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China's Crisis Offensive - EastRussia |






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The Crisis of China

About the role of China as the engine of global institutional innovation, argues Erik Berglof, director of the Institute of International Relations at the LSE

The IMF has included the yuan in the list of reserve currencies, and China is actively involved in development projects around the world. The country is increasing its influence on the global economy and gaining experience for a qualitative leap.

The Crisis of China

Eric Berglof

Director of the Institute of International Relations at LSE
Crisis offensive

The Board of Directors of the European Bank for Reconstruction and Development (EBRD) approved the application of China to join the number of shareholders of the bank. Work on the application was conducted about 10 years. Membership in the EBRD is only one manifestation of China's rapidly growing role in international financial institutions. The question now is, will China become a motor in these institutions or vice versa?

The global financial crisis has shaken the international financial architecture, taking many institutions by surprise. For example, the International Monetary Fund seeks to seriously reduce its activity. Many of the institutions, such as the EBRD and the European Investment Bank, have demonstrated the ability to respond flexibly and as a result have received expanded powers and additional capital.

The crisis also undermined the legitimacy of the G-7, uniting the countries that became a source of problems, while simultaneously giving fresh strength to the G-20. Against these transformations, China has been able to expand its global influence, and it is determined to use it, despite the resistance of individual countries. For example, China plans to use its G20 presidency in 2016 to advance an ambitious agenda.

China is a member of many institutions, including some regional players, such as the African Development Bank (ADB) and the Inter-American Development Bank (IDB). With their help, he deepens his external relations, in particular through joint investments in projects around the world. For example, last year China significantly expanded its cooperation with ADB by creating the "Africa: Growing Together" fund of $ 2 billion.

Similarly, Chinese public welfare funds have become important anchor investors in investment mechanisms created by both the International Finance Corporation of the World Bank and the EBRD to attract long-term institutional capital to their projects. One of these funds, SAFE, is now the only investor in such an EBRD mechanism, despite the fact that China has not yet formally joined this organization.

Copying institutions

China is also creating new institutions. The establishment of the Asian Infrastructure Investment Bank (AIIB) fell into the headlines of world news this year, not only because of active opposition from the United States, but also because countries such as the United Kingdom and Germany still joined it. China also played a key role in setting up a New Development Bank (NBR) with its BRICS partners, whose headquarters are located in Shanghai.

There is a Chinese Silk Road Fund of $ 40 billion, designed to support infrastructure projects that are necessary to implement the strategy put forward by President Xi Jinping, "One belt, one road." This strategy is aimed at improving trade relations and communications in the territory of Eurasia. The Silk Road Fund - currently the most ambitious project of China - overshadows the activities of traditional international financial institutions in terms of both scale and breadth. The first initiative of the fund - the Karot hydroelectric dam in Pakistan worth $ 1,65 billion - involves not only direct lending to the project, but also equity investment in companies that are engaged in the construction of the dam and are responsible for its operation for the next 30 years.

So far, the Silk Road Fund is a one-sided initiative, therefore it belongs to the same category of institutions as the Chinese Development Bank or the state investment conglomerate CITIC. However, the Chinese authorities say that the fund is open for other countries to join it, which, incidentally, seems unlikely, given the scale of Chinese obligations.

Communist innovators

Despite the impressive size of China’s investment projects, the country's leadership has so far been relatively conservative with regard to institutional innovations. Recently, however, functionaries of the Chinese Communist Party have been discussing the idea of ​​an experimental new multilateral financial institution designed to “restore the environment”, that is, to support large projects to regenerate land, purify water and improve air quality.

It will not be easy to create such an institution: it needs global coordination to attract potential shareholders, as well as in large subsidies, without which investments will not be possible. However, such a serious institutional innovation would help fill an important gap in the global financial architecture, and also strengthen China's leadership in financing environmental rehabilitation.

At the same time, Chinese institutions are engaged in less large-scale innovations, acting as leaders in developing more flexible and quick approaches to financing. For example, the first president of ABIA, Jin Liqun, announced plans to dismantle some of the elements inherent in existing institutions, for example, boards of directors with permanent residence, as well as migration restrictions when hiring employees.

Despite all this, China's growing role in global finance is unlikely to profoundly change the way that existing institutions operate. Of course, those innovations that emphasize shortcomings in existing structures can help inspire the reform process. And the EBRD, no doubt, can benefit from China's experience in pilot projects and in their scaling.

As for the EBRD, China's share in the bank will be tiny, at least at first. The Chinese say that they are here to learn. Indeed, joint investments with the EBRD can give Chinese companies the necessary knowledge, and potentially even protection, as they penetrate new markets.

Now it seems likely that the increased participation in the work of multilateral institutions will change China more than it has these institutions. China will be able to hone their own strategy for participating in projects in Africa and other parts of the world. Moreover, he will have the opportunity to improve his own development model.

However, in the long run, the development problems that China faces at home (primarily the rapid deterioration of the environmental situation) may push him to take on a more active, transforming role as an engine of global institutional innovation.

For the first time the material was published on the website of RBC 01.12.2015