The AIIB and China’s challenge to the global financial architecture


The emergence of a Chinese controlled Asian Infrastructure Bank and a New Development Bank backed by the BRICS countries along with the rapid rise of the China Development Bank and the Export and Import Bank of China have raised the question of whether China can become the primary creditor to emerging economies, overturning the US led hegemony of the IMF and World Bank. These Washington based institutions have acted as lenders to the developing world for 70 years dominating the global financial architecture in conjunction with the US Federal Reserve which in effect acts as a central bank to the world, but sets rates for the benefit of the US economy.

For years developing countries have complained about the power of the dollar and the actions and governance of the Bretton Woods institutions which it is felt are run for the benefit of developed European economies and the US. The financial crisis and the emergence of China as an economic power has opened an opportunity for change and a shift in power, but the new multilateral institutions are for now untested and while Chinese banks are powerful, but are relatively new on the world stage. The questions on policy makers lip’s are whether these initiatives will overturn the old order in China’s favour; create a competitive market with opposing models for development finance or will Europe and the US remain in the driving seat as China is unable or unwilling to hold together a collation of emerging market nations.

One of the aims of the NDA is to provide monetary stability in the same way as the IMF, providing funds to those facing collapsing currencies and economies, but quite simply it does not have the firepower of the IMF, which has reserves of a trillion US dollars compared to the proposed Contingency Reserve Account CRA of the NDA which has a US $100 million, an amount not be sniffed at, but unlikely to help anything beyond a small frontier economy, of course the fund is denominated in US dollars no BRICS currency is hard underlining the dollars continuing dominance.

The BRICS would counter that this is just the start and the fund can grow, which is true but it will have to be tested first and the effectiveness of the NDA proved before firm conclusions can be met.

On project and infrastructure finance the Chinese and their emerging economies are on firmer ground, already the China Development Bank is outgunning the World Bank in Latin America and Africa, albeit with often a focus on very different countries. Now the emergence of the AIIB and the NDA as Chinese dominated institutions will help cement the country as creditor of choice for the developing world. However the truth is that financial flows to emerging markets are now huge and flow primarily from the private sector and no one institution can truly dominate a diverse set of economies across the globe as the Bretton Woods institutions has in the past. However the dominance of the US dollar remains a powerful influence across the globe as so many countries denominate their lending in dollars, just the prospect of an interest rate rise in the US can cause tremors from India to Nigeria to Thailand.

The next few years will see the start of the Chinese/BRICS led financial institutions and it will become clearer whether they can sustain a challenge to the IMF and World Bank. There is a danger that developing countries will split into camps, those favouring Chinese led institutions and those preferring the western models and this will encourage and accelerate division between US and Chinese allied states. The hope remains that government led institutions will work together to help meet the acute financial needs of the developing world.

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