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Hiroshi Yuasa

【#256】Don’t Tolerate China’s Control on International Finance

Hiroshi Yuasa / 2014.07.24 (Thu)

July 22, 2014

     Five major emerging countries have launched an initiative to counter the Bretton Woods system representing the postwar international financial order. Driving the initiative has been China that pursues the dream of developing into a Chinese empire. The five – Brazil, Russia, India, China and South Africa, called BRICS – have decided to create a “New Development Bank” to support infrastructure construction in developing countries. By writing and directing a scenario to lead the initiative, China could take advantage of financial aid through the New Development Bank to expand its influence.

New development bank to counter existing order
     The postwar international monetary and financial framework was launched as 44 Allied nations in World War II signed an agreement in Bretton Woods, New Hampshire, in 1944. The Allied nations then decided to promote postwar reconstruction through the World Bank and the International Monetary Fund. The Bretton Woods system allowed the United States to take advantage of global confidence in the dollar as the key currency to lead Pax Americana. Now, China is attempting to take advantage of its enhanced economic and military power to control the international finance system.
     The international monetary and financial order led by the United States, Europe and Japan has checked political corruptions and democratic conditions in loan-borrowing countries and strictly instructed them to implement structural reform. At a time when developing countries were growing discontent with such approach under the existing order, the five emerging powers positioned the existing World Bank as an ancient regime and signed the agreement to create the New Development Bank competing with the World Bank. Indicating China’s determination behind the initiative is an illustration depicting burning dollar bills in an article on the People’s Daily, the organ of the Chinese Communist Party. The Voice of Russia also declared the initiative as countering the United States’ control on international finance.
     China has reportedly tried to host the New Development Bank, own a large stake in the bank and obtain the bank’s top post, while India has disputed the Chinese attempt to the end. Finally, the five countries agreed to base the bank in Shanghai, appoint an Indian as its head, and equally invest $10 billion in it to support developing countries’ infrastructure construction. China may be confident that it can get the top post by accumulating capital increases.

Be alert to China’s soft power
     In Asia, China is seeking to create an Asian infrastructure bank to counter the existing Asian Development Bank. The ADB is based in Manila, the capital of the Philippines that has a territorial dispute with China over the Spratly Islands in the South China Sea, and its top post has been occupied by Japan that effectively controls the Senkaku Islands in the East China Sea to which China has a territorial claim. Instead of taking over the top ADB post, China is bracing for creating the new Asian infrastructure bank and becoming the largest investor in it. China is said to have called on around 20 countries mostly in Asia and the Middle East, excluding Japan, to participate in the planned bank.
     Both the New Development Bank and the Asian infrastructure bank may refrain from intervening in domestic affairs of loan-borrowing countries or requiring them to respect human rights. Rather, these banks may give priority to loan-borrowing countries’ subordination to China and provide them with funds discretionarily for the purpose of winning their support for China. These banks could become China’s soft power that could be far more powerful than its massive naval power. What Japan, the United States and Europe should do is cooperate with India within the two banks and to make the Bretton Woods system more attractive.

Hiroshi Yuasa is Columnist for the Sankei Shimbun and Planning Committee Member at the Japan Institute for National Fundamentals.