Mak­ing space for China

Financial Mirror (Cyprus) - - FRONT PAGE -

When the United King­dom an­nounced ear­lier this month that it had agreed to be­come a found­ing mem­ber of the China-led Asian In­fra­struc­ture In­vest­ment Bank (AIIB), most of the head­lines fo­cused not on the news it­self, but on the fric­tion the de­ci­sion had caused be­tween the UK and the United States.

The White House is­sued a state­ment urg­ing the Bri­tish gov­ern­ment to “use its voice to push for adop­tion of high stan­dards.” And one se­nior US ad­min­is­tra­tion of­fi­cial was quoted ac­cus­ing the UK of “con­stant ac­com­mo­da­tion of China, which is not the best way to en­gage a ris­ing power.” In fact, it is the US that is ad­vo­cat­ing the wrong ap­proach.

In the UK, the diplo­matic spat served as an oc­ca­sion for the Bri­tish press to air crit­i­cism from those who be­lieve that the gov­ern­ment should adopt a stronger stance on China. For ex­am­ple, they say that the gov­ern­ment should have spo­ken out more force­fully in sup­port of last year’s prodemoc­racy protests in Hong Kong, and that it should not have dis­tanced it­self from the Dalai Lama (as it seems to have done) dur­ing Prime Min­is­ter David Cameron’s visit to China in 2013.

The UK does need to stand up for it­self, but there is no rea­son for it to be­come con­fronta­tional about in­ter­nal Chi­nese mat­ters – es­pe­cially in the case of Hong Kong, where it lost its stand­ing when it agreed to re­turn the city to Chi­nese con­trol in 1997.

The US, too, would be wise to stop re­sist­ing the fact that the world is chang­ing. The US Congress has yet to rat­ify a 2010 agree­ment pro­vid­ing China and other large emerg­ing economies greater vot­ing power in the World Bank and the In­ter­na­tional Mon­e­tary Fund. In the mean­time, the agree­ment has be­come ob­so­lete; China’s econ­omy has nearly dou­bled in size since the deal was struck.

Amer­ica’s re­luc­tance – and that of France, Ger­many, and Italy – to give the emerg­ing pow­ers an ap­pro­pri­ate voice in the es­tab­lished in­ter­na­tional fi­nan­cial in­sti­tu­tions is coun­ter­pro­duc­tive. It drives the cre­ation of new par­al­lel in­sti­tu­tions such as the AIIB and the New Devel­op­ment Bank, founded in 2014 by the BRICS coun­tries (Brazil, Rus­sia, In­dia, China, and South Africa).

In the com­ing days, I will be vis­it­ing China in my role as Chair of the Bri­tish gov­ern­ment’s Re­view on An­timi­cro­bial Re­sis­tance, and also as a par­tic­i­pant in the Boao Fo­rum for Asia, an event sim­i­lar to the an­nual gath­er­ing of the World Eco­nomic Fo­rum in Davos. I hope to en­cour­age Chi­nese pol­i­cy­mak­ers to make the fight against an­timi­cro­bial re­sis­tance a pri­or­ity when China chairs the G-20 in 2016. And though I am not the Bri­tish am­bas­sador, I will be happy to state my be­lief that the UK gov­ern­ment was wise to join the AIIB, and that the US ad­min­is­tra­tion, in voic­ing its op­po­si­tion, was not.

China’s $10 tril­lion econ­omy is big­ger than those of France, Ger­many, and Italy com­bined. Even if its an­nual out­put growth slows to 7%, the coun­try will add some $700 bil­lion to global GDP this year. Ja­pan would have to grow at some­thing like 14% to have that type of im­pact on the world.

For any­one who wants to en­gage in global trade, it is thus vi­tal to iden­tify what China wants. In the case of the UK, this ob­vi­ously in­cludes fi­nance (as well as sports, mu­sic, fash­ion, and per­haps health care). The UK is sim­ply be­ing smart when it pro­motes its own in­ter­ests by co­op­er­at­ing with China.

One of the few pos­i­tive con­se­quences of the 2008 fi­nan­cial cri­sis was the el­e­va­tion of the G-20’s global role; in prin­ci­ple, it is a far more rep­re­sen­ta­tive fo­rum for in­ter­na­tional lead­er­ship than the G-7 ever was. There is, how­ever, a down­side to the G-20’s emer­gence: the large num­ber of par­tic­i­pants can make it dif­fi­cult to reach agree­ments and get things done.

A new G-7 needs to be cre­ated within the G-20, thereby pro­vid­ing China with a de­gree of in­flu­ence that re­flects its eco­nomic weight and re­quires it to as­sume a com­men­su­rate pro­por­tion of global re­spon­si­bil­ity. Space at the ta­ble for China could be ob­tained if the eu­ro­zone coun­tries, sig­nal­ing their com­mit­ment to the com­mon cur­rency, agreed to sur­ren­der their in­di­vid­ual seats in ex­change for one rep­re­sent­ing the en­tire mon­e­tary union. The US, too, would fi­nally have role.

Later this year, the IMF will re­cal­i­brate the weights in its unit of ac­count, the so-called Spe­cial Drawing Rights, which com­prises a bas­ket of cur­ren­cies that cur­rently in­cludes the US dollar, the euro, the Bri­tish pound, and the Ja­panese yen. Ac­cord­ing to al­most ev­ery eco­nomic and fi­nan­cial cri­te­rion, the SDR bas­ket should now in­clude China’s ren­minbi. The US would be wise to not op­pose such a move. Oth­er­wise, it would risk ac­cel­er­at­ing the decline of the es­tab­lished in­ter­na­tional fi­nan­cial in­sti­tu­tions.

Sim­i­larly, the US Congress should rat­ify the agreed changes to the gov­er­nance of the IMF and the World Bank. By found­ing the AIIB and the New Devel­op­ment Bank, China and other emerg­ing pow­ers have sig­naled that they will not wait for their voices to be bet­ter heard. And de­ci­sions like that of the UK – and France, Ger­many, and Italy – show that they are not alone.

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