Home Finance International Institutions Challenged by Trump, While China Creates its New World Bank

International Institutions Challenged by Trump, While China Creates its New World Bank

by internationaldirector

Written By: Mike Ross – Corporate Finance


Too much power in developed countries’ hands? 

One key advantage of developed economies lies in voting power and representation. They have either a right of veto or the possibility of a minority blockage within the Bretton Woods Agreement institutions—the International Monetary Fund and the World Bank. Those rights have allowed developed countries to influence the rules and practices of the International Monetary Fund and the World Bank through the decades. Those institutions were supposed to help ensure the stability of the international economy. However, since 2008 the capacity of Western economies and their institutions to maintain the global economic equilibrium has been seriously challenged.

The 2008 financial crisis revealed, indeed, excessive risk-taking and lax regulation in developed economies, leading to the near-collapse of the financial system and pushing the world into a recession lasting several years. This crisis and its consequences have contributed to the emergence of movements seeking to reshape long-established cross-border trade relations. The risks of fragmentation and the proliferation of bilateral agreements are now high. But if a free trade agreement/exchange is emerging between Europe and North America, China has decided to challenge the Bretton Woods organization by creating a new world bank: the Asian Infrastructure Investment Bank (AIIB).

China escapes the Western world.

Despite opposition from the United States, the Asian Infrastructure Investment Bank was created in March 2015 with 50 founding member countries—the United States having failed to dissuade some of its allies, such as Australia, South Korea and the United Kingdom, from joining. Many European countries have joined this new organisation (among them the United Kingdom, the Netherlands, France and Germany). China has more than 25 percent of the voting rights, thus benefiting from a type of veto power. The initial capital of $100 billion will probably be increased in following years. In its first year of operation, the AIIB funded nine projects totalling $1.73 billion in countries such as Bangladesh, Indonesia and Tajikistan.

“By creating AIIB, China wanted to put pressure on existing institutions and propose an alternative solution,” explains Sébastien Jean, director of CEPII, the French research centre in international economics.

Among the investments Beijing is promoting is the construction of the new Silk Road in Central Asia, calling the project One Belt, One Road (OBOR). Originally thought to promote regional integration in Asia, this institution is now strong in 57 member states, including many European countries, Russia, Turkey, Pakistan, Qatar and Central Asian countries. New members are considered for admission only once a year. Twenty more candidates could enter the AIIB after the next board meeting in June 2017. OBOR is part of the global internationalization policy of China, with the Chinese government planning long in advance what resources will be needed for its development. It hopes OBOR will bring, among other investments, the capacity to solve its dependency on oil distribution.

China plans to invest nearly $4 trillion to build infrastructure—roads, rails, ports, telecommunications—to create an area covering 65 countries in Asia and Europe representing 55 percent of the world’s gross domestic product and 70 percent of the world’s population (4.4 billion). The investments and construction are planned to take place over 30 years.

China is also reinforcing its trade capacities; the acquisition in 2016 of the Piraeus Port of Athens by the Chinese company COSCO (China Ocean Shipping Group Company) will bring a Mediterranean hub for Chinese containers. In 2017, the bank will focus on improving connectivity throughout Asia by supporting member countries to meet their environmental and development goals, prioritizing cross-border projects.

Meanwhile, the administration of US President Donald Trump plans to build a wall at the US border with Mexico, leading potentially to isolation. Mr Trump is also heavily challenging the World Trade Organization, accusing it of maintaining unfavourable taxes for the United States, and he has promised to tighten tariffs on Chinese imports drastically.

This will not divert China from its goal. 

Whatever Mr Trump’s plans are, China is ready to cooperate and sign important agreements with already existing international organisations. Beginning February 2017, the Asian Infrastructure Investment Bank and International Finance Corporation, a member of the World Bank Group, have signed an International Swaps and Derivatives Association (ISDA) Master Agreement to enhance their capacity to make investments in emerging-markets projects, especially in Asia’s infrastructure sector. Those two institutions will be able to hedge with each other the interest-rate and currency risks associated with investments. “This agreement facilitates AIIB’s ability to support our clients’ projects and help promote local currency bond issuance,” said Søren Elbech, treasurer of AIIB.


Leave a Comment