Gross US Miscalculation on PRC's Asian Infra Bank

Obama's international economic diplomacy team is hard at work.

I suppose that if I were in their place, I too would exhibit the sort of nonchalant complacency American officials have displayed before its erstwhile "allies" paid it no heed in joining China's newfangled Asian Infrastructure Investment Bank (AIIB). Fat, dumb and happy, they have been totally outmaneuvered by their Chinese counterparts despite the PRC not being exactly popular in the region since it has territorial disputes with about everyone. Perhaps for this reason the Americans thought that it would be a simple matter of discouraging involvement in China's forays into multilateral development lending, but no. I suppose there was a time when the US could have its cake and eat it too in international economic diplomacy--think of the Asian financial crisis--but now is not that time.

Let us update ourselves with who's fled America in the meantime since the list keeps getting longer since we last discussed the topic. Apparently, the UK was the Pied Piper: other Europeans were not about to let the Brits get a head start by participating in potentially lucrative Asian infrastructure deals. Remember, too, that the UK and China have a rather contentious history but that was overlooked in a bout of pragmatism from both sides:

But as Beijing systematically recruited longtime American allies to help fund and oversee the new bank, it became clear that the push was more than a public relations gesture to China’s Asian neighbors. It was also a direct threat to the post-World War II financial institutions led primarily by the United States, and to President Obama’s pledges to make a “pivot” to Asia in American foreign policy.

Now with Britain, France, Germany and Italy signing up to join the new bank, despite direct pleas from Washington to steer clear, the question is whether the Obama administration mishandled a significant challenge from China, and what it might have done differently. “The administration made a major mistake in its opposition. It was a very shortsighted,” said Paul Haenle, director of the Carnegie-Tsinghua Center in Beijing. “The bank was going to go ahead whether we supported it or not.”

In a changed world, the United States should have swallowed its pride and accepted being just another member country of an organization China founded, some say. Instead, they will be on the outside looking in due to an inability to imagine not being the center of attention:

The United States would have been wiser, he and others said, to temper its resentment of China’s efforts to raise its international profile and play a bigger role in global financial affairs. Some argue it may also have sought to play a role in an Asia-focused bank led by China, just as Washington expects China to contribute more to the World Bank and the International Monetary Fund, the Washington-based lending agencies for development and monetary stability.

The willingness of Britain to join the China bank over American objections was an especially clear sign of China’s sophisticated strategy for winning friends, and Washington’s failure to respond effectively.

The biggest positive for the AIIB is that it makes sense: China has a massive capacity for building infrastructure it doesn't need at the moment as the PRC seeks to curb overinvestment in marginal projects. At the same time, the rest of Asia suffers from poor-quality infrastructure. So, having lots of foreign exchange to buy friends and infrastructure for, well, infrastructure given lesser domestic demand, China was bound to internationalize both:

China was upset that after the 2008 financial crisis, Congress rebuffed legislation intended to increase Beijing’s voice in the World Bank and the International Monetary Fund. Now that China was sitting on more than $3 trillion in foreign exchange reserves, Beijing could easily afford to finance an entirely new institution that would have a majority Chinese stake with other countries as minority shareholders, they said.

Moreover, China had decided that it wanted to use its excess capacity in steel, concrete and pipes to build up neighboring economies and benefit the Chinese economy, said Laurence J. Brahm, an American who worked with Prime Minister Zhu Rongji on China’s entry to the World Trade Organization in 2001.

Not wanting to be left out perhaps, Australia and South Korea are reconsidering their American lackeydom:

The British decision cleared the way for other European allies that China had courted to go Beijing’s way, as well. Australia is expected to sign up in the next week, according to government officials, and South Korea is likely to follow.

Barrons mirrors these points...

But China can be forgiven for wanting its own development bank. “China’s voting power in the Bretton Woods institution is only 5% even though it accounts for more than 10% of global GDP,” noted Bank of America Merrill Lynch.

Plus, Asia does need more infrastructure money. Asian Development Bank estimates that Asia needs about $800 billion a year to meet its infrastructure needs. Combined, the World Bank and Asian Development Bank only provide $20 billion financing.

...as the AIIB buoys PRC infrastructure stocks at a time of domestic slowdown:

China’s equities have certainly responded. Looking at the performance of Hong Kong-listed Chinese stocks since the People’s Bank of China‘s interest rate cut last November, China Communications Constructions (1800.HK), China Railway Group (390.HK) and China Railway Construction Group (1186.HK) have risen 24%-46% respectively. This is quite remarkable considering they are industrial stocks and China has been slowing down. 

There's a new sheriff in Asia, folks. It looks like everyone's bandwagoning with China in the expectation that the PRC's regional influence will only increase, infrastructure needs in Asia will hardly diminish among fast-growing developing economies, and commercial opportunities are there to be taken by infrastructure-related firms whether they're Chinese, British, French, etc.

UPDATE 1: Also catch Treasury Secretary Lew's testimony before the United States Congress that's effectively blocked reform at the World Bank and IMF:

The Obama administration recognizes the link between the creation of the AIIB and Washington’s pathetic performance on multilateral funding. As Treasury Secretary Jack Lew pointed out in recent congressional testimony: “It’s not an accident that emerging economies are looking at other places because they are frustrated that, frankly, the United States has stalled a very mild and reasonable set of reforms in the IMF.” The failure to act, suggested Lew, raised “significant questions about U.S. credibility and leadership in the multilateral system.”