ONE BANK HAS TORN THE WORLD IN TWO


By Kristopher Klein
Staff Writer 

There is a new institution on the financial landscape. It includes five G7 member states and 26 regional member states and carries an endowment just under $100 billion. But there is one big issue that’s causing a stir—the United States refuses to participate even as its closest allies rush to join.

The rise of the China-backed Asia Infrastructure Investment Bank (AIIB) has fed the ‘American decline’ narrative popular among many news outlets. In the past weeks several notable American allies have agreed to join the bank. On March 12, the United Kingdom became the first US ally to announce that it would join the AIIB after originally deciding against membership. Several European countries, including Germany, France and Italy quickly followed. Two weeks later on March 26, South Korea announced that it too would join the AIIB. After three days, Australia and the Netherlands completed the humiliation. In light of these defections, the media remains transfixed to the unyielding opposition of the United States and its increasingly ‘isolated’ stance. When China first unveiled the AIIB, the United States used diplomatic pressure to prevent its allies from signing on to the new bank. However, those efforts failed in recent weeks after China agreed to scrap its veto power over the bank’s decision-making process in order to attract American allies. Despite the criticism directed towards the Obama administration, the strategy employed by the United States is not one of isolationism, nor has the United States been isolated. The United States is refusing to join the AIIB until China has solidified a system of decision-making that guarantees its actions are apolitical and responsible toward sustainable development.

The United States expressed great dissatisfaction when the United Kingdom joined the bank as its first Western member. According to a senior Obama administration official the United States remains “wary about a trend of constant accommodation of China, which is not the best way to engage a rising power.” The United States is concerned, and reasonably so, that the new bank will serve as a tool for the People’s Republic of China to challenge the established international system and the norms that exist within it.

America Is Not Being Isolated, It’s Being Wise.

China has a history of making loans to regimes that refuse to make the reforms necessary to secure a loan from traditional institutions such as the International Monetary Fund (IMF), World Bank or Asian Development Bank. In the decade from 1998 to 2008, during the worst of the genocide in Darfur, China gave the Sudanese government $1 billion in low or no interest ‘concessional’ loans. In 2004 shortly after Iran announced it would resume uranium enrichment, China agreed to invest $70 billion to develop Iran’s oil fields and to buy the oil they would produce over the next 30 years. Lending habits that place China on the side of abusive and reform-averse regimes have fueled concerns that the AIIB will not uphold existing international requirements to secure loans. In a statement to the UK’s Guardian newspaper, the National Security Council expressed concerns “about whether the AIIB will meet these high standards, particularly related to governance, and environmental and social safeguards.”

In spite of withering criticism, the United State’s decision to withhold support for the AIIB has its merits. It would be unwise for the United States to back an institution that allows China to wield outsized influence over decision-making, particularly when that decision-making could lead to politically, economically and environmentally irresponsible investments. The agreement by Chinese officials to forgo veto power was a step in the right direction. However, more concessions can yet be gained.

Allegations of a hidden Chinese agenda

Concerns that the AIIB will be used to further China’s political agenda were raised last week when China demanded that Taiwan only be admitted to the bank’s membership if it applied with an ‘appropriate’ name. Taiwan, referred to by China as “Taipei, China” and officially known as the Republic of China (ROC), has been in a near constant state of conflict with the mainland since 1949, when defeated Nationalist Chinese forces led by Chiang Kai-shek fled to the island following the Communist Party’s rise to power and the establishment of the People’s Republic of China (PRC). The use of Taiwan’s AIIB membership as a chance to bring up the issue of its sovereignty is not only incredibly dark, but indicative of China’s intentions to use its influence in the AIIB to pursue its own political agendas.

Furthermore, Beijing’s maneuvering of its own bank’s role as an alternative to the IMF, World Bank, and the ADB have led to concerns that contracts funded by AIIB investments might favor firms that support Chinese political positions. China must provide credible assurances, that it will not use the AIIB as a tool of its own power before the institution can be considered politically kosher around the globe.

Suggestions have been made to pressure China to address concerns that its new bank will be used as a political tool, but thus far, China has not acted to assuage such concerns. South Korea recommended moving the bank’s headquarters to Seoul in order to alleviate concerns over China’s political intentions. However, China insisted that the headquarters remain in Beijing. South Korea did not attend the signing of the original document laying out plans for the creation of the bank.

All the scrutiny focused on the rise of the AIIB places substantial pressure on China to facilitate a system that dispels these concerns. It is imperative for the survival of the AIIB that China establishes fair guidelines for the bank. If voting structure and day-to-day operations of the bank are seen as being skewed or unfair, all of the progress China has made toward establishing its own alternative institution will be done in vain.

What The United States Should Do

If the United States truly wants the AIIB to adopt standards used by existing international institutions, it must first show China that it is willing to be fair with rules and procedures. In 2010 the IMF proposed changes to its voting structure that would increase the voting power of developing countries by 2.6 percent and redistribute voting power among developing and developed countries from over-represented countries to under-represented countries. Among the countries to gain the most voting share from these reforms are China and India. Though this set of IMF reforms has received backing from the Obama administration, it has not been implemented due to resistance from the U.S. Congress, which must ratify any change in the US’s voting quota. If Congress were to ratify IMF reforms, it could turn the current narrative to focus on the structure of the AIIB and place additional pressure on China to endorse both equitable voting power and stricter standards for lending in the new bank.

The focus of the United States should not be on the maintenance of its own voting power alone, it should be on the improvement of lending standards that it helped create to bring greater efficiency and reform progress to the international financial system. In order for the current regime of international standards to survive, the United States must show a willingness to allow its role within that structure to evolve. The perfect way of sending that message would be to ratify IMF reforms, while continuing to pressure China into accepting existing norms. Until the AIIB can prove itself to be impartial and responsible, the United States should limit its interactions with the institution.

CHINA IN 2014: YEAR IN REVIEW

China Focus Year in Review

PROSPECT Journal is collaborating with China Focus, a blog focusing China’s role in the world and U.S.-China relations. As part of this collaboration, PROSPECT will be intermittently publishing articles by the China Focus bloggers. Our journal is excited to bring a wider range of expert analysis of Chinese politics, economics and culture to our readers.

By Jack Zhang
Contributing Writer

The Chinese Dream and its Discontents

The contours of Xi Jinping’s ‘Chinese Dream’ began to crystalize in 2014. Both at home and abroad, he has pursued policies for the ‘great rejuvenation of the Chinese nation’ with single-minded determination. Orville Schell unpacked the ‘Chinese Dream’ into its major components at his February book talk for Wealth and Power: China’s Long March to the 21st Century. The realization of the ‘Chinese Dream’ is the pursuit of wealth and power to regain its preeminence in world affairs after the Century of Humiliation (1839-1949).

Evan Osnos, New Yorker staff writer and winner of the 2014 National Book Award for Non-Fiction (China Focus interview with Mr. Osnos will be up in the new year), saw two components of the ‘Chinese Dream’ in his December book talk for Age of Ambition: Chasing Fortune, Truth, and Faith in the New China (watch here): one international, and the other individual. The international component was the one on display as Xi Jinping and the 5th generation of leaders took power at the 18th Party Congress; it is the dream of national power and global ambition. The other component is the individual dreams and aspirations of 1.4 billion Chinese; it is the pursuit of fortune, truth, and faith. At times these two components exist in harmony, the individual pursuit of fortune propelled China’s economic miracle, but they can also conflict as Osnos illustrates in his book with profiles of Liu Xiaobo, Ai Weiwei, and Chen Guangchen. Osnos concludes his talk and his book with the insight that the reconciliation of the individual and national ambitions will determine the future of China.

Viewed through the Osnosian lens, 2014 was a clash between Xi’s dream of the great rejuvenation of the Chinese nation and its discontents. China overtook the United States as the world’s largest economy and achieved some landmark foreign policy victories. China’s pursuit of fortune resulted in the world’s largest ever IPO ($25 billion) as e-commerce giant Alibaba floated shares on the New York Stock Exchange and made its founder, Jack Ma, the richest man in China. Homegrown smartphone maker, Xiaomi, took the No. 1 position from Samsung in China’s domestic market and the company looks poised for global expansion as the third largest phone maker in the world. China also completed the South-North Water Transfer Project, one of the most ambitious engineering projects in world history, and began construction on a Nicaragua Canal to rival the Panama Canal.

But as we marked the 25th anniversary of the Tiananmen Square Incident, China is in the midst of what many consider the harshest crackdown on dissent since 1989. The Propaganda Department under Liu Yunshan has gone into overdrive and updated its approach to new social media. Writers and artists have been reminded that ‘the arts must serve the people and serve socialism’ and, in a throwback to the Cultural Revolution, artists will be sent to live in rural areas to “form a correct view of art.” All in all, the party demonstrated in 2014 that it is more willing and capable to interfere with the pursuit of truth in China than ever before.

2014 also witnessed the eruption of the largest mass demonstrations in Hong Kong since it returned to Chinese control in 1997. At the Spotlight on Hong Kong event in October, Professors Susan Shirk, Richard Madsen, and Victor Shih led a discussion on the meaning of Occupy Central and the implications for HKSAR-Mainland relations (listen here). Professor Jeffrey Wasserstrom observed in a recent op-ed, “Beijing’s handling of the Hong Kong situation was the latest illustration of the party’s fear that its grip on the national rejuvenation package is weaker than outsiders sometimes imagine.” Elsewhere in China, terrorist attacks on train stations Urumqi and Kunming were connected to Islamic terrorists from Xinjiang and were dubbed China’s 9/11 by the media. These acts of defiance, one peaceful and the other violent, both represent discordant notes in the pursuit of faith in China to the party’s central melody. Though effectively muffled by Beijing in 2014, the tension between these individual voices seeking truth and faith and the national pursuit of wealth and power will continue to clash in 2015 and this dialectic will give shape to the Chinese Dream.

End of the Economic Miracle?

Inaugural China Focus Debate Poster

China overtook the US as the world’s largest economy in 2014 (based on IMF purchasing power parity data). Yet the Chinese media response was muted and speculation abounded in the foreign press about the end of the Chinese economic miracle. The most read article on this blog in 2014 featured a debate between Victor Shih and Barry Naughton on this very topic (watch it here). Professors Shih and Naughton each led a team of UCSD students to debate the motion: “The house believes that the Chinese economy will collapse in five years.” Both sides agreed that the Chinese economy faces some serious challenges (housing bubble, mounting debt, weak exports, demographic decline) and the debate hinged the question of whether efforts to reform to the economy can overcome some of these challenges before the system unravels. Professor Shih and the proposition team (yes to the motion) won the debate by a large margin.

As Professor Susan Shirk remarked, “The debate that we’re having here on stage is really just a continuation of the debate that Barry and Victor have been having with each other in print and in the halls of the IR/PS buildings.” Both Professors Shih and Naughton participated in a panel earlier in the year on economic reform with one of China’s preeminent economists, Professor Wu Jinglian of the Chinese Academy of Social Sciences, and the Dean of the School of International Relations and Public Administration at Fudan University, Professor Chen Zhimin (watch it here).

Reflecting on the Third Plenum of the 18th CCP Congress in November 2013, which presented a wide-ranging blueprint for reform, Professor Naughton expressed cautious optimism about the reform. Professor Wu interpreted the plenum as a conclusive end to a decade-long debate about the reform in China: the market (rather than the state) will now have a decisive role in resource allocation. After being pulled in two different directions by the expansion of market forces on the one hand and the growth of state power and crony capitalism on the other, the plenum charts a course towards an integrated, open, competitive and rule-based market economy. Though more hopeful now than he has been in over a decade, Professor Wu is not as optimistic as Professor Naughton. He sees major obstacles from entrenched interests. Professor Shih echoed Professor Wu’s concerns. He faults the plenum for making too many vague promises, containing internal contradictions, and being disappointing on political reform.

Indeed, as 2014 drew to an end, after the rise and collapse of the super-bull market, the debate remains alive and well. The 2014 record for reform is decidedly mixed: a new Shanghai-Hong Kong Stock Exchange was established but the Shanghai Free Trade Zone disappoints, Hukou Reform was announced but its scope is very limited, the NDRC streamlined the approval process for international investors but foreign firms continue to be singled out for regulatory scrutiny, and the pace of SOE reform remains slow. Meanwhile, GDP growth slowed to in 7.3 percent in Q3 and ‘new normal’ has become a catchword among policymakers and in the press in China. A major unanswered question is whether the ongoing anti-corruption efforts will prepare the ground for deeper economic reforms. In any case, the trajectory of the Chinese economy will continue to be one of the biggest stories of 2015.

Foreign Policy in Big Strokes

Xi Jinping and Shinzo Abe shake hands at November 2014 APEC Summit.

Chinese foreign minister Wang Yi declared 2014 a ‘bumper harvest for China’s diplomacy’. Professor Xie Tao has called 2014 ‘a year of big strokes’ for Chinese foreign policy. Xi Jinping visited 18 countries and participated in a series of high profile summits, including a successful APEC where China and the US reached a landmark U.S.-China Climate Agreement and a number of other constructive accords. China pledged $10 billion for the BRICS Development Bank, $41 billion to the BRICS Emergency Fund, $50 billion to the Asian Infrastructure Investment Bank, and $40 billion to establish the Silk Road Fund. These investments appear to be part of a grand strategy of ‘One Belt, One Road (or the New Silk Road),’ which seeks to integrate economies and promote trade across the Eurasian landmass.

Indeed, as geopolitical crises roiled Europe and the United States in 2014 with the rise of the Islamic State in Iraq and Russia’s invasion of Crimea, foreign policy with Chinese characteristics seems worthy of admiration. But it is still too early to tell whether the seeds China sowed in 2014 will bear fruit. As the discussions at the China-Japan Relations and the Role of the US Conference in March and the Northeast Asia Cooperation Dialogue in September reveal, disputes in the East China Sea and South China Sea remain major challenges for China’s foreign policy. Chinese grand strategy seems to be guided by a belief that greater levels of economic integration will enhance Chinese political influence even though the opposite trend appears to be playing out in the region. Despite unprecedented levels of trade and investment between China and Japan (as well as the Philippines and Vietnam), political relations are deteriorating. Closer to home, Beijing’s long-standing policy of ‘one country, two systems,’ which appeals to the business elite, seems to have derailed in Hong Kong and distrusted by Taiwan in the face of populist opposition. With the landslide victory of nationalist Prime Minister Shinzo Abe in Japan this December and the pro-independence Democratic Progressive Party poised to regain power in Taiwan in 2016, democratic politics will continue to complicate China’s foreign policy initiatives in the region. Ambassador Clark Randt spoke on the challenges of the United State’s role in Asia’s rebalance at the Ellsworth Memorial Lecture in March.

Tigers and Flies

Xi Jinping’s anti-corruption campaign continued to grab headlines in 2014 as disciplinary probes reached the highest ranks of the party: Zhou Yongkang (former security czar and politburo standing committee member), Ling Jihua (former aide to President Hu Jintao), Xu Caihou (former vice chairman of the Central Military Commission). “Fighting Tigers (打老虎),” a euphemism for investigating high-level officials for anti-corruption, became one of the most popular search terms on Baidu in 2014. Scores of flies, low level officials caught up in the campaign, have been disciplined as well. 59 officials with vice-ministerial rank or above and 74 executives at state-owned enterprises as well as some 180,000 lower ranking cadres have been punished for ‘breaches of discipline’ by the Central Commission for Discipline Inspection (CCDI) in 2014. This excellent special report from SCMP tracks the relentless campaign across time and space. China’s anti-corruption czar, Wang Qishan vowed at a CCDI news conference that the crackdown would never end.

Amidst the continuing crackdown, the party has trumpeted a new slogan “socialist rule of law with Chinese characteristics” and made this the subject of the 4th plenum of the 18th Party Congress held in October. It has even decreed December 4 as Constitution Day. China’s leaders recognize the need to rule of law to constrain the abuses local officials can heap on their constituents. The Politics of Stability Maintenance Conference in August examined many of the challenges to social stability in China and the government’s responses. But as the consensus among the participants is that the party today stands above the law, and rule by law not rule of law prevails in China today. Xi’s campaign against graft serves as a poignant reminder of this fact; the CCDI’s brand of justice is arbitrary, non-transparent, and politically motivated. Rather than curbing arbitrary power of party officials in favor of a more transparent judiciary, rule of law with Chinese characteristics seems to be doing the opposite.

Cover photo from Flickr.

Photo from APEC summit from Creative Commons.

ON CLIMATE, THE UNITED STATES AND CHINA ACT INTERNATIONALLY BUT THINK DOMESTICALLY

By Kristopher Klein
Staff Writer

Last month President Obama and the President of the People’s Republic of China, Xi Jinping, jointly announced a plan for both countries to tackle greenhouse gas emissions. The deal, hailed by western media outlets as ‘historic,’ is comprised of some very specific and ambitious targets for reducing emissions. However, climate and political experts on both sides of the Pacific have raised concerns about the ability and intention of both countries’ leaders to make good on their lofty commitments.

Ambitious Goal Setting

Under the agreement, the United States, which was previously planning to reduce carbon emissions by only 17 percent by the year 2025, would commit to reducing emissions to 26 percent below 2005 levels by 2025. China would commit to achieve a peak in its CO2 emissions by the year 2030.

The deal in its current form would drive the United States to double the pace of its current emissions reductions program in order to meet the treaty’s deadlines.

In order to achieve its stated aims, China proposes that by 2030 it will generate 20 percent of its total energy needs from zero-emissions sources. For this to happen, China must provide an additional 800 to 1000 gigawatts of zero-emission energy capacity by 2030. That is more energy than all of the China’s current coal-fired power plants combined.

Fair To Both Countries

Critics of Obama’s agreement with President Xi claim that the deal puts China under less pressure to reduce emissions, because China must only cap emissions, while the United States must reduce emissions in a shorter time period. However, the agreement is likely to take heavy political and economic lifting for both countries.

Though the United States is currently the second largest emitter of greenhouse gases after China, it has been an emitter for much longer than China. The United States began its industrialization in the 19th century and is responsible for around 26 percent of the current man-made greenhouse gases in the atmosphere. In comparison, China did not begin emitting significant amounts of greenhouse gases until economic growth picked up in the 1980s and is responsible for 11 percent of the atmosphere’s man-made greenhouse gases.

It seems only logical that China would take more time than the United States to reduce emissions. If China can cap its emissions by 2030, it will have done so just 25 years after the United States, a short timeframe relative to the course of both countries’ economic development.

Will Both Economies Be Able To Make Good On Their Promises?

President Obama will certainly face pushback on his emissions reduction goals, if not now then when he attempts to implement strategies designed to actually help the country reach these goals.

Even without political pushback, meeting the goals set in this agreement will require the use of tremendous government resources and the creation of market incentives. Meeting the goal of a 26 percent reduction of CO2 emissions will require an almost 75 percent decline in the use of coal-fired power plants by 2025, an incredibly demanding goal.

Chinese leaders will also face major obstacles in their attempt to meet the goals set out in this agreement. Xi Jinping, despite his influence as the President of the Republic, Chairman of the Central Military Commission and General Secretary of the Communist Party, will need the support of local bureaucrats in order to successfully implement programs that would help China reach these goals. However, local bureaucrats will be reluctant to implement policies when there is very little profit incentive.

Another barrier to implementing successful climate policies is the economy. The Chinese economy is slowing, and regulating the consumption of fossil fuels and the economic effects of such policies may prove too politically unpopular for the Communist Party to bear. A Tsinghua-MIT study shows that the use of a $38 per ton carbon tax could help China reach its reduction goals by 2030, which may hint as to what Chinese leaders may be planning.

However, if a carbon tax is the way Xi Jinping plans to achieve his stated aims, there should be some doubt about his ability to get the job done. A tax on carbon would most likely mean a rise in the price of energy for the Chinese market and higher prices across multiple industries that are energy intensive. The Chinese Communist Party and vested political interests may be unwilling to implement a tax that would squeeze the average Chinese household’s budget at a time when the Chinese economy is already slowing considerably.

In China, a slower economy means less legitimacy for the Communist Party. The idea that Chinese leaders would intentionally bind themselves to goals that could endanger internal stability seems farfetched. Chinese leaders have shown they are unwilling to compromise complete political control for the sake of any reform. They certainly would not start now for the sake of keeping the United States happy. The purpose of this agreement’s ambitions may lie not in the prospect of achieving the goals it sets, but in using the deal for political appearances and hoping for a residual effect.

Even Xi Jinping Needs Leverage

Given the general sense of malaise among Chinese bureaucrats when implementing environmental reforms, China’s president needs a significant amount of political force behind him. China has, for decades, run oil companies that are closely related to government politics and are even a part of the Communist Party’s bureaucracy. In order for Xi Jinping to push environmental reform and renewable energies, he will have to stick his nose right into the business of powerful Chinese politicians. To do this he will need international agreements, which he has much more control over than actual environmental policy initiatives, to leverage his party into putting more pressure on pro-oil industry executives.

Obama’s Motives In Using International Agreements

Obama now also has domestic incentives to achieve climate reform through international agreements rather than domestic legislation. Obama could have gone to Congress with programs designed to reduce carbon emissions. The EU, for example, has been reducing emissions unilaterally for decades. However, Obama has a unique opportunity, and little choice, given recent developments in domestic politics.

In November’s midterm elections, the Democratic Party lost control of the Senate and with it any agenda-setting power in Congress. This means that Congress is unlikely to soon take up any meaningful climate legislation of its own. Luckily the President has some tools, and among them is negotiating international agreements.

An article published in the Virginia Journal of International Law analyzes the President’s ability to use international agreements against a congressional majority. It suggests, “by providing the President with the exclusive power to negotiate the terms of the international agreement, the President has the power to determine which policy alternative will be matched against the status quo in a final vote.”

By drafting international treaties and announcing them to the media, the President is setting the Senate’s and the media’s agenda. The Senate will now need to have an up or down vote on the text of this emissions agreement with China, as Obama negotiated it. This means voting yes or no to specific policy initiatives on climate change, something Republicans were most likely trying to avoid. The media coverage this treaty has received also serves to set the public political agenda and focus public pressure around this issue, which might be helpful throughout the legislative process.

What Does This Mean For The Fate of This Agreement?

It seems likely that this agreement has been drafted and publicized less for the purpose of providing a meaningful path towards emissions reduction and more for leveraging international agreements for use in domestic politics. This treaty, should it be ratified, could be a very meaningful bit of symbolism and a useful tool in shifting political focus onto the issue of climate change. As for the specifics laid out in the agreement itself, I wouldn’t count on their timely realization.

Image by U.S. Embassy The Hague