Rising power such including China wants to change the voting rights in the IMF to reflect the fact that if you believe clout in the IMF is dependent on economic power, then rising powers should get more. The US has been unwilling or unable to get this change. So China decided in 2013 to set up its own bank called the Asian Infrastructure Investment Bank (AIIB). It plans to start off with $50 billion dollars of which China will provide half and own 50% of its shares. While the funds is somewhat lesser than the IMF, it will focus in on infrastructure projects only.
Despite reports that the IMF itself welcomes the competition or help depending on how you look at it, the US has been lobbying behind the scenes to get countries to not join the AIIB. A proposition its denied of course, but from Australian news, we were pretty much approached by the US. Publicly the US has merely "raised concerns" about standards and not told anyone not to join. Except when they did.
You see, after they US managed to convince Australia not to join (in what was a very heated debate in Australia's cabinet) the UK suddenly up and decided to join. Then the Obama administration rebuked the UK (BBC, FT) for doing so, even though they haven't really told anyone not to join the AIIB.
Anyway soon after that, other American allies decided to join. Germany, France, and Italy joined and financial centre Luxembourg is now applying to join. SK is now "seriously considering the issue" and Australia is reconsidering (some predict it will join).
Financial times provided good analysis and calls it a Diplomatic debacle which makes America look isolated and petulant. The Diplomat calls it AIIB disaster.
The Washington Posts (not sure how reliable they are) calls it Diplomatic disaster The Washington post doesn't limit the number of articles you can view like FT, so I will post their article here.
I think there are a few things of note here in this affair.Diplomatic disaster: Obama humiliated by allies’ rush to join China’s new bank
Britain, France, Germany, Italy sign on as Beijing courts Australia, South Korea
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.”
1. By opposing China in something less offensive as a bank to lend money for development, Obama has just strengthened voices in China who believe that the US is seeking to contain them. I can understand if China made military moves, but for this. Nevertheless this doesn't look good, because it will be better if the US and China cooperated. But as they say it takes two to tango.
2. I think the Washington post put it aptly. By losing this diplomatic struggle with China it unintentionally feeds into the "US decline" and "China rising" memes.
"We don't like your bank cause it's competing with our bank". Sore losers.
