovereign decision” of each country on whether to participate in the bank.

Mr. Lew did acknowledge that the longtime U.S. and Western primacy in the global financial sphere was being challenged by China and other rising powers, which may not share Washington’s priorities.

“New players are challenging U.S. leadership in the multilateral system,” Mr. Lew said, pleading for passage of the IMF reform package. “Our international credibility and influence are being threatened.”

But private analysts say that credibility and influence have taken major hits from the rush to join the Asian Infrastructure Investment Bank.

C. Fred Bergsten, a senior fellow at the Washington-based Peterson Institute for International Economics, wrote this week that the Obama administration made a huge mistake by trying to undermine the bank, not only failing to persuade allies to stay out but also strengthening the voices in Beijing who argue that the U.S. is trying to keep China down.

“The U.S. hostility reinforces the Chinese view that U.S. strategy is to contain and suppress it,” he wrote, “so increasing rather than decreasing the prospect of uncooperative Chinese behavior.”

Financial Times columnist Gideon Rachman said this week that the saga “is turning into a diplomatic debacle for the U.S.”

“By setting up and then losing a power struggle with China,” he said, “Washington has sent an unintended signal about the drift of power and influence in the 21st century.”

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