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Our renminbi. Your problem.

The U.S. is not on board the train of AIIB. Source:

“If an alien landed on earth they would be puzzled by its international financial institutions as China is grossly underrepresented” (BBC). In fact, it’s not just China; the vast majority of Asian countries are severely underrepresented in international financial institutions such as the International Monetary Fund (IMF), though Asia is home to the world’s fastest growing economies. Apparently frustrated at the failure of the existing world order to accommodate its rapid rise, and aiming to export China’s production capabilities, the Chinese government introduced plans for the Asian Infrastructure Investment Bank (AIIB), China’s first multilateral development bank. The U.S. has been a key opponent of China’s efforts to expand global influence, turning China’s financial initiatives into a diplomatic contest by urging its allies not to join. However, the international society has ever since rejected the U.S. endeavor by supporting China’s initiatives with overwhelming zeal. Now that the pros and cons of accommodating these initiatives have become abundantly clear, the U.S. should forgo its frantic political race and realign itself with China in maintaining the rising tide of the global economy.

The establishment of AIIB is welcomed with overwhelming international response and financial support. Among AIIB’s fifty-seven prospective founding member (PFM) countries are advanced economies such as Germany, France, U.K., Australia, and South Korea. China’s voluntary action of forgoing its outright veto power is accounted for the success: without overriding authority, each PFM is entitled to the right of creating AIIB governance and operational rules. In comparison, the U.S. retains a final say in the WTO and the World Bank. It is hence no surprise that Jin Liqun, the president-designate of the bank, hinted last month that about twenty more countries await joining.

In the 5th Chief Negotiators’ Meeting in Singapore this May, AIIB’s PFMs coauthored the Articles of Agreement. The AOA planned 100 billion dollars as initial registered capital and included details on equity allocation and approval process. Outside sources have also mentioned the ease for countries to obtain loans. What has become evident, then, is AIIB’s singular emphasis on providing funds for infrastructure projects.

A singular goal promises efficiency. In addition, AIIB’s aim for “lean, clean, and green” conduct is promoted by a concise governance structure: with one president-designate and no standing board of directors, the bank hires a handful of field officers and around 500 to 600 experienced staff, one-sixth that of ADB and a mere five percent of World Bank employees. This structure also depletes internal bureaucracy. As Henry Gao, Associate Professor of Law at Singapore Management University, noted, “Bureaucracy is a result of a long and old working pattern, new organizations like AIIB won’t encounter such problems during the first decade of its operation.”

AIIB’s priority on interests specific to the Asia-Pacific region fundamentally distinguishes it from other multilateral development banks. Despite having PFMs across the globe, AIIB allocates seventy-five percent of shared votes for Asia-Pacific countries, giving smaller Asian countries a greater say in global financial institutions. As Professor Chen Kang from the National University of Singapore noted: “AIIB would have lost its Asian characteristic if allocation was strictly followed the only standard of GDP. Firstly differentiate Asian countries and countries outside the region, then allocates on the basis of GDP.” Under this plan, China comes in first in terms of voting share at 26.06 percent, followed by India with 7.5 percent and Russia with 5.92 percent.

Given AIIB’s vast network, efficiency, and priority on Asian interests, it can be anticipated that when the organization goes into full swing by the end of 2015, the focus of global economy will experience a considerable migration eastward.

Although AIIB’s incentive is consistent with White House’s goal for the Trans-Pacific Partnership, the Obama administration responded to AIIB with suspicion and skepticism. An article from the Financial Times notes that “The Obama administration’s reflexive hostility. . . risks giving the impression that the US is less interested in Asian development than in restraining Beijing.” Raising questions about possible environmental damage and governance structure, the White House’s concerns were only resolved later by detailed plans from AIIB to protect nature and secure internal democracy.

The U.S. Congress had also mishandled China’s rising economic status by repeatedly ignoring urges from political figures (like British chancellor George Osborne) to back quota and governance reforms of the IMF, which would give more power to emerging economies like China. It is widely accepted that the IMF’s tradition of using quotas to determine voting weights upsets the balance of represented economies. The structure of the IMF was designed at Bretton Woods in 1944, based on a 1944 world. Ever since, U.S. presidents from both parties had supported augmenting their resources to cope with an ever-changing global economy. But since 2009, efforts to reform IMF were stalled in the U.S. Congress. Arguing that “The U.S. refusal to capitalize the existing institutions ensures that they will lose leadership,” here is an excerpt by William H. Overholt, a senior fellow at Harvard Asia Center, that is worth pondering:

“The United States has three options: update existing institutions sufficiently so that they can provide leadership; refuse modernization and embrace new institutions that fill the resulting vacuum; or refuse modernization of the Bretton Woods institutions and oppose new ones. The first two options both provide a decent chance that the United States will remain the preeminent economic leader, albeit with more influential colleagues. Ironically, congressional choice of the third option ensures that the new institutions will be preeminent and that China will be preeminent within them.”

It is already a mistake that the U.S. excluded China from its TPP deal on the insufficient argument that “China is not ready for the high standards of TPP.” The U.S. response to AIIB, rather, has become a diplomatic failure, losing all of its allies but Japan to China’s economic initiative. Their arguments came back to Washington: “China will launch AIIB anyway, better be on the side influencing its governance.”

With Chinese President Xi Jinping’s state visit to White House this September, good news emerged that Washington has eased its tone on the new China-led financial institution. An official fact sheet remarks that “the United States welcomes China’s growing contributions to financing development and infrastructure in Asia and beyond.” Enumerating a number of organizations in which cooperation is expected, it was disappointing to see that the name of AIIB was never mentioned.

Declaring that “We should write those rules” in his State of the Union speech addressing China’s attempt “to write the rules for the world’s fastest-growing region,” it may occur to President Obama that he needs another solution when the odds are not in his favor. In a U.S. dominated world economy, the U.S. attitude could be summarized by Treasury Secretary John Connally’s remark: “It’s our dollar. It’s your problem.” The reverse of this statement cannot fit today’s situation any better: It’s our renminbi. It’s your problem.