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The AIIB: A Great Leap Towards China's Century


03-04-2015

Ibrahim Karsany

Former Director, Public Policy Division


Tag: USA Foreign Policy economy
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China has taken two significant financial initiatives in 2014. The first is the establishment of the New Development Bank in July, 2014 in collaboration with its BRICS partners (Brazil, Russia, India, China, South Africa). The second is that China has signed a Memorandum of Understanding (MoU) with twenty one countries, mostly Asian, in October 2014 to establish the Asian Infrastructure Investment Bank (AIIB). Both banks have an initial capital of $ 100 billion, with AIIB having a $50 billion paid up capital.
By creating these two giant financial institutions, China is paving the way for positioning itself as the number one world economic power in the twenty first century. The position of Chinas economy versus that of the USA is still under scrutiny and is the subject of heated debate between economists and scholars who are interested in Chinese affairs world over, including some leading American economists.
One of those is the well- known American economist, Nobel laureate, Joseph E. Stiglitz. He has argued fiercely that if we measured the GDP of both China and the USA according to the Purchasing Power Parity (PPP) method, and not according to the internationally recognized GDP per capita, China has already surpassed the USA and became the largest economy in the world in 2014. According to him, When the history of 2014 is written, it will take note of a large fact that has received little attention: 2014 was the last year in which the United States could claim to be the worlds largest economic power. China enters 2015 in the top position, where it will likely remain for a very long time, if not forever. In doing so, it returns to the position it held through most of human history.
The assertions of J. Stiglitz were reinforced by The Economist, which has predicted that Chinas economy will be on par with its American counterpart by 2021 and will be almost triple that of the US economy by 2075, as depicted in the diagram accompanying this article.
 
Figure 1- source: The Economist
According to the IMF and the economics editor of the BBC, Robert Beston, The Chinese economy is now worth $17.6 trillion while that of the USA is worth $17.4 trillion. So for the first time since 1872, when it overtook the UK, the US has been knocked off the top spot.  This figure illustrates the fact that the Chinese are unlikely to relinquish their number one status soon because as it shows, by the end of this decade the Chinese economy will be worth around $ 27 trillion, 20% bigger than the US which will stand at around $ 22 trillion. These figures seem to be more realistic because they were calculated on a PPP basis, as Stiglitz has done.
The US got very angry over Chinas initiative because it thought that China would like to undermine the well-established, American led international financial institutions such as the World Bank, the IMF and Asian Development Bank. The US was furious when Britain, its closest ally, decided the join AIIB as a founding member. Following Britains decision, most of other major western European countries, notably amongst them France, Germany, Luxembourg, Switzerland and Italy followed suit and signed up to join AIIB. Australia has already joined and Austria is considering it. South Korea is applying to be a founding member of AIIB, despite the opposition of the US.
South Koreas finance ministry announced on Friday, 27 March 2015 that, The AIIB is the first international financial institution Korea joins as a major member country from its inception. Koreas growing economic role in the world requires Korea to take on more responsibilities, and the AIIB will be an important venue for Korea to that end.  Not just South Korea, but another NATO member, Turkey applied on Thursday March 26 2015 to join the bank, also as a founding member. Amongst the US major allies only Japan stand aloof on this matter.
 I think this step is being taken by these countries due to the actions of the US congress, which has refused to give other countries, like China, more of a say in running the affairs of the IMF and the World Bank, in accordance with their global economic weight, which means the way the world economy is currently managed does not reflect the real picture of the global economic powers of the twenty first century.
The over reaction of the US to those countries which had joined as well as its own opposition to the establishment of the AIIB, to my mind, seems to reflect its policy makers assessment that this new bank will be parallel to the IMF and the World Bank. Even if this is true, could it not be considered as an additional source of capital for those who need it most in poor countries?
The AIIB is a strong indicator pointing towards the future course the global economy will take. The U.S. might stand against including the renminbi (the Chinese currency) in the IMFs currency basket as that would open the door to it becoming a global reserve currency. Right now, the dollar stands as the worlds reserve currency, followed by the euro and the yen. But if the renminbi were included in the IMF basket, this will open the door wide for it to become the worlds reserve currency not in the very far future, as it looks right now.
If this happens, it will have very serious implications not just for the future world economic order, as we know it, but for the global political influence as this transformation will hugely enhance Chinas soft power at the expense of that of the USA.
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Sources referred to in this article:

 1. J. Stiglitz, The Chinese Century, Vanity Fair News, January 2015. http://www.vanityfair.com/news/2015/01/china-worlds-largest-economy

 

2. Ben Carter, Is Chinas economy really the largest in the world?, BBC Magazine, 16 December 2014.

 

3. Announcement by South Koreas Finance Ministry  http://english.mosf.gov.kr 

 

4. Image source: The Economist


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