US allies to join AIIB

By Muhammad Jamil

Since the paradigm shift from the communist pattern of a state-run economy to a market economy, the Chinese economy is growing. China has already surpassed Japan as the world's second largest economy, and over time it is likely to surpass the US in this regard as well

On Tuesday, US allies — Germany, France, and Italy — agreed to join the Asian Infrastructure Investment Bank (AIIB) launched by China. Last week one of America's staunchest allies, the UK, became the first Western nation to join the new bank. The US has tried to persuade South Korea, Japan and Australia to not join AIIB on the pretext that it will make the World Bank and other global financial institutions redundant. Without mincing words, the Obama administration has said that there is no need for another international financial institution, as it is likely to compete with the World Bank and Asian Development Bank. Asian countries and the European Union give the impression that their decision to join as founding members of the AIIB is because the US Congress has reformed voting rights in the International Monetary Fund (IMF). 

Most developing countries feel that the global financial institutions controlled by the US and the West have been disenfranchising them and that the decisions to lend money are made according to the whim and fancy of the sole super power. But there is more to it than that. Fred Bergsten, a senior fellow at the Peterson Institute for International Economics, says that there is a huge demand for infrastructural investment in Asia. He believes that roughly $8 trillion of infrastructural investment will be needed over the next decade and that AIIB will help fill in that gap. It is believed that China is prepared to put up half of the initial $100 billion budget, probably giving it veto power in AIIB, much the same as the US has in the World Bank and IMF. 

Bergsten believes that there is 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.” Since the paradigm shift from the communist pattern of a state-run economy to a market economy, the Chinese economy is growing. China has already surpassed Japan as the world’s second largest economy, and over time it is likely to surpass the US in this regard as well. IMF measures the gross domestic product (GDP) of countries, both in market exchange terms and in terms of purchasing power. As far as purchasing power goes, China has already overtaken the US and become the world's largest economy. By the end of 2014, China’s purchasing power adjusted GDP was $17.632 trillion, while the US GDP stood at $17.416 trillion. 

Matthew Goodman, a senior adviser on Asian economics at the Centre for Strategic and International Studies says: “the Europeans have an incentive to deepen their economic ties with China. But their decision to join the new development bank is a blow to the Obama administration.” This does not mean that China is on a collision course with the US because both countries will continue working together on the issues of reconstructing new financial architecture and climate change. However, the fact remains that China has invested an estimated $1.27 trillion in U.S. Treasury Bonds and is the largest investor amongst foreign governments, according to the June 2014 figures released by the U.S. Treasury. This amounts to over 21 percent of the U.S. debt held overseas and about 7.2 percent of the US’s total debt figure. For a long time, the US has relied on China to fund its debts and China relies on the US to import its goods. The US has a deficit in trade with China and the latter finds it beneficial to invest in treasury bonds, which are a relatively safer investment. At the same time, Americans benefit from the competitive prices of Chinese products such as bonanza. Developing countries are happy about China’s unstoppable rise as a super power, which will end the era of a unipolar world. Most pundits agree that this is China’s century and there has also been some respite in the US’s criticism of China. 

Earlier, Americans were wary of China’s rising military strength, which they believed was aimed at countering US power. Despite apparently cordial relations, the US continued to criticise China for human rights’ violations. In October 2010, the Nobel Peace Prize was awarded to Chinese dissident Liu Xiaobo as a part of a plot to denigrate China. The Nobel Prize Committee stated that this award was given to Xiaobo for his long non-violent struggle for fundamental human rights in China. Yet they did acknowledged that “China has had economic growth hardly comparable in history, and lifted millions of people out of poverty”. However, the committee failed to grasp the true sense or real meaning of freedoms and fundamental rights. 

The question is, which country is ready to allow its dissenters to slander and incite others to create unrest and chaos in the name of fundamental rights? Secondly, their myopic vision failed to see that the Chinese government has alleviated poverty and improved the living conditions of the people. In their reaction to the Norwegian Nobel Prize Committee’s decision, Chinese authorities called the award an obscenity. Nevertheless, the relations between the US and China have markedly improved after a boost in their economic ties. China is currently the largest creditor of the US, having invested over $1 trillion in Treasury Securities and more than $130 billion in portfolio investment. It is also the second largest trading partner of the US after Canada.