A petty and short-sighted hissy fit

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

The UK’s de­ci­sion to join China’s new Asian In­fra­struc­ture In­vest­ment Bank is turn­ing into a diplo­matic tri­umph for Bei­jing and a dis­as­ter for Wash­ing­ton. France, Ger­many and Italy say they will fol­low the UK’s lead. South Korea and Australia, which the US urged not to sign up when the bank was es­tab­lished last Oc­to­ber, are re­con­sid­er­ing. Even Ja­pan, the most stal­wart US ally in Asia, is ru­mored to be wa­ver­ing.

Wash­ing­ton fears that China is try­ing to re­shape the eco­nomic ar­chi­tec­ture of Asia. It rightly views the AIIB as a po­ten­tial com­peti­tor to the Asian Devel­op­ment Bank and World Bank, and is con­cerned about China’s will­ing­ness to ad­here to rules of good gov­er­nance and en­vi­ron­men­tal pro­tec­tion. But US at­tempts to un­der­mine an in­sti­tu­tion that could im­prove lives across Asia are both petty and short-sighted. Far from dis­suad­ing its friends from join­ing a mul­ti­lat­eral in­sti­tu­tion it does not trust, Wash­ing­ton should wel­come their abil­ity to in­flu­ence it from the in­side. This would be pos­i­tive not only for the US but for China, too, which is strug­gling to con­vince its neigh­bors that it can be trusted to de­liver re­gional devel­op­ment.

For its ‘New Silk Road’ to be a suc­cess, Bei­jing needs to re­think its pol­icy of of­fer­ing loans to cor­rupt regimes. From Zam­bia to Liberia, South Su­dan to Myan­mar, its pol­icy of work­ing with un­sa­vory gov­ern­ments has back­fired. The lat­est ex­am­ple is Sri Lanka, a key link in the ‘Mar­itime Silk Road’, where vot­ers re­cently threw out the thug­gish gov­ern­ment of Mahinda Ra­japaksa. Un­der Ra­japaksa’s nineyear ad­min­is­tra­tion, China fi­nanced in­vest­ments of more than $5 bln. It built a much-needed high­way and power sta­tion, but also a port and air­port in Ra­japaksa’s home­town that have proved ex­pen­sive white ele­phants. Worse, th­ese in­vest­ments were fi­nanced at ex­tor­tion­ate in­ter­est rates with a cut of the funds ap­par­ently si­phoned off to Ra­japaksa and his cronies.

The new gov­ern­ment, a coali­tion of the main op­po­si­tion and other par­ties, has been elected on a man­date to clean up gov­ern­ment. Last week se­nior min­is­ters told us they are reval­u­at­ing sev­eral Chi­nese-funded projects and that it has suspended work on a $1.5 bln land recla­ma­tion and real es­tate devel­op­ment next to Colombo port. It says it will rene­go­ti­ate a num­ber of hefty loan re­pay­ments due to Chi­nese banks, some with an in­ter­est rate as high as 9%.

“The high costs come from noth­ing other than cor­rup­tion, but we do not want tax­pay­ers to pay for the past de­ci­sions of a cor­rupt regime,” Ravi Karunanayake, Sri Lanka’s fi­nance min­is­ter, told us at his home in Colombo. “What we’re say­ing to the Chi­nese is this: ‘We’re in a tough spot. Please help us by tak­ing a hair­cut on our debt’.”

Of­fi­cials in Sri Lanka’s new gov­ern­ment in­sist they blame Ra­japaksa’s gov­ern­ment for cre­at­ing an en­vi­ron­ment in which Chi­nese com­pa­nies were obliged to pay mas­sive back­han­ders to se­cure deals. But they recog­nise that Sri Lanka be­came too re­liant on Chi­nese dol­lars and that this was an im­por­tant fac­tor in the coun­try’s gen­eral gov­er­nance deficit. Now, in ad­di­tion to seek­ing to re­struc­ture its Chi­nese debts, they are ac­tively invit­ing other coun­tries to play a greater role. Last week Naren­dra Modi vis­ited the is­land—the first state visit by an In­dian prime min­is­ter for a re­mark­able 27 years—and Colombo is nor­mal­is­ing eco­nomic re­la­tions with Europe and the US.

As Bei­jing found in Myan­mar—where Chi­nese in­vest­ment has col­lapsed since the mil­i­tary junta dis­solved it­self in 2011—the will­ing­ness of China’s state-owned firms to work with cor­rupt elites and ig­nore in­ter­na­tional codes of con­duct can be self-de­feat­ing. Ill-ad­vised lend­ing by Chi­nese pol­icy banks also un­der­mines in­ter­na­tional at­tempts to sup­port good gov­er­nance in de­vel­op­ing coun­tries where legal in­fra­struc­ture and state ca­pac­ity are of­ten weak. So, as China steps up its pol­icy of ‘go­ing global’, it is clearly in the in­ter­ests of both Wash­ing­ton and Bei­jing to help Chi­nese com­pa­nies and banks im­prove their record over­seas.

Just how much in­flu­ence the UK and other west­ern coun­tries will wield within the Chi­nese-led AIIB re­mains to be seen. Lon­don’s de­ci­sion to sign up is pri­mar­ily mo­ti­vated by com­mer­cial considerations, de­spite its po-faced protes­ta­tions about en­sur­ing the bank is eth­i­cal, trans­par­ent and en­vi­ron­men­tally sound. But if the pres­ence of the UK and other al­lies can prod China to re­spect in­ter­na­tional lend­ing stan­dards, then the US should throw its weight be­hind their membership. Rather than seek­ing to con­tain China, Wash­ing­ton should ac­cept Bei­jing’s le­git­i­mate at­tempts to carve out a global role—and help it to do so in a con­struc­tive way. Per­haps it could start by ap­ply­ing to join the AIIB it­self.

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