Editor’s Monthly Column
Countering China’s AIIB Ambition
The competition over the China-led Asian Infrastructure Investment Bank (AIIB) ended with American defeat.
Since the end of WWII, the International Monetary Fund (IMF) led by the U.S. government, along with the World Bank, had maintained the world’s financial order. While the AIIB was created to challenge this system, the U.S. had not expected developed countries – such as England, Germany, France and Italy – would join the AIIB along many developing countries.
China’s 100 Year March Toward Hegemony
AIIB is not merely a challenge to the financial world order.
Recently, the book “The Hundred Year Marathon”, by Michael Pillsbury of the U.S. think tank The Hudson Institute, has become a sensation. In it, Pillsbury postulated that China is attempting to replace the American-led international order with a system under the dominance of the Communist Party of China, thus aiming to surpass America in both military and economic terms. This, he says, include achieving reserve currency status for the Chinese Yuan.
The 100 years refers to the year 2049, the 100 year anniversary of the establishment of Communist China. However, Chinese President Xi Jinping has increased his pace, seemingly aiming to realize this plan before his term of office ends in 2023.
His ideas behind “One Belt One Road”, announced around the same time as the AIIB, is also part of this plan. One might draw a parallel between his idea of bringing the Middle East and Europe under Chinese economic power, with that of Genghis Khan who invaded up to East Europe.
Saying No To American Standards
America’s defeat was largely self-inflicted. Former U.S. Treasury Secretary Larry Summers has been claiming in newspapers that rather than enforcing budget cuts, it is better to prioritize the encouragement of investment.
Since the 1980s, when the IMF provided aid and support to developing countries, America would enforce upon them the liberalization of trade and investments, together with control of budgets as the ‘global standard’. America did this to countries such as Thailand and South Korea during the 1997 Asian financial crisis, consequently delaying economic recovery. The same can be said for the current situation in Greece and their financial crisis.
Infrastructure development is the highest trending topic in Asia. Hundreds of billions of yen are required for roads, railways and dams, and developing countries are desperately seeking financial aid and support from developed countries. The World Bank, however, and its branch bank the Asia Development Bank demand budget reduction to countries they choose to support.
Effectively, the Asian and African countries that joined the AIIB are saying ‘no’ to the American global standard.
Truth behind the Dollar’s dominance
Will China’s ambition to achieve dominance really succeed?
Since the 16th century, superpowers have shifted from Spain, Holland, England, then to America. In all of these cases, once the country acquired wealth, the rise to dominance was a result of having a powerful navy that was able to protect overseas investments and citizens. The shift in power from England to America was largely due to the transfer of gold from England to America to pay for money lent during the two World Wars. When England had the gold, it backed up the pound, which was at the time, the reserve currency used for global commerce; gold assured its high value. Due to the debt, the pound not only lost its status as the reserve currency, but England also sold off many of their naval assets.
Currently, America holds the largest debt in the world, much like England in the post-WWII period. After the war, Japan became a major economic power and Japanese financial institutions began to buy American government bonds, effectively supporting America’s finances. If one were to observe how power shifted from England to America, one might naturally assume that Japan would become the next superpower, but this was not the case.
This is because, for England the debt was in dollars, and to repay the debt they needed to somehow gather large sums of dollars, whereas America’s current debt is also in dollar, meaning that as long as they print more of their own currency, they will be able to repay the debt without problems.
In 1971, then-U.S.President Richard Nixon took the U.S. dollar off of the gold standard. Ever since, the dollar has been backed up by the stability in U.S. government revenues. The dollar remains stable due to America’s status as a major immigrant country, which gathers many highly talented people from around the world to support its economic growth.
Obama looks for a Transfer of HegemonyAnother guarantee for the dollar is the U.S. military, the most powerful in the world. The U.S. military protects American businesspersons, investments and maritime lanes. It is because of this military that the dollar and U.S. government bonds are accepted around the world.
The dominance of the dollar is supported by the “American Dream”, which gathers talented people from around the world and allows them to succeed, and the notion that the U.S. military would protect the global economic activity.
This has been wavering since the Obama presidency. This is because President Obama himself is more interested in adjusting economic disparity than in producing successful people. He has also mentioned explicitly that America is not the world police. In conclusion, Obama wants the transfer of hegemony to occur.
A neo-colonialist Chinese economic system
Xi Jinping’s plan for a Chinese economic system will not bring a happy ending to mankind. Their rapid entry into Africa is designed to scavenge for resources. The terms and conditions of infrastructure investments are to employ Chinese workers and to use Chinese materials. This results in little local employment or industrial growth. If on top of this, they were to ignore local laws, and destroy the environment, the end result will look as if a plague of locust had struck. Some critics rightly claim that this is neo-colonialism.
Japan and America must now cooperate to prevent Chinese hegemony. What’s needed now is a sense of mission and resolve to take responsibility for the world’s economic prosperity and security.
Japanese finances and the “Sontoku Ninomiya method”
With this in mind, japan must now take the following 4 steps:
This style was also taken by the Meiji-era banker Zenjiro Yasuda. The fact that they were able to help establish industries in Korea and Taiwan, and modernize their rural community was because they were taught the values of hard work, improvisation, and teamwork. In the aftermath of WWII, although the banks had nothing take in the form of collateral, they would look at the person’s character to decide whether to loan them money.
By spreading this financial philosophy throughout Asia and Africa, the 1.6 quadrillion yen of private Japanese financial assets can be made to use.
2: Import goods from developing countries. The industries of developing countries can only grow when developed countries buy their product. Like the TPP, actively fostering free trade is the responsibility of developed nations.
3: Like the IMF, Japan should fill the role of the “lender of last resort”. . This would mean reviving the Asia Monetary Fund, which Japan proposed during the Asian financial crisis only to be rejected by America. Japan should work together with America in its management and operation.
4: Japan should develop its own aircraft carriers, nuclear-powered submarines, and Marine Corps to work together with the U.S. It would be natural for a creditor nation that lends money throughout the world to have a powerful military. There is also the responsibility associated with protecting sea-lanes.
Taking responsibility for the world will make the Yen a reserve currency
These choices and actions will increase the number of transactions that are settled with the Yen. Currently, the settlements amount to a mere 3% overall global trade. At the same time, nations and corporations will increasingly decide to hold onto yen-back financial assets and Japanese government bonds.
If 30% of foreign currency reserves for international settlements become based on the yen, and as the yen increasingly becomes a source of funding for Asia and Africa, a time will come when the yen can be printed endlessly, much like the dollar, .
This will not be brought about by the American global standard, or neo-colonialism; it will be brought about through the ideals of Sontouku Ninomiya and the sense of responsibility for the prosperity of the world.
This will become the starting point to counter China’s AIIB ambitions.
The Liberty Editor-in-Chief Jiro Ayaori