China: Catching Up with the US in the Financial Olympics

China seems to have won a battle in the financial war it is waging with the United States. Moreover, it did it with the help of America’s allies.

The Asian Infrastructure Investment Bank (AIIB) has become a new weapon in the Chinese leadership’s favorite policy of soft power. Its client numbers are growing daily, demonstrating the rapid growth of the Celestial Kingdom’s prestige around the globe. With the help of the AIIB, Beijing has delivered a powerful blow to Washington’s influence worldwide, particularly among its allies.

Washington isn’t hiding its completely justified fears that the AIIB, founded by China, will become a tool of Chinese foreign policy. Naturally, the White House is doing everything in its power to hinder Beijing from strengthening its position in the Asian financial markets and spreading its influence into financial spheres on other continents. However, this time, Washington, used to relying on loyal allies in all its projects, has suffered a defeat. Despite pressure from America’s closest allies, neither the Europeans nor the Asians fell in line with American policy. They shrugged off all U.S. attempts to sway them and decided to become founders of the AIIB. Moreover, we’re talking about countries the White House considers “its own,” and upon whom it’s used to relying. Germany, France and Italy, as well as nations close to the United States, like Australia, New Zealand and Canada, all expressed their desire to join the AIIB. Even London betrayed its “big brother.” The country conducts its own policy so rarely that, any such case, especially when it contravenes U.S. policy, immediately becomes sensational.

The fact that Japan might become a member of the AIIB speaks to China’s total victory. This is despite the fact that the idea of founding the AIIB is based on a fight with Japan and the USA. Together, Japan and America dominate the Asian Development Bank (ADB); the AIIB will become its chief rival. Over time, the AIIB will be quite capable of competing with the International Monetary Fund and the World Bank (both dominated by the U.S. and Western nations). This is especially true when you consider the rate at which its membership is growing.

Of course, developing countries show more interest in the AIIB. After the AIIB begins functioning, America’s authority in the developing world will weaken further.

Beijing lured America’s European allies into the AIIB not only with tens of billions of dollars, but also by renouncing its right to veto, which belongs to China as founder of the bank.

The growth in the AIIB’s attractiveness was also facilitated by the White House’s inability to convince Congress to allocate more funds to finance the IMF.

Negotiations on the bank’s management and structure remain ongoing. The next round of consultations will occur in Kazakhstan at the end of March. According to Beijing, the Memorandum of Association will be ready by the end of June, and the AIIB should be functional by the end of the year. Most likely, voting rights will be distributed as follows: Seventy-five percent will belong to the 27 Asian member countries, distributed according to gross domestic product, and the remaining 25 percent will go to non-Asian members.

If this or a similar voting-right distribution plan is fixed in the final document of the Memorandum of Association – and this is highly likely – then China will play a role in the AIIB similar to America’s role in the IMF.

President Xi Jinping suggested founding the AIIB at the end of 2013 for financing infrastructure projects in Asia due to the inability of the IMF, World Bank and Asian Development Bank to provide for all projects. Economists estimate that such projects currently require around $750 billion annually, whereas the ADB, for example, invested only $22 billion in infrastructure projects in Asia last year, according to its chief economist Shang-Jin Wei.

Jin Liqun is the current president of the AIIB. He drew experienced financiers to the founding of the AIIB, including some from Washington, who had previously worked for the World Bank and IMF. For example, one of Jin’s first invitations to work at the AIIB was extended to Natalie Lichtenstein, a former lawyer for the World Bank.

Currently, 35 countries are members of the AIIB, or want to become members. The final day to submit an application is March 31, so that number could easily increase. Beijing says that South Korea and other U.S. allies in the Asia-Pacific region may apply.

At first it was assumed that the AIIB’s founding capital would be $50 million, provided by Beijing. However, now, the PRC has reviewed its plans and decided to double this amount.

The White House, it seems, has already come to terms with this defeat. In order to mitigate its effects, it has suggested that the new bank work closely with the IMF and the World Bank, hoping to somehow impede Beijing from growing its influence in the global financial markets through these institutions.