Asia blues: AIIB and the New Silk Road
By Steen Jakobsen, Chief Economist and CIO, Saxo Bank A/S
Chinese president Xi Jinping announced his intention to extend Deng Xiaoping's 1979 "reform and opening up" initiative.
Xi's version is called "the new Silk Road" and the initiative has just been given top priority by the Chinese National People's Congress here in March. Now it is being implemented with both political capital and hard currency. In terms of the latter, a new Silk Road fund, Asian Infrastructure Bank (AIIB), has been launched and it has USD 40 billion with which to support infrastructure investment in countries involved in what Chinese more commonly call the "One Belt, One Road" plan.
It may not be a "Chinese Marshall plan" in the fullest sense, but the result should mirror the gigantic boost that the US gave Europe after World War II where (through access to credit and infrastructure investment) the US oversaw a quick European recovery that left Washington as its main financial and geopolitical beneficiary. The Marshall plan gave birth to the rise of the US' hegemonic power.
Xi's vision is to create a Silk Road in Eurasia - a link across Western China (which is underdeveloped and politically unstable) to Venezia in Italy. The plan is to give access to credit and investment, which should in turn build close ties between China and Eurasia. Unlike the Marshall plan, everyone can partake without - at least officially - any pre-conditions attached.
China has over USD 4 trillion of foreign reserves that are presently earning close to nothing in an economic environment characterised by weaker global growth, challenging social tension and capital flight. China is running out of export markets, but the New Silk Road will secure for Beijing not only commerce, but also influence in emerging economies throughout Asia and into Europe.
By doing so, it will also come to offer a real alternative to the US- and European-dominated International Monetary Fund and World Bank.
This is clearly a testament to the coming-of-age of not only China but also Asia. Their influence over the last few decades has mainly been as engines of growth and investment, but now they want to have a political say as well. Also, China wants (and is trying) to step into the void created by the financial crisis and by a Western political establishment that seems content with simply buying time and avoiding reforms at all costs.
The plan's rationale is to work towards China's wish to internationalise the yuan and to secure more geopolitical power. The global response from other major powers has been predictable: The US sees it as an escalation of China's geopolitical emergence and a direct response to its increased focus on Asia.
The Silk Road is under-reported in the Anglo-Saxon media, but more than 60 countries have now signed on to the Asian Infrastructure Investment Bank and the BRICs' new development plan. The US (of course), Japan (of course) and India (of course) remain on the sidelines, for now at least.
I think China and Asia are using this crisis to redefine their overall economic plan. They learned in the 1990s (Asian crisis) not to "trust" the western banks for credit. Now in the 2010s, they have learned that in order to continue growing their export markets, they need to invest by increasing the supply of credit and infrastructure.
This forms the basis of two conclusions:
One, China will continue to see significant growth after this slowdown, which will serve as a platform for anti-corruption efforts and aligning political interests in China before President Xi takes full power of the country in his final four years.
Two, the world now have two equal superpowers: the US and China. This is clearly a win-win for China and win-lose for the US (it will lose hegemonic power but gain access to higher world growth), and this makes for more volatile markets.