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If You Can’t Beat Them, Co-Finance: America’s About Face on AIIB

© AP Photo / EyePress, FILECoins and banknotes of the Chinese yuan are set up together with a U.S. dollar
Coins and banknotes of the Chinese yuan are set up together with a U.S. dollar - Sputnik International
Today in an about face from earlier posturing, the United States proposed cooperation and partnership between the newly created Chinese Asian Infrastructure Investment Bank (AIIB) and US-led institutions such as the IMF and the World Bank.

Andre Alessandro — The move comes after the United States failed to pressure several of its key allies, most notably the United Kingdom, France, and Germany, to boycott the institution. 

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The significance of the event, however, lies in the fact that the Chinese now have attracted major G7 partners to the AIIB, boosting its prestige and hopefully its efficacy. Moreover, the AIIB will rival the World Bank, IMF, and the Asian Development Bank (ADB), giving China a stronger foothold in the region and allowing it to dictate its own policy measures like the preceding banks do already.

The AIIB is a threat to the US for several reasons.

First, it will allow the Chinese to find a better investment environment for almost $3 trillion in US Treasuries which are only yielding just over 0% to 2% a year. By reallocating them into Asian infrastructure projects, they will be able to increase the GDP and purchasing power of its nearest neighbors, creating a larger demand for Chinese export goods and Yuan.

The second reason why the AIIB poses a threat to the US is due to the fact that by enacting its own development bank instead of increasing participation in existing institutions, China is hoping to increase its influence in the region without the other G7 nations, such as Japan and the US, who make the final decision on what projects are funded.

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Previously, China had been a member of the ADB and the IMF for many years, however, its influence and voting powers have been vastly underserved, leaving the rapidly growing nation at odds over how it could exert itself in the region. In the ADB, China has held the voting rights of Japan and its President has always been Japanese. While in the IMF, an increase in Chinese power has been delayed for years. Thus, China felt the time was right to manifest its own destiny in the region.

Third and most importantly, the AIIB will reduce dollar dependence in Asia and allow China to sidestep existing treaties and trade barriers set forth by the US and the institutions it dominates. The AIIB is a perfect representation of the decline of US power in the region and the slow emergence of China as a soon to be dominant power.

This is why from its initial announcement, the Obama administration called on its allies and partners to refuse to support the institution. While the White House publicly said they felt it would not meet a sufficient level of standards to prevent excessive debt buildup, human rights abuses and environmental destruction, the real reason was to try and stem the creation of a rival institution not under US control. By defecting from Obama's mandate, the major countries who signed on as founders of the institution greatly embarrassed the US. Now, the new approach taken by the Obama administration is a small measure to retain credibility. 

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“The U.S. would welcome new multilateral institutions that strengthen the international financial architecture,” said Nathan Sheets, US Treasury Under Secretary for International Affairs. “Co-financing projects with existing institutions like the World Bank or the Asian Development Bank will help ensure that high quality, time-tested standards are maintained.”

By trying to join forces with the AIIB now, the Obama administration hopes to maintain some level of power and control. Whether China will choose to work with the US, the IMF, and the World Bank is yet undecided. Zhu Haiquan, spokesman at the Chinese embassy in Washington, said the bank “is built in the spirit of openness and inclusiveness and will follow high standards.” He also said, “It will effectively cooperate with and complement the existing multilateral development banks such as the World Bank and the Asian Development Bank to provide investment and financing for the infrastructure building in Asia.”

Demand for infrastructure in Asia in the next decades is expected to approach $8 trillion. New roads, train lines, ports, airports, electricity grids and other projects are necessary to keep the billions of people in Asia fed, provided with clean water and ensure they receive exported Chinese goods.

At its start, the AIIB will be funded with just $50 billion. A large sum, however the ADB is currently funded with $160 billion dollars and the World Bank has nearly a half billion. The number does represent a growing divide though between Western and Chinese interests, which will only grow with time as China expands and exerts more influence over the region.

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