Opinion

Making space for China

When the United Kingdom announced earlier this month that it had agreed to become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB), most of the headlines focused not on the news itself, but on the friction the decision had caused between the UK and the United States. The White House issued a statement urging the British […]

By: Date: March 17, 2015 Topic: Global Economics & Governance

When the United Kingdom announced earlier this month that it had agreed to become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB), most of the headlines focused not on the news itself, but on the friction the decision had caused between the UK and the United States.

The White House issued a statement urging the British government to “use its voice to push for adoption of high standards." And one senior US administration official was quoted accusing the UK of “constant accommodation of China, which is not the best way to engage a rising power." In fact, it is the US that is advocating the wrong approach.

In the UK, the diplomatic spat served as an occasion for the British press to air criticism from those who believe that the government should adopt a stronger stance on China. For example, they say that the government should have spoken out more forcefully in support of last year’s pro-democracy protests in Hong Kong, and that it should not have distanced itself from the Dalai Lama (as it seems to have done) during Prime Minister David Cameron’s visit to China in 2013.

The UK does need to stand up for itself, but there is no reason for it to become confrontational about internal Chinese matters

The UK does need to stand up for itself, but there is no reason for it to become confrontational about internal Chinese matters – especially in the case of Hong Kong, where it lost its standing when it agreed to return the city to Chinese control in 1997.

The US, too, would be wise to stop resisting the fact that the world is changing. The US Congress has yet to ratify a 2010 agreement providing China and other large emerging economies greater voting power in the World Bank and the International Monetary Fund. In the meantime, the agreement has become obsolete; China’s economy has nearly doubled in size since the deal was struck.

America’s reluctance – and that of France, Germany, and Italy – to give the emerging powers an appropriate voice in the established international financial institutions is counterproductive. It drives the creation of new parallel institutions such as the AIIB and the New Development Bank, founded in 2014 by the BRICS countries (Brazil, Russia, India, China, and South Africa).

In the coming days, I will be visiting China in my role as Chair of the British government’s Review on Antimicrobial Resistance, and also as a participant in the Boao Forum for Asia, an event similar to the annual gathering of the World Economic Forum in Davos. I hope to encourage Chinese policymakers to make the fight against antimicrobial resistance a priority when China chairs the G-20 in 2016. And though I am not the British ambassador, I will be happy to state my belief that the UK government was wise to join the AIIB, and that the US administration, in voicing its opposition, was not.

China’s $10 trillion economy is bigger than those of France, Germany, and Italy combined.

China’s $10 trillion economy is bigger than those of France, Germany, and Italy combined. Even if its annual output growth slows to 7%, the country will add some $700 billion to global GDP this year. Japan would have to grow at something like 14% to have that type of impact on the world.

For anyone who wants to engage in global trade, it is thus vital to identify what China wants. In the case of the UK, this obviously includes finance (as well as sports, music, fashion, and perhaps health care). The UK is simply being smart when it promotes its own interests by cooperating with China.

One of the few positive consequences of the 2008 financial crisis was the elevation of the G-20’s global role; in principle, it is a far more representative forum for international leadership than the G-7 ever was. There is, however, a downside to the G-20’s emergence: the large number of participants can make it difficult to reach agreements and get things done.

More on the same topic: The twenty-first century needs a better G20 and a new G7+

A new G-7 needs to be created within the G-20, thereby providing China with a degree of influence that reflects its economic weight and requires it to assume a commensurate proportion of global responsibility. Space at the table for China could be obtained if the eurozone countries, signaling their commitment to the common currency, agreed to surrender their individual seats in exchange for one representing the entire monetary union. The US, too, would finally have to accept China’s heightened global role.

Later this year, the IMF will recalibrate the weights in its unit of account, the so-called Special Drawing Rights, which comprises a basket of currencies that currently includes the US dollar, the euro, the British pound, and the Japanese yen. According to almost every economic and financial criterion, the SDR basket should now include China’s renminbi. The US would be wise to not oppose such a move. Otherwise, it would risk accelerating the decline of the established international financial institutions.

By founding the AIIB and the New Development Bank, China and other emerging powers have signaled that they will not wait for their voices to be better heard.

Similarly, the US Congress should ratify the agreed changes to the governance of the IMF and the World Bank. By founding the AIIB and the New Development Bank, China and other emerging powers have signaled that they will not wait for their voices to be better heard. And decisions like that of the UK – and France, Germany, and Italy – show that they are not alone.

This was reprinted with permission from Project Syndicate. To secure the rights to this commentary, please contact Project Syndicate here.

This was reprinted with permission from Project Syndicate. To secure the rights to this commentary, please contact Project Syndicate here.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Blog Post

Global income inequality is declining – largely thanks to China and India

Income inequality among citizens of 146 continues to fall, though at a somewhat reduced pace, according to the updated Bruegel dataset. Income convergence of China and India accounts for the bulk of the decline in global income inequality from 1988-2015.

By: Zsolt Darvas Topic: Global Economics & Governance Date: April 19, 2018
Read about event More on this topic

Upcoming Event

Apr
24
12:00

European development policy in a global context

What is the role of Europe in development finance and how effective is the current institutional structure? How can we leverage the private sector to support development objectives?

Speakers: Cecilia Akerman, Sir Suma Chakrabarti, Thierry Déau, Marjeta Jager and Jean Pisani-Ferry Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Podcast

Podcast

Director's Cut: EU risks US tariff pain in standing by the WTO

As global trade war continues to unfold, Bruegel director Guntram Wolff is joined for this Director's Cut of 'The Sound of Economics' podcast by Bernd Lange MEP, chair of the Committee on International Trade (INTA), to discuss Europe's options.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: April 18, 2018
Read article More on this topic More by this author

Opinion

US Tariffs Aim to Contain China’s Technological Rise

While tension increases with each of the imports listed under the new tariffs, it now seems clear that the US are trying to slow down China's technological advances. Though such a protectionist attitude represents an obstacle, China should consider it an opportunity to strengthen relations with its Asian neighbours and the EU.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 10, 2018
Read article More on this topic More by this author

Opinion

What Are the Targets in the US–China Trade War?

Following the US announcement of new, high tariffs on imports, China is answering the Trump administration by applying its own series of tariffs. In this article, the author identifies the list of products that each country will be targeting, going beyond purely trade issues as each attempts to weaken the other.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 10, 2018
Read about event More on this topic

Upcoming Event

May
25
08:30

Where is China’s financial system heading? Implications for Europe

An event on the Chinese Banking Sector.

Speakers: Alicia García-Herrero and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Opinion

How Should the EU Position Itself in a Global Trade War?

It is high time for the EU to work on more than just wishful thinking in response to the US challenge to global trade. With the first cracks appearing in the multilateral system, it will be difficult for the EU to maintain a middle course between the US and China.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: April 5, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: A global trade triumvirate?

In this week’s Director’s Cut of ‘The Sound of Economics’ podcast, Bruegel director Guntram Wolff hosts a discussion with Bruegel fellows Alicia García-Herrero and André Sapir on where Europe will position itself between the two major trading powers of China and the United States if relations continue to cool.

By: The Sound of Economics Topic: Global Economics & Governance Date: March 27, 2018
Read article More on this topic

External Publication

Capital Markets Union and the Fintech Opportunity

Fintech has the potential to change financial intermediation structures substantially. It could disrupt existing financial intermediation with new business models empowered by intelligent algorithms, big data, cloud computing and artificial intelligence.

By: Maria Demertzis, Silvia Merler and Guntram B. Wolff Topic: Finance & Financial Regulation Date: March 26, 2018
Read article More on this topic More by this author

Opinion

Will U.S. tax reform lure U.S. companies away from China?

What will be the results of the changes to the U.S. tax system in China? Will the new U.S. corporate tax rate cause Chinese firms to shift their operations to the U.S. to enjoy the new tax benefits? Read Alicia García-Herrero's opinion on President Donald Trump’s tax reform.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 26, 2018
Read article More on this topic More by this author

Opinion

Reading The Tea Leaves on China’s Constitutional Amendments

The recent amendments of the Chinese Constitution have stimulated much attention, focusing on the power consolidation of President Xi. Though the four key amendments do not mention direct economic reforms, indirect impact should be considered even if clear-cut conclusions are difficult to draw.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 12, 2018
Read article More on this topic

Opinion

China's “matryoshka” approach for debt-to-equity swaps could be good for banks, but bad for investors

The Chinese banking sector has enhanced its clean-up mechanism by introducing debt-to-equity swaps for the resolution of problem loans. While this allows banks to offload their stressed assets at a very low cost, it does not prevent banks’ exposure when we look closer at the so-called "state-owned funds" who are shareholders in the debt-to-equity swaps.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation Date: March 8, 2018
Load more posts