China’s AIIB Quietly Declares War on the IMF

Suppose you have a neighbor who lives across the street. His house isn’t quite as big as yours and he’s constantly building and adding on to it. You and he get along for the most part, but you know there’s always a bit of resentment smoldering that your home is bigger and you have more influence in the neighborhood. Now suppose one day your neighbor rolls up in a tank, and parks it in his driveway. Even though he’s careful not to point the gun at your house, it’s hard not to see this new development as a threat. Your neighbor insists it’s a flower planter.

That’s how the U.S. sees China’s new Asian Infrastructure Investment Bank, or AIIB. The Chinese insist the AIIB is nothing more than a vehicle for bringing energy, transportation and telecommunications projects to remote regions in Asia—even though Asia already had a development bank called the Asian Development Bank (ADB). But China didn’t like the ADB because it’s mostly run by Japan, an ally of the U.S. in the region. China also doesn’t like what it sees as the ADB’s political interference in places like Azerbaijan.

So next month the AIIB will officially be open for business, as the organization kicks off its first annual meeting in Beijing.

Troubled History with the IMF

The AIIB is also an outgrowth of China’s long and troubled history with the IMF. The real dustup came when China wanted its currency, the yuan, included as one of the world’s reserve currencies. At first the IMF said no and China reacted strongly. Since conflict really isn’t the IMF’s thing, eventually China won out. The IMF is also a frequent critic of Chinese economic policy and it’s probably frustrating to China to not be able to silence dissent on the global stage like it does at home.

China Wants More Say

Weary of what they saw as interference by the U.S., Japan and the IMF, the Chinese decided they would start their own investment bank, the AIIB. Predictably the U.S. pushed back against other nations joining the AIIB, including allies like Australia, South Korea and the United Kingdom—all of which was wasted effort. U.S. allies or no, those nations wanted a piece of the developing nation pie that the AIIB represents, thus we discovered our partners’ economic allegiance to the U.S. was fairly flimsy.  Australia, South Korea and the U.K. all applied to join the AIIB; even Canada quietly filled out an application.

In truth the exodus to the AIIB was also likely due to an undercurrent of resentment that the IMF and ADB were pushing more and more regulations and funding projects that had nothing to do with infrastructure development. Like any big institution, over the years the IMF experienced mission creep and did in some ways become a tool of U.S. foreign policy. As good an argument as any to throw in with the Chinese…

Extending Its Influence

The AIIB is simply the next move for China in extending its global economic power. Interestingly, the first steps China took towards that goal involved escalating its influence over the worldwide gold market.  First it dove for a chair in the newly-revamped London gold fix.  At the same time it was setting up its new Shanghai Gold Exchange.  This April, the Chinese began publishing a benchmark gold price denominated in the yuan.

After gaining greater influence over the price of gold, China’s next move was to provide an alternative to the heavy-handed IMF. It’s interesting that currently China appears to be more concerned with extending its reach among Asian nations, rather than trying to influence western nations—and it’s working. Russia, which has a history of conflict with China, was one of the first nations in line for AIIB cash.

You have to give the Chinese credit for being smart about playing the long game for economic influence.