True. But let's give credit to the PLAN for this: the bulk of the fleets are not abroad but within Chinese territorial waters.
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PLAN is now a peer competitor USN admits
- Thread starter SelfServeFive
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True. But let's give credit to the PLAN for this: the bulk of the fleets are not abroad but within Chinese territorial waters.
大汉奸柳传志
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It‘s all about the settlement currency the bank will be using，be that Euro，Yuan or a basket including several currencies，since US didn’t join，the AIIB can legitimately reject USD as settlement currency or exclude it from the basket，making it the first ever major global financial institution that says “no thanks” to the dollar，technically it won‘t kill USD instantly，but it will open the pandora's box，since we all know the dollar is just paper，its value is purely made of people’s believes and confidence，once people start to lose confidence，the dollar supremacy will be gone before you even know it.Yes, I am, so tell me why AIIB can kill US Dollar??Can't seems to find the answer with my master degree in international business
Right now it's being negotiated，it’s still possible for the bank to use USD to settle，depends on how much China is getting on the table，in half a month the US already sent Penny Pritzker and Jacob Lew to China，along with Lockheed Martin!!! that’s how nervous the banksters gets and how much they are willing to give for their beloved DOLLARRR
apparently you skipped a lot of classes in business1 school didn‘t you？
jhungary
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It‘s all about the settlement currency the bank will be using，be that Euro，Yuan or a basket including several currencies，since US didn’t join，the AIIB can legitimately reject USD as settlement currency or exclude it from the basket，making it the first ever major global financial institution that says “no thanks” to the dollar，technically it won‘t kill USD instantly，but it will open the pandora's box，since we all know the dollar is just paper，its value is purely made of people’s believes and confidence，once people start to lose confidence，the dollar supremacy will be gone before you even know it.
Right now it's being negotiated，it’s still possible for the bank to use USD to settle，depends on how much China is getting on the table，in half a month the US already sent Penny Pritzker and Jacob Lew to China，along with Lockheed Martin!!! that’s how nervous the banksters gets and how much they are willing to give for their beloved DOLLARRR
apparently you skipped a lot of classes in business1 school didn‘t you？
The bolded part is simply, wrong.
AIIB, or any bank, for this matter, can issue the loan to the applicant on whatever form of currency they want. It can be in Yuan, in Australian Dollar, in Vietnamese Dong or any given currency they want. However, to use said loan, the applicant have to use the loan on an project that pay for with their own currency, say if a South korean company applied a loan with AIIB, now, then the South Korean company would need to somehow use the loan from AIIB to pay off any development project they apply for. And that would be in South Korean Currency - Won. Now, depend on how the loan actually work, but generally it can only be one of 3 ways
1.) AIIB offer the loan in South Korean Won to the applicant, and the applicant use the loan to pay off the project directly. However, say a Chinese Bank is issuing the loan in this case, and RMB is not pegged with Won and so, the loan issued to that SK Company would have need to exchange from RMB to Won, which involve USD.
2.) AIIB offer the loan in RMB, then the Chinese bank would not need to exchange the currency into RMB (They are using RMB to begin with) however, the applicant, on receiving the loan, would then need to exchange the loan in RMB
to Won, in which since the RMB is not pegged with Won, USD is involved.
3.) AIIB issue the loan in USD, then the bank issuing the loan will issue the money in USD, as RMB and USD is pegged, no exchange required. And the Thai company would use the loan in USD form directly as again Won and USD are pegged.
So, no, AIIB would actually increase the USD flow in the international market, And it is damaging the US bank, but it actually improve the USD value by lending to previous unavailable customer.
There are only 7 country that uses RMB or have peg their currency to RMB, they are Vietnam, Japan, Sri Lanka, Russia, Thailand, Australia and Zimbabwe. And Unless China can have more name added to that list, AIIB would have been helping USD, not damaging USD. If Chinese bank lend to company in these 7 country, then nothing has change, as they used RMB anyway. but if AIIB lend money to country other than these 7, then USD WILL BE involved and said loan will help, not damage USD valuation. So, the case is, China only lend to those 7 country, that would be status quo as today, anything else will help USD.
The reason why US is panicking is simply AIIB is in direct competition to their own IMF and WB, for every project goes to AIIB, it took customer away from IMF and WB and which US Company (Not US treasury) lost money. And those bank would have push the US government to assert pressure to inhabit the AIIB...
Does that mean AIIB can damage USD as a currency?? No..
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大汉奸柳传志
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completely different issues man...
"settlement currency" is what I am talking about，for the sake of this argument consider it has nothing to do with how a bank loan actually works，it‘s rather symbolic. Maybe my english isn’t as good as I thought but I‘ll try to put it simply for you：Rejecting USD as settlement currency won’t hurt USD in practice，but hurt its image as a global dominating currency.
jhungary
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Why it will hurt the image as a global currency?? If there are no damage in practices??
There are several bank, both National and International does not use USD as settling currency, Eurobank (ECB) for an example. Does not use USD to settle accounts...
Audio
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China appears to finally have reached the first stages of a slow meltdown.
Housing bubble bursted and the funds are escaping to stocks which is driving Shanghai stock market to unnatural heights. The root cause of this rally cannot be a solid economy as most indicators have a downward momentum, some are already in the negative.
Note that the dips coincide with global recession, first in '08 and in '12 when it double dipped. Also note the discrepancy in the sizes.
BNP bank claims:
prudent investor newsletters: China Bubble: The Price-to-Whatever Ratio Stock Market
Would be interesting to see electricity consumption charts.
Housing bubble bursted and the funds are escaping to stocks which is driving Shanghai stock market to unnatural heights. The root cause of this rally cannot be a solid economy as most indicators have a downward momentum, some are already in the negative.
Note that the dips coincide with global recession, first in '08 and in '12 when it double dipped. Also note the discrepancy in the sizes.
BNP bank claims:
prudent investor newsletters: China Bubble: The Price-to-Whatever Ratio Stock Market
Would be interesting to see electricity consumption charts.
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jhungary
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@utp45
If you want to know why exactly AIIB amount to nothing in the international banking game, I suggest this article.
Written by Michael Pettis, professor in Peking University Guanghua School of Management
Michael Pettis - Wikipedia, the free encyclopedia
Will the AIIB One Day Matter? - Carnegie Endowment for International Peace
Will the AIIB One Day Matter?
When Isaac, an editor at Foreign Policy, sent me an email two weeks ago asking if I could write a piece on the new Asian Infrastructure Investment Bank (AIIB), I quickly wrote back promising 1,200 words within a few days. I thought it would be pretty easy to come up with the points I wanted to make, and all I would need was one uninterrupted day to pull them together into a coherent article.
As I see it, the creation of the AIIB is not nearly as important as everyone seems to think, and if Beijing’s decision to create the AIIB, and Washington’s decision to oppose it, was part of the struggle for future geo-political dominance in Asia, let alone the world, they were both going to be wrong. There were only two useful parts to this story, it seemed to me. First, it showed that neither Washington nor Beijing understood very well either the functioning of the global balance of payments or the reasons why the West, and especially the US, dominates the regime that governs global trade and capital flows (but I guess we already knew that). Second, Washington had handled this whole process so ineptly that it had managed to transform a minor initiative by Beijing into a huge symbolic disaster for Washington and a great victory for Xi Jinping.
Michael Pettis
Nonresident Senior Associate
Asia Program
More from this author...
In the case of the AIIB I assume that readers of my blog are quite familiar with these assumptions, but on March 16 Singapore-based academic Kishore Mahbubani published an article that, perhaps predictably, exemplifies the more excited version of the consensus. He described the decision by Great Britain to join the AIIB as an “epochal event” signaling nothing less than “the end of the American century and the arrival of the Asian century”. He goes on to say:
Any objective and calm assessment of the Chinese decision to launch the AIIB would show that this is a bank whose time has come. The Asian Development Bank has estimated that Asia needs to spend at least $8 trillion in infrastructure investment. The American-dominated World Bank and related institutions cannot possibly fulfill this demand. China’s decision to use its reserves to boost Asian infrastructure investment was clearly welcomed in Asia. Given its spectacular success with developing world-class infrastructure in record time, China has a lot of expertise in this area. Asia needs this.
In spite of the fact that I disagree with nearly every part of this paragraph, and I think there are many, and very varied, precedents for Beijing’s initiative that show just how questionable many of these assumptions are, it actually turned out to be very difficult to write the article. On my first attempt I was well over the 3,000 word mark before I realized that there would be no way to finish the article and then cut it down to anything close to 1,200 words. I put the piece aside and started up the next day with a completely different strategy, but the result was the same – too many words. After the third attempt, with a new strategy but the same result, I realized that there was no way I could present my objections except in a much longer piece, and I wasn’t sure whether it was worth the effort.
The string of implausibilities
I think I know why it would take much longer than I expected to write the essay. The claims about the importance of the AIIB or the significance of London’s decision are based on a series of implicit and fairly abstract assumptions, and in order to dispute them I would have to specify all the possible ways in which these claims would be correct, and then show that each of them is implausible or even impossible. It is a little like the dispute over the value of reserve currency status. If someone claims that reserve currency status is valuable because it allows the country that issues the currency to reduce its borrowing costs, it is quite easy to show why this isn’t true, or is true only under very specific conditions that may or may not apply. But if someone simply claims that reserve currency status is self-evidently extremely valuable, it is much more complicated to dispute the claim because then you have to consider and refute all the possible ways that this might be true.
In this essay, I thought I would follow a different tack. It might be interesting not so much to dispute the importance of the AIIB, or of Britain’s decision, but rather to suggest some of the historical antecedents for Beijing’s initiative and show how similar perceptions turned out to be wrong before, and so suggest the ways in which they might be wrong again.
This is not to say that the AIIB cannot become as important an institution as some of the more excited commentary suggests. It can, but only under certain fairly implausible conditions. If China’s economic rise during this century leads it not just to overtake the United States but to achieve a level comparable to that of the United States in the 1940s and 1950s, and if the RMB becomes the world’s dominant reserve currency, with Beijing understanding and accepting the full costs of having the RMB as the dominant reserve currency, and if Beijing chooses to implement its foreign policy objectives at least partly through the AIIB, its importance will rival that of the Bretton Woods institutions.
However if the 21st Century evolves into a bi-polar world, or a multipolar world, or if it continues to be dominated by the US, the AIIB’s history will resemble that of its many antecedents. It will join the long list of much-hyped initiatives aimed at transforming the global trading regime but that now languish in obscurity, known primarily for absorbing university graduates from very prestigious schools who have failed their other job interviews.
This just means, in other words, that if Beijing occupies the same relation to the rest of the world that Washington did in the 1940s, and if, occupying this position, its ideas about what it expected from a global trade and currency regime had not changed during the next decade or two (which, given its very difficult expected rebalancing, as I will show, makes this very unlikely) then the AIIB can replicate the rather extraordinary impact of the Bretton Woods institutions. Note however that the AIIB itself will not play a role in China’s rise. It will be nothing more than one of the consequences of that rise, which is why even if this whole string of implausibilities were to become real, it is absurd to say that the AIIB itself changes anything.
Before discussing the precedents I thought I would make a quick digression about perfidious Albion. It is widely believed that David Cameron made a decision that shocked much of the world, including Beijing itself, for solidly pecuniary reasons. It was no secret that there was little David Cameron wouldn’t do to ensure that London became the leading offshore center for trading RMB, and was especially worried about the close relationships between Berlin and Beijing, which, he feared, might place Frankfurt in the lead in the race to become the main trading center for RMB. Many people have interpreted Cameron’s actions as implicitly anti-American, but to the extent that they matter, they were designed primarily to damage German ambitions for Frankfurt’s future role as a financial center.
Booting out Frankfurt was important because of the big pot of gold associated with becoming the dominant offshore trading center for RMB. Cameron seems to believe that the RMB will soon become one of the world’s major reserve and trading currencies, perhaps even overtaking the dollar, and London’s primacy as a global financial center would be guaranteed if it became the leading offshore trader of RMB-denominated assets.
But this was always silly. The reason London is the world’s major currency-trading center has to do with its very powerful institutional advantages. After all it was widely feared less than two decades ago that the establishment of the ECB in Frankfurt in 1998 had all but killed London’s continued future as the center of European finance. In fact the creation of the euro largely wiped out local currency centers and most of the market actually migrated out of the euro zone and into London.
The reason this happened – London’s unassailable institutional advantages – make it almost certain that, whatever Beijing’s preferences, offshore trading in RMB would migrate to London anyway. After all the traders at Aberdeen Asset Management, say, are not going to decide whether to have their trades executed in Frankfurt or in London based on their eagerness to please Beijing. I suspect their decision will be based primarily on their evaluation of which market is deeper, more liquid, clears more conveniently, and trades more efficiently.
Will the RMB become an important reserve currency?
More importantly the RMB will not become a major reserve currency any time soon, and while its importance as a trading currency will probably continue to rise, this is from an extremely low base and is mainly because compared to the currencies of other, smaller, developing countries, like the Mexican peso and Brazilian real, the RMB is hugely under-represented in international trade. So while it has a lot of catching up to do with the peso and the real, even if China is to become the word’s largest economy, the RMB is very unlikely to catch up to the dollar for many decades because of significant constraints in the governance of Chinese financial markets. The US, after all, was the world’s largest economy for fifty years prior to WW1, and Germany the world’s second largest economy, and yet the US dollar was of minor importance in international trade and the German goldmark only third in importance, behind the French franc and far behind sterling.
London had spent decades proving that it was far less likely to intervene in sterling markets then any of its competitors and so, as long as it did not do so, inertia alone allowed sterling to retain its primacy, but it certainly did not need to worry about a challenge from the dollar until WW1 completely transformed global governance and the institutions that characterized international finance. The dollar in the late 19th century did not enjoy high levels of confidence in the international markets because there were doubts about the quality and credibility of Washington’s governance and about whether Washington would resist intervening in its financial markets or in the currency if it felt that it was in the national interest to do so. Even if the dollar today were at risk somehow of losing the huge advantage inertia creates, the same constraints that prevented the dollar from mounting a challenge to sterling’s pre-eminence before WW1 make the ERMB an unreliable international currency.
While use of the RMB as a reserve currency or as a trading currency will probably rise in the next decades, this is mainly because of its still very low base. According to SWIFT, for example, which settles interbank trading orders and is one proxy for currency use, the RMB broke into the top five currencies at the end of last year, accounting for 2.2% of SWIFT transactions (the USD accounted for 45% and the euro 28%, and because all transaction involve two currencies, I think a 50% share is the limit any currency can have). Given China’s size, this is a tiny share, but even this may overstate the importance of the RMB if part of the transactions were driven by substantial amounts of currency speculation seeking to get around the rules that limit China’s capital account.
In fact it probably was. The latest SWIFT numbers, for February, show that the RMB has dropped to 7th place, with a 1.8% share, and that the number of companies expecting to increase their use of RMB has declined in the past year. It is probably not a coincidence that use of the RMB rose when expectations were that RMB appreciation was a sure thing, and is declining at the same time that uncertainty rises about the future value of the RMB.
Whatever its fate as a trading currency, however, the RMB cannot soon become a dominant reserve currency. To understand why, it might be useful to consider the following. There are only two scenarios under which foreign central banks can accumulate enough RMB-denominated Chinese government bonds (CGBs) for this to happen.
Whether Beijing decides to go this path, or the PBoC intervenes directly, there are important consequences that make it implausible. Either the rise in RMB reserves would have to be matched with an increase in PBoC holdings of advanced country reserves, mainly US dollar and perhaps euro bonds (other advanced countries are too small to matter), or if Beijing wanted to stop accumulating dollars and euro, it would have to be matched with an accumulation of government bonds, or even infrastructure loans, in Malaysian ringit, Brazilian reais, Mexican pesos, Indian rupees, and other developing-country government bonds. Given China’s poor track record in lending to developing countries and the huge associated risks, Beijing is unlikely to want to do this. Remember that if we are expecting the RMB to become a major reserve currency (let alone the major currency) China has to be prepared to see some pretty huge inflows and matching outflows, running into the trillions of dollars.
Central bank swaps
The effect would be to have RMB reserves in all these other central banks — Brazil, Malaysia, India, Mexico and other developing countries – rise in exchange for an equivalent rise in the PBoC’s central bank reserves, denominated in all these various currencies. While the use of the RMB as reserves would certainly rise, there would be no net trade impact or monetary impact because centrals would simply swap government bonds with each other. In fact asset swaps have been among the major mechanisms by which RMB reserves have accumulated in foreign central banks.
But for the RMB to become an important reserve currency simply as a function of asset swaps between central banks has important risk implications. A few creditworthy countries might be willing to play this game in the beginning, giving the PBoC some of their government bonds in exchange for their central banks receiving CGBs, but why bother? It just means that they take on China credit risk and get no benefits at all, except to make Beijing happy.
In the days of the “China Century” when it was believed that whoever made Beijing the happiest would get rich by becoming the leading off-shore trading center for the world’s dominant reserve currency, there might have been some demand from the Switzerlands or Luxembourgs of the world, but I wonder if David Cameron might not be among the last people still to believe this, and anyway this game involves very small amounts of swaps and will only go on until London has already become the leading off-shore RMB trading center.
So who is left who will want to do these swaps with the PBoC? Pretty obviously the only contenders will be countries that have trouble raising credit. Beijing, in other words, can exchange trillions of dollars worth of CGBs and receive government bonds from pretty much every dodgy credit in Latin America, Europe, Asia and Africa. While I am sure that there are many who will hail this as a brilliant geopolitical move, I would have to say that if it really were a good move, and if having the dominant reserve currency was such a great advantage, then this strategy could and should have been replicated by other credit-worthy countries long before China had thought it up, and they could have easily taken away the exorbitant privilege from the US decades ago. After all there was a time when the yen was supposed to become the dominant reserve currency, and it had far better technical credentials then than the RMB does today, and yet Tokyo never followed this path.
More pointedly, in 1965 French finance minister Valéry Giscard d’Estaing complained bitterly about the exorbitant privilege the dollar’s reserve status gave the US, allowing it to print as many dollars as it liked to finance its deficits, but France could have easily engaged in massive swaps with central banks around the world in the 1960s and 1970s under Giscard d’Estaing’s guidance. Had Paris done so, today the French franc would reign supreme among currencies, or, more likely, France would be totally bankrupt.
That’s why I think Scenario 1 of the two scenarios is almost impossible except as a way for the RMB to become a little more actively used as a reserve currency. If China really wants the exorbitant privilege, it is stuck with Scenario 2 and its associated trade implications. It can only gain reserve currency status by allowing unlimited amounts of foreign purchases of CGBs, with little to no commensurate PBoC intervention, in which case it gets the US privilege of being forced into current account deficits. I really don’t see any way around this.
If you believe, as most of us seem to, that Beijing is not willing to run large current account deficits in order accommodate the accumulation by foreigners of RMB reserves (especially if foreigners begin to accumulate RMB for the same trade-related reasons that the PBoC accumulated US dollar reserves), and if you also believe that the PBoC will not be willing to accumulate perhaps trillions of dollars worth of developing-country government bonds (i.e. lend trillions of dollars to developing countries), then you cannot also believe that the RMB will become a major reserve currency, let alone the dominant reserve currency, because you have eliminated the only two ways foreign central banks can accumulate sufficient amounts of RMB reserves.
What does history “prove”?
Most analysts do not understand the reserve accumulation process well enough to understand the logic of this argument, but they nonetheless are fairly confident about their predictions for the RMB on the grounds that history supports them. This is usually because, however, their understanding of history is not much better. One thing, we are often told, is that as the Chinese economy becomes the world’s biggest, its currency must become the dominant reserve currency because history proves that the world takes on the currency of its largest economy as its preferred reserve currency.
History proves no such thing. First of all, there is no “history” as such. There has only been one fiat currency in history that was a dominant reserve currency, and this was the US dollar, beginning either in 1944, or in 1971 after the “Nixon shock”, or some time in between, depending on your reading of the history. There has also been only one case in history in which a currency generally recognized as the dominant reserve currency was replaced by another, and this was the replacement of sterling with the dollar, some time in the 1930s or early 1940s, again depending on your read of history.
More importantly, as I discuss above, the US economy became the biggest in the world in the later 1860s or early 1870s, during which time Germany became the second, and yet the dollar was considered a fairly unimportant reserve currency right up until the late 1910s (and Germany only went on gold in the early 1870s). The dollar only became important, in other words, forty to fifty years after the US became the world’s largest economy, and the dollar only became the dominant reserve currency perhaps more than seventy years after the US had acquired its leading economic status.
For me the interesting question is why it took nearly half a century after the US became the world’s largest economy for the US dollar to become an important reserve currency and whether this has implications for China. The answer may be partly because of the uncertainty surrounding the dollar, and American commitment to gold backing (in fact the Federal Reserve System was not created until 1914), and given the structure of the Chinese political system and a wide range of financial market governance issues, it is not hard to imagine reasons why the RMB might also attract uncertainty.
The late use of the dollar may also be explained partly because during much of this time the US was running trade surpluses and, except for its bankers, it would not have benefitted from foreign interest in acquiring large amounts of dollars. China faces a very difficult rebalancing, and while status-seeking is an especially powerful urge in China, anyone in Beijing who can ignore the status that would come from managing the dominant reserve currency would see that substantial foreign acquisition of RMB-denominated CGBs would make the rebalancing so much more difficult that it would all but guarantee a failed adjustment. Even if China does become the world’s largest economy, in other words, the RMB may face some of the same constraints that prevented the dollar from becoming an important currency in the five decades before WW1.
There are other mistaken historical references. Some people have pointed out that the US was able both to run surpluses in the 1940s and 1950s and still have the dominant reserve currency, as was England at the end of the 19th century, but both cases occurred under conditions that do not apply to China today. In the former case, the US economy represented at least 50% of the relevant world back then (excluding among others communist countries like the USSR, China, and their various allies). Much more importantly, the system simply didn’t work. The world was not able to acquire nearly as many dollars as it needed, and the result was the famous “dollar shortage” which was severe enough that it threatened to derail the global recovery. Only the huge gift of the Marshall Plan was able temporarily to resolve it in Europe. China can replicate the US of the 1940s and 1950s, in other words, only if it were able to make as large a gift, even though it is much poorer than most countries and represents about one-third of the share of global GDP that the US represented.
As for the British example at the end of the 19th Century, in those days currency was part of reserve accumulation, but much if not most reserves were in the form of gold or silver, and while Britain had the most important reserve currency, the difference between central bank holdings of sterling and central bank holdings of other gold-based currencies, like the franc, were pretty small relative to total trade. The gap between British capital exports and the British current account surplus, in other words, could be quite small and still allow the world to accumulate enough sterling for sterling to be the dominant reserve currency. This is no longer the case. Reserves are held primarily in the form of government bonds and reserve accumulation is much greater relative to trade.
There was a reason Keynes supported bancor instead of dollars as the global reserve currency during the 1944 Bretton Woods conference, and it was not, as everyone assumes, just because of nationalist pride. He saw how sterling reserve status without the automatic constraints of gold backing helped undermine the British economy in the post-WW1 period as countries that needed to boost growth accumulated sterling. He knew this would happen to the US, and while this might not matter at a time in which the US was roughly half of the relevant world, and in which there was much more cooperation among major governments and central banks, eventually the US would no more be able to absorb the cost, just as England was not able to do so in the 1920s.
This is why I think the dollar will eventually lose its reserve status, not because it will be replaced by the RMB but rather because the US will eventually figure out that it entails too a high cost and that it is no longer willing to pay that cost. When this happens, unless there is a credible alternative, perhaps the SDR, the US will be better off by forcing the world to abandon the dollar but the rest of the world, especially developing Asia, would be much worse off. My main point, however, is not that the US should not accept its role any longer but rather that until China decides it is willing to pay that cost (assuming that it is able, which I very much doubt), I really cannot see how the world can possibly acquire enough RMB for it to become a dominant reserve currency.
Other things to consider for the AIIB
This blog entry is already far more than three times the length of the article I was supposed to provide for Foreign Policy, and I still haven’t fully addressed just the key reasons for skepticism about the importance of the AIIB. Because addressing them fully would take this essay easily into book length, let me just suggest them:
In fact most of the debate about China in the last decade has been held hostage to this absurd idea, even after the past decade has proven conclusively that a certain amount of skepticism is not only sensible, but would have resulted in much better policies and a less dangerously imbalanced economy. We have plenty of history to suggest that we should be skeptical about the importance of the AIIB and the role it is likely to play.
It is always a good thing when more money is devoted to developing infrastructure in poor countries, but there is a long history of national and multilateral development institutions that have pledged to do a better job than their predecessors. They have all discovered, however, that this is never as easy as it seems. The AIIB has not explained exactly how it plans to channel money into developing countries while avoiding the two big problems its predecessors have always faced: how to ensure that the money is not wasted, and how to channel large amounts of debt financing without creating financial distress and non-repayment risk. For now, for all the excited chatter, the AIIB is an institution laden with symbolic value, and little else.
Read more at: http://carnegieendowment.org/2015/04/11/will-aiib-one-day-matter
If you want to know why exactly AIIB amount to nothing in the international banking game, I suggest this article.
Written by Michael Pettis, professor in Peking University Guanghua School of Management
Michael Pettis - Wikipedia, the free encyclopedia
Will the AIIB One Day Matter? - Carnegie Endowment for International Peace
Will the AIIB One Day Matter?
When Isaac, an editor at Foreign Policy, sent me an email two weeks ago asking if I could write a piece on the new Asian Infrastructure Investment Bank (AIIB), I quickly wrote back promising 1,200 words within a few days. I thought it would be pretty easy to come up with the points I wanted to make, and all I would need was one uninterrupted day to pull them together into a coherent article.
As I see it, the creation of the AIIB is not nearly as important as everyone seems to think, and if Beijing’s decision to create the AIIB, and Washington’s decision to oppose it, was part of the struggle for future geo-political dominance in Asia, let alone the world, they were both going to be wrong. There were only two useful parts to this story, it seemed to me. First, it showed that neither Washington nor Beijing understood very well either the functioning of the global balance of payments or the reasons why the West, and especially the US, dominates the regime that governs global trade and capital flows (but I guess we already knew that). Second, Washington had handled this whole process so ineptly that it had managed to transform a minor initiative by Beijing into a huge symbolic disaster for Washington and a great victory for Xi Jinping.
Michael Pettis
Nonresident Senior Associate
Asia Program
More from this author...
- When Do We Decide That Europe Must Restructure Much of Its Debt?
- Syriza and the French Indemnity of 1871-73
- Can Monetary Policy Turn Argentina Into Japan?
In the case of the AIIB I assume that readers of my blog are quite familiar with these assumptions, but on March 16 Singapore-based academic Kishore Mahbubani published an article that, perhaps predictably, exemplifies the more excited version of the consensus. He described the decision by Great Britain to join the AIIB as an “epochal event” signaling nothing less than “the end of the American century and the arrival of the Asian century”. He goes on to say:
Any objective and calm assessment of the Chinese decision to launch the AIIB would show that this is a bank whose time has come. The Asian Development Bank has estimated that Asia needs to spend at least $8 trillion in infrastructure investment. The American-dominated World Bank and related institutions cannot possibly fulfill this demand. China’s decision to use its reserves to boost Asian infrastructure investment was clearly welcomed in Asia. Given its spectacular success with developing world-class infrastructure in record time, China has a lot of expertise in this area. Asia needs this.
In spite of the fact that I disagree with nearly every part of this paragraph, and I think there are many, and very varied, precedents for Beijing’s initiative that show just how questionable many of these assumptions are, it actually turned out to be very difficult to write the article. On my first attempt I was well over the 3,000 word mark before I realized that there would be no way to finish the article and then cut it down to anything close to 1,200 words. I put the piece aside and started up the next day with a completely different strategy, but the result was the same – too many words. After the third attempt, with a new strategy but the same result, I realized that there was no way I could present my objections except in a much longer piece, and I wasn’t sure whether it was worth the effort.
The string of implausibilities
I think I know why it would take much longer than I expected to write the essay. The claims about the importance of the AIIB or the significance of London’s decision are based on a series of implicit and fairly abstract assumptions, and in order to dispute them I would have to specify all the possible ways in which these claims would be correct, and then show that each of them is implausible or even impossible. It is a little like the dispute over the value of reserve currency status. If someone claims that reserve currency status is valuable because it allows the country that issues the currency to reduce its borrowing costs, it is quite easy to show why this isn’t true, or is true only under very specific conditions that may or may not apply. But if someone simply claims that reserve currency status is self-evidently extremely valuable, it is much more complicated to dispute the claim because then you have to consider and refute all the possible ways that this might be true.
In this essay, I thought I would follow a different tack. It might be interesting not so much to dispute the importance of the AIIB, or of Britain’s decision, but rather to suggest some of the historical antecedents for Beijing’s initiative and show how similar perceptions turned out to be wrong before, and so suggest the ways in which they might be wrong again.
This is not to say that the AIIB cannot become as important an institution as some of the more excited commentary suggests. It can, but only under certain fairly implausible conditions. If China’s economic rise during this century leads it not just to overtake the United States but to achieve a level comparable to that of the United States in the 1940s and 1950s, and if the RMB becomes the world’s dominant reserve currency, with Beijing understanding and accepting the full costs of having the RMB as the dominant reserve currency, and if Beijing chooses to implement its foreign policy objectives at least partly through the AIIB, its importance will rival that of the Bretton Woods institutions.
However if the 21st Century evolves into a bi-polar world, or a multipolar world, or if it continues to be dominated by the US, the AIIB’s history will resemble that of its many antecedents. It will join the long list of much-hyped initiatives aimed at transforming the global trading regime but that now languish in obscurity, known primarily for absorbing university graduates from very prestigious schools who have failed their other job interviews.
This just means, in other words, that if Beijing occupies the same relation to the rest of the world that Washington did in the 1940s, and if, occupying this position, its ideas about what it expected from a global trade and currency regime had not changed during the next decade or two (which, given its very difficult expected rebalancing, as I will show, makes this very unlikely) then the AIIB can replicate the rather extraordinary impact of the Bretton Woods institutions. Note however that the AIIB itself will not play a role in China’s rise. It will be nothing more than one of the consequences of that rise, which is why even if this whole string of implausibilities were to become real, it is absurd to say that the AIIB itself changes anything.
Before discussing the precedents I thought I would make a quick digression about perfidious Albion. It is widely believed that David Cameron made a decision that shocked much of the world, including Beijing itself, for solidly pecuniary reasons. It was no secret that there was little David Cameron wouldn’t do to ensure that London became the leading offshore center for trading RMB, and was especially worried about the close relationships between Berlin and Beijing, which, he feared, might place Frankfurt in the lead in the race to become the main trading center for RMB. Many people have interpreted Cameron’s actions as implicitly anti-American, but to the extent that they matter, they were designed primarily to damage German ambitions for Frankfurt’s future role as a financial center.
Booting out Frankfurt was important because of the big pot of gold associated with becoming the dominant offshore trading center for RMB. Cameron seems to believe that the RMB will soon become one of the world’s major reserve and trading currencies, perhaps even overtaking the dollar, and London’s primacy as a global financial center would be guaranteed if it became the leading offshore trader of RMB-denominated assets.
But this was always silly. The reason London is the world’s major currency-trading center has to do with its very powerful institutional advantages. After all it was widely feared less than two decades ago that the establishment of the ECB in Frankfurt in 1998 had all but killed London’s continued future as the center of European finance. In fact the creation of the euro largely wiped out local currency centers and most of the market actually migrated out of the euro zone and into London.
The reason this happened – London’s unassailable institutional advantages – make it almost certain that, whatever Beijing’s preferences, offshore trading in RMB would migrate to London anyway. After all the traders at Aberdeen Asset Management, say, are not going to decide whether to have their trades executed in Frankfurt or in London based on their eagerness to please Beijing. I suspect their decision will be based primarily on their evaluation of which market is deeper, more liquid, clears more conveniently, and trades more efficiently.
Will the RMB become an important reserve currency?
More importantly the RMB will not become a major reserve currency any time soon, and while its importance as a trading currency will probably continue to rise, this is from an extremely low base and is mainly because compared to the currencies of other, smaller, developing countries, like the Mexican peso and Brazilian real, the RMB is hugely under-represented in international trade. So while it has a lot of catching up to do with the peso and the real, even if China is to become the word’s largest economy, the RMB is very unlikely to catch up to the dollar for many decades because of significant constraints in the governance of Chinese financial markets. The US, after all, was the world’s largest economy for fifty years prior to WW1, and Germany the world’s second largest economy, and yet the US dollar was of minor importance in international trade and the German goldmark only third in importance, behind the French franc and far behind sterling.
London had spent decades proving that it was far less likely to intervene in sterling markets then any of its competitors and so, as long as it did not do so, inertia alone allowed sterling to retain its primacy, but it certainly did not need to worry about a challenge from the dollar until WW1 completely transformed global governance and the institutions that characterized international finance. The dollar in the late 19th century did not enjoy high levels of confidence in the international markets because there were doubts about the quality and credibility of Washington’s governance and about whether Washington would resist intervening in its financial markets or in the currency if it felt that it was in the national interest to do so. Even if the dollar today were at risk somehow of losing the huge advantage inertia creates, the same constraints that prevented the dollar from mounting a challenge to sterling’s pre-eminence before WW1 make the ERMB an unreliable international currency.
While use of the RMB as a reserve currency or as a trading currency will probably rise in the next decades, this is mainly because of its still very low base. According to SWIFT, for example, which settles interbank trading orders and is one proxy for currency use, the RMB broke into the top five currencies at the end of last year, accounting for 2.2% of SWIFT transactions (the USD accounted for 45% and the euro 28%, and because all transaction involve two currencies, I think a 50% share is the limit any currency can have). Given China’s size, this is a tiny share, but even this may overstate the importance of the RMB if part of the transactions were driven by substantial amounts of currency speculation seeking to get around the rules that limit China’s capital account.
In fact it probably was. The latest SWIFT numbers, for February, show that the RMB has dropped to 7th place, with a 1.8% share, and that the number of companies expecting to increase their use of RMB has declined in the past year. It is probably not a coincidence that use of the RMB rose when expectations were that RMB appreciation was a sure thing, and is declining at the same time that uncertainty rises about the future value of the RMB.
Whatever its fate as a trading currency, however, the RMB cannot soon become a dominant reserve currency. To understand why, it might be useful to consider the following. There are only two scenarios under which foreign central banks can accumulate enough RMB-denominated Chinese government bonds (CGBs) for this to happen.
- As foreign central banks buy CGBs, the PBoC intervenes and the RMB does not rise, in which case the PBoC’s assets rise by exactly the same amount as foreign central bank purchases of CGBs.
- As foreign central banks buy CGBs, the PBoC does not intervene and the RMB rises enough that the rise in foreign purchases of CGBs is matched by the combination of a decline in China’s current account surplus and an increase in China’s capital account deficit. If the RMB rises, of course, we are unlikely to see an increase in China’s capital account and in fact may even see it decline into a surplus. This means that the current account surplus must decline by more than the amount of CGBs that foreign central banks purchase, and in fact could easily drive the current account into deficit.
Whether Beijing decides to go this path, or the PBoC intervenes directly, there are important consequences that make it implausible. Either the rise in RMB reserves would have to be matched with an increase in PBoC holdings of advanced country reserves, mainly US dollar and perhaps euro bonds (other advanced countries are too small to matter), or if Beijing wanted to stop accumulating dollars and euro, it would have to be matched with an accumulation of government bonds, or even infrastructure loans, in Malaysian ringit, Brazilian reais, Mexican pesos, Indian rupees, and other developing-country government bonds. Given China’s poor track record in lending to developing countries and the huge associated risks, Beijing is unlikely to want to do this. Remember that if we are expecting the RMB to become a major reserve currency (let alone the major currency) China has to be prepared to see some pretty huge inflows and matching outflows, running into the trillions of dollars.
Central bank swaps
The effect would be to have RMB reserves in all these other central banks — Brazil, Malaysia, India, Mexico and other developing countries – rise in exchange for an equivalent rise in the PBoC’s central bank reserves, denominated in all these various currencies. While the use of the RMB as reserves would certainly rise, there would be no net trade impact or monetary impact because centrals would simply swap government bonds with each other. In fact asset swaps have been among the major mechanisms by which RMB reserves have accumulated in foreign central banks.
But for the RMB to become an important reserve currency simply as a function of asset swaps between central banks has important risk implications. A few creditworthy countries might be willing to play this game in the beginning, giving the PBoC some of their government bonds in exchange for their central banks receiving CGBs, but why bother? It just means that they take on China credit risk and get no benefits at all, except to make Beijing happy.
In the days of the “China Century” when it was believed that whoever made Beijing the happiest would get rich by becoming the leading off-shore trading center for the world’s dominant reserve currency, there might have been some demand from the Switzerlands or Luxembourgs of the world, but I wonder if David Cameron might not be among the last people still to believe this, and anyway this game involves very small amounts of swaps and will only go on until London has already become the leading off-shore RMB trading center.
So who is left who will want to do these swaps with the PBoC? Pretty obviously the only contenders will be countries that have trouble raising credit. Beijing, in other words, can exchange trillions of dollars worth of CGBs and receive government bonds from pretty much every dodgy credit in Latin America, Europe, Asia and Africa. While I am sure that there are many who will hail this as a brilliant geopolitical move, I would have to say that if it really were a good move, and if having the dominant reserve currency was such a great advantage, then this strategy could and should have been replicated by other credit-worthy countries long before China had thought it up, and they could have easily taken away the exorbitant privilege from the US decades ago. After all there was a time when the yen was supposed to become the dominant reserve currency, and it had far better technical credentials then than the RMB does today, and yet Tokyo never followed this path.
More pointedly, in 1965 French finance minister Valéry Giscard d’Estaing complained bitterly about the exorbitant privilege the dollar’s reserve status gave the US, allowing it to print as many dollars as it liked to finance its deficits, but France could have easily engaged in massive swaps with central banks around the world in the 1960s and 1970s under Giscard d’Estaing’s guidance. Had Paris done so, today the French franc would reign supreme among currencies, or, more likely, France would be totally bankrupt.
That’s why I think Scenario 1 of the two scenarios is almost impossible except as a way for the RMB to become a little more actively used as a reserve currency. If China really wants the exorbitant privilege, it is stuck with Scenario 2 and its associated trade implications. It can only gain reserve currency status by allowing unlimited amounts of foreign purchases of CGBs, with little to no commensurate PBoC intervention, in which case it gets the US privilege of being forced into current account deficits. I really don’t see any way around this.
If you believe, as most of us seem to, that Beijing is not willing to run large current account deficits in order accommodate the accumulation by foreigners of RMB reserves (especially if foreigners begin to accumulate RMB for the same trade-related reasons that the PBoC accumulated US dollar reserves), and if you also believe that the PBoC will not be willing to accumulate perhaps trillions of dollars worth of developing-country government bonds (i.e. lend trillions of dollars to developing countries), then you cannot also believe that the RMB will become a major reserve currency, let alone the dominant reserve currency, because you have eliminated the only two ways foreign central banks can accumulate sufficient amounts of RMB reserves.
What does history “prove”?
Most analysts do not understand the reserve accumulation process well enough to understand the logic of this argument, but they nonetheless are fairly confident about their predictions for the RMB on the grounds that history supports them. This is usually because, however, their understanding of history is not much better. One thing, we are often told, is that as the Chinese economy becomes the world’s biggest, its currency must become the dominant reserve currency because history proves that the world takes on the currency of its largest economy as its preferred reserve currency.
History proves no such thing. First of all, there is no “history” as such. There has only been one fiat currency in history that was a dominant reserve currency, and this was the US dollar, beginning either in 1944, or in 1971 after the “Nixon shock”, or some time in between, depending on your reading of the history. There has also been only one case in history in which a currency generally recognized as the dominant reserve currency was replaced by another, and this was the replacement of sterling with the dollar, some time in the 1930s or early 1940s, again depending on your read of history.
More importantly, as I discuss above, the US economy became the biggest in the world in the later 1860s or early 1870s, during which time Germany became the second, and yet the dollar was considered a fairly unimportant reserve currency right up until the late 1910s (and Germany only went on gold in the early 1870s). The dollar only became important, in other words, forty to fifty years after the US became the world’s largest economy, and the dollar only became the dominant reserve currency perhaps more than seventy years after the US had acquired its leading economic status.
For me the interesting question is why it took nearly half a century after the US became the world’s largest economy for the US dollar to become an important reserve currency and whether this has implications for China. The answer may be partly because of the uncertainty surrounding the dollar, and American commitment to gold backing (in fact the Federal Reserve System was not created until 1914), and given the structure of the Chinese political system and a wide range of financial market governance issues, it is not hard to imagine reasons why the RMB might also attract uncertainty.
The late use of the dollar may also be explained partly because during much of this time the US was running trade surpluses and, except for its bankers, it would not have benefitted from foreign interest in acquiring large amounts of dollars. China faces a very difficult rebalancing, and while status-seeking is an especially powerful urge in China, anyone in Beijing who can ignore the status that would come from managing the dominant reserve currency would see that substantial foreign acquisition of RMB-denominated CGBs would make the rebalancing so much more difficult that it would all but guarantee a failed adjustment. Even if China does become the world’s largest economy, in other words, the RMB may face some of the same constraints that prevented the dollar from becoming an important currency in the five decades before WW1.
There are other mistaken historical references. Some people have pointed out that the US was able both to run surpluses in the 1940s and 1950s and still have the dominant reserve currency, as was England at the end of the 19th century, but both cases occurred under conditions that do not apply to China today. In the former case, the US economy represented at least 50% of the relevant world back then (excluding among others communist countries like the USSR, China, and their various allies). Much more importantly, the system simply didn’t work. The world was not able to acquire nearly as many dollars as it needed, and the result was the famous “dollar shortage” which was severe enough that it threatened to derail the global recovery. Only the huge gift of the Marshall Plan was able temporarily to resolve it in Europe. China can replicate the US of the 1940s and 1950s, in other words, only if it were able to make as large a gift, even though it is much poorer than most countries and represents about one-third of the share of global GDP that the US represented.
As for the British example at the end of the 19th Century, in those days currency was part of reserve accumulation, but much if not most reserves were in the form of gold or silver, and while Britain had the most important reserve currency, the difference between central bank holdings of sterling and central bank holdings of other gold-based currencies, like the franc, were pretty small relative to total trade. The gap between British capital exports and the British current account surplus, in other words, could be quite small and still allow the world to accumulate enough sterling for sterling to be the dominant reserve currency. This is no longer the case. Reserves are held primarily in the form of government bonds and reserve accumulation is much greater relative to trade.
There was a reason Keynes supported bancor instead of dollars as the global reserve currency during the 1944 Bretton Woods conference, and it was not, as everyone assumes, just because of nationalist pride. He saw how sterling reserve status without the automatic constraints of gold backing helped undermine the British economy in the post-WW1 period as countries that needed to boost growth accumulated sterling. He knew this would happen to the US, and while this might not matter at a time in which the US was roughly half of the relevant world, and in which there was much more cooperation among major governments and central banks, eventually the US would no more be able to absorb the cost, just as England was not able to do so in the 1920s.
This is why I think the dollar will eventually lose its reserve status, not because it will be replaced by the RMB but rather because the US will eventually figure out that it entails too a high cost and that it is no longer willing to pay that cost. When this happens, unless there is a credible alternative, perhaps the SDR, the US will be better off by forcing the world to abandon the dollar but the rest of the world, especially developing Asia, would be much worse off. My main point, however, is not that the US should not accept its role any longer but rather that until China decides it is willing to pay that cost (assuming that it is able, which I very much doubt), I really cannot see how the world can possibly acquire enough RMB for it to become a dominant reserve currency.
Other things to consider for the AIIB
This blog entry is already far more than three times the length of the article I was supposed to provide for Foreign Policy, and I still haven’t fully addressed just the key reasons for skepticism about the importance of the AIIB. Because addressing them fully would take this essay easily into book length, let me just suggest them:
- We have a terrible track record of extrapolating from periods of rapid growth to predict which country is the “rising power”. In fact more broadly, depending on how you define them, there have been 30-40 “growth miracles” since WW2, of which perhaps only two came even close to achieving consensus expectations. In every case, including the “successes” the growth period was followed by a terribly and unexpectedly difficult adjustment that derailed all earlier expectations.
More relevantly, in the past century these growth miracle countries have included at least four rising powers that were expected to become the dominant geopolitical and financial power in the world – the US in the 1920s, Germany in the 1930s, the USSR in the 1950s, and Japan in the 1980s. In every case they rebelled bitterly against the existing global financial framework, complaining that it was designed to maintain the status quo and restrain their rise. Every one of these countries initiated policies aimed at transforming the world to align interests correctly and accommodate their rise to dominance. Only one of them succeeded.
The United States in the 1920s was the only country that met expectations. It had already been the world’s largest economy for nearly five decades, but played a minor role in the global system until WWI thrust it into center stage. In the 1920s the US experienced a period of spectacular growth during which institutional distortions forced up its saving rate and resulted in massive trade surpluses, along with the largest accumulation of central bank reserves in history (it is worth noting, by the way, that although the US in the 1920s experienced some of the conditions that characterized China’s growth model, of the four “rising powers” its economic growth was the least similar). Like Beijing today, during this period Washington demanded a greater say in the institutions that shaped global trade and capital flows, but was very suspicious of European initiatives designed, it believed, to enhance the status quo at American expense. For the most part Washington refused to participate, or attempted to create its own institutions. The “rising power” period, however, came to an end, along with most of the expectations generated during the 1920s. US growth was derailed in the 1930s as it was forced into a very difficult adjustment, and among the casualties were the ambitions associated with its geopolitical dominance.
In the 1930s Germany designed a version of the investment-driven growth model, with the two fundamental characteristics similar to China’s growth model that both caused soaring growth and deepening savings imbalances (policies that force up savings by constraining household income and the centralization of the investment process). At the time many if not most economists, not just in Germany but also in the US, expected that Germany would soon overtake the US economically and become the world’s largest economy. Of course WW2 interrupted the rebalancing process, but economic historians argue that had war not occurred, Germany would have probably faced a debt crisis by the early 1940s.
A fully developed version of the investment-driven growth model was implemented in the USSR after WW2 and led to such spectacular growth that, by the early 1960s, most economists and analysts, including apparently President Kennedy, fully expected the USSR to overtake the US both economically and technologically well before the end of the century. Instead, in the now familiar sequence, the USSR suffered a brutal rebalancing and an ultimately disruptive adjustment. Although the USSR participated in the Bretton Woods conference and approved the final agreement, Moscow almost immediately rescinded its agreement and proposed a number of financial initiatives within the Soviet or communist blocs, none of which survive. And while the USSR urgently sought to accumulate dollars for trade and reserve accumulation, its unwillingness to hold these dollars in US-based banks subject to pressure from Washington played a large part in the creation of the offshore market for dollars, and eventually for other currencies. This initiative can be listed as one of the few “reforms” by disgruntled “rising powers” to have survived and changed the global financial regime, but its effect, ironically, was not to undermine the Bretton Woods system so much as to extend it.
In the 1970s and 1980s Japan developed the most successful version to date of the investment growth model, with such stunning results that the Japanese economy was unanimously expected to overtake that of the US, and the yen replace the dollar, before the end of the century. During this period Tokyo complained bitterly about the Washington-dominated global regime and attempted a number of reforms whose consequence included a bitter dispute over the Asian Development Bank and Japan’s role in the regime that governed global trade and finance. Once again, however, a growth model based on structures that forced up both savings and investment generated very high growth levels, but at the cost, in its later stages, of deep savings imbalances and a soaring debt burden, the consequence of which was yet again an unexpectedly difficult adjustment in which all earlier expectations about needed reforms in the global system of trade and capital flows were either jettisoned or modified.
There have been four times in the past 100 years, in other words, in which we were more or less certain (absolutely certain in the cases of the US in the 1920s and Japan in the 1980s, very certain about the USSR in the 1950s, and arguably certain about Germany in the 1930s) that a country would become the dominant economic and geopolitical power, and only once did this turn out to be true. Anyone old enough to remember the 1980s will remember that we were even more certain about Japan’s rise in the 1980s than we are about China’s rise today, but in the Japanese case, as in every other case, we were flabbergasted by how difficult the economic adjustment turned out to be, which suggests at the very least that we might want to wait to see how Beijing manages China’s rebalancing before we insist that this time is indeed different.
- Whatever the outcome, the adjustment period has always overturned the institutions and expectations generated during the growth period. This is why even if China becomes only the second successful case of five in which our predictions about the “rising power” turn out to be correct, it is foolish to assume that the expectations that led to the creation of the AIIB will remain unchanged. China’s priorities will have shifted during its rebalancing to such an extent that today’s goals will not apply to the conditions that accompany its position of dominance. During the adjustment, domestic institutions and political conditions have always been so radically transformed that the country “before” the rebalancing period had a completely different set of objectives and goals from the country “after” the rebalancing period.
It is important not to underestimate this point. Regardless of whether or not it becomes the world’s largest economy, the China that emerges from the adjustment of the next decade or two will be a very different China, with different institutions, different objectives, and different priorities. Among the easier predictions, it is a virtual certainty that the imbalances that force China today to recycle massive current account surpluses will have reversed themselves, so that the recycling process will no longer be a major objective.
- The world is not starved of capital. In fact it has too much capital. The idea that the AIIB will be important because its accumulation of lending power will give it something important that the world needs is widespread but completely wrong. In fact the world is satiated with excess savings, to the point where it has driven interest rates in some countries negative. In fact China and the other founding members of the AIIB who know that they desperately need places to put their money but who do not understand why they have this problem are probably hoping that the bank will be able to increase credible demand for savings by transforming real demand from non-credible borrowers into real demand from borrowers whose credit has been mysteriously enhanced somehow by the AIIB.
- Management of the regime that governs global trade and capital flows depends not on the support of institutions like the World Bank and the IMF but rather on the willingness to underwrite the costs of trade volatility. The reason the US more than any other country sets the global rules for trade and capital flows is not because the US dominates the IMF and the World Bank, whose financial firepower underpins US power. It is because the US has been willing to absorb the volatility generated by trade policies of other countries, and this willingness is based not so much on the openness of its domestic markets for goods and services to foreign trade (although it is clearly more open than any other major economy) but on the fact that its capital markets are open. This point confuses many analysts, who think of the capital and current accounts separately. The right way for any country that wants to power domestic growth by boosting exports is by increasing productivity. In that case it will export more abroad, but the resulting increase in wealth will also cause it import more, and it will not obviously run either a surplus or a deficit, but rather a trade imbalance close to zero.
But if increasing productivity is too hard, it can also boost exports simply by accumulating US assets, the most common of which ways to do so is to have the central bank acquire US government bonds. As its net capital exports to the US grow, its current account surplus and the corresponding US current account deficit will automatically grow by exactly the same amount. I have explained why this must be the case many times, including last year in the September 28 and October 5 entries in my blog. This consequence was why the UK remained so important after WW1, even though its economy was dwarfed by that of the US and was smaller than that of Germany. Countries that needed surpluses purchased British government bonds – at England’s great cost, as Keynes tried to explain.
Most analysts, even US government officials involved in international trade and foreign policy, simply do not understand how this works, but the confusion this causes does not make the accounting identities any less true. In fact the mechanism has been explained often enough by many economists whose work focuses on the functioning of the global balance of payments, from John Hobson and Charles Arthur Conant at the end of the 19th Century, to Keynes in the 1930s and 1940s, to Jared Bernstein and Kenneth Austin today.
Any discussion about how China is going to transform the global financial architecture, in other words, is primarily a discussion about when China will open up its capital markets to unrestricted foreign purchases of domestic assets, especially Chinese government bonds, and its willingness to allow other countries to power domestic growth by accumulating renminbi reserves. This of course also means that the discussion is ultimately about China’s willingness to run large current account deficits to stabilize employment elsewhere. And yet most people on either side of the discussion would probably say that it will be many decade, if ever, before China permits this kind of access to its markets.
- The only countries not reluctant to import the savings of other countries are those who capital exporters shun. These are developing countries who have obvious investment needs but in whom investors are very reluctant to invest because of low credibility. The AIIB has not addressed how it will differ in the way in which it supplies the estimated $8 trillion in infrastructure that Asia needs to ensure that it will be more successful than the many national and multilateral development banks that have made the same and similar promises.
And while people like Mahbubani might claim that China’s “spectacular success with developing world-class infrastructure in record time” gives us reason to expect success for the AIIB, the evidence suggests no such thing. While Beijing certainly has in recent years lent aggressively to developing countries, and many analysts at first hailed what they called a novel approach and hard-headed business intelligence, every time a new country, or group of countries, first begins to invest abroad aggressively, we hear exactly the same sorts of things.
But every time, as soon as global economic conditions turn, we discover that this most recent wave of investment has been successful largely because of its willingness to misprice risk. Inevitably it is followed by defaults and a very dramatic change in approach. It is too early to tell if China will prove to be the sole deviation from historical precedence, but a very depressing article three weeks ago in the Financial Times suggests that when it comes to lending to developing countries, China’s experiences are turning out to be remarkably consistent with those of its predecessors. It is not easy to lend large amounts to developing countries and get repaid.
In fact most of the debate about China in the last decade has been held hostage to this absurd idea, even after the past decade has proven conclusively that a certain amount of skepticism is not only sensible, but would have resulted in much better policies and a less dangerously imbalanced economy. We have plenty of history to suggest that we should be skeptical about the importance of the AIIB and the role it is likely to play.
It is always a good thing when more money is devoted to developing infrastructure in poor countries, but there is a long history of national and multilateral development institutions that have pledged to do a better job than their predecessors. They have all discovered, however, that this is never as easy as it seems. The AIIB has not explained exactly how it plans to channel money into developing countries while avoiding the two big problems its predecessors have always faced: how to ensure that the money is not wasted, and how to channel large amounts of debt financing without creating financial distress and non-repayment risk. For now, for all the excited chatter, the AIIB is an institution laden with symbolic value, and little else.
Read more at: http://carnegieendowment.org/2015/04/11/will-aiib-one-day-matter
大汉奸柳传志
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- Mar 27, 2015
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Not "a global currency"，but "a global dominanting currency''，for that，image is everything.
we all know what happened to Saddam and Gadhafi when they decided to challenge the petrodollar，the cornerstone of dollar supremacy.
People's believes matter，that‘s why we are using paper for money，it’s economy 101.You really should go back to relearn something dude，or may I suggest，watch some Game of Thrones lol
Speeder 2
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- Mar 24, 2010
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Petardo is such a rare word that you don't hear that often in Spanish in Europe, oke, probably once a year.
Or it is a much more popular Hispanish word spoken in South America mainly?
For any significant AIIB borrower in the int'l market, such as Korean Won, no USD will be involved if they perfer, because a currency swap can be constructed quite easily in case of a loan issued in RMB.
Heck yes! One of AIIB's end results, no matter how you look at it, is to increase RMB's int'l exposure, which by zero-sum definition reduces USD's existing power.
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jhungary
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- Oct 24, 2012
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Not "a global currency"，but "a global dominanting currency''，for that，image is everything.
we all know what happened to Saddam and Gadhafi when they decided to challenge the petrodollar，the cornerstone of dollar supremacy.
People's believes matter，that‘s why we are using paper for money，it’s economy 101.You really should go back to relearn something dude，or may I suggest，watch some Game of Thrones lol
Problem is, bank settlement does not impact any particular currency global dominance, as I said, most international bank, apart from IMF and WB does NOT uses USD to settle their account, however, commercial bank don't store Foreign Currency, central/federal bank does, AIIB is a commercial or what we called an investment bank. As well as IMB and WB, what AIIB uses to settle does not affect the strength or linkage to the USD, the image, itself is based on the availability of USD in world market, not which bank are using what currency to settle. IMB and WB can use gold as their settlement. That does not damage the reputation or image of USD, as long as the balance of payment still involve USD in the process.
As long as the bank would touch the currency one way or another, they will actually bring support to that currency, hence what AIIB does is, thy actually promote USD as world currency when they started to increase the lending volume and trade volume of USD by expanding to the world market.
The only single remote case where AIIB can threaten USD as world currency status is AIIB have lending volume more than IMF and WB combine and the member start changing their currency base from USD to AIIB denomination. But for that to achieve, AIIB need to surpass both IMF and WB, which is virtually impossible. And for that to happen, RMB or any single currency have to be adopted to push the USD aside, which actually goes against the charter of AIIB to begin with.
This is actually very simple, what your problem is what Michael Pettis wrote in his article, as usual, you have hijacked the value of AIIB and inflate their importance against USD, while you should focus on a plan to which how AIIB can effectively lend money to other party without losing or wasting the loan on corruption, or how AIIB can have a sound plan for retrieval of loan. Which are far more important issue than how AIIB can kill off USD as a currency, hell, some even suggest that AIIB uses USD as denomination. I guess we will see a month from now.
Petardo is such a rare word that you don't hear that often in Spanish in Europe, oke, probably once a year.
Or it is a much more popular Hispanish word spoken in South America mainly?
I never ask where this word is originated, I was taught this word when I was learning Spanish, and I use it, what is the problem with that?? And how and why is it important if that word is more Hispanic originated or Castellano??
No, Won could have pegged with RMB before AIIB, what AIIB uses does not matter and it would have no relation to which country peg what, the currency pegging is solely depending on the stability of currency and the amount of which the world hold, and USD dollar have a world distribution far more than RMB (81% of World reserve is USD, while RMB is 8%) Actually, if AIIB uses RMB as official currency, they would have to depreciate RMB to met the demand of world need, for people who have no background in economic, this is bad for RMB.
It is kind of stupid to say since many people joined the AIIB, they would require to peg the RMB (Given if AIIB chooses RMB as the denomination) Because this will broke the back of the Chinese financial structure.
There are only certain amount of RMB in the world, as it stand today, 8%. To peg a currency, The country need to buy enough of that currency so that the reserve they hold would mean any usage, trade of that currency does not damage the exchange rate a bit, that in economic term called buffer.
Now, What happen if 50 country suddenly peg RMB as their currency? Then the need of RMB would sore, *** you suddenly have 50 country buying a large amount of RMB, but remember the world only have 8% of RMB as reserve, so to cater that, Chinese Central bank would have to increase RMB circulation, to a point they can satisfied all 50 country in AIIB for them to peg RMB, which would broke the supply and demand system of RMB world wide. Just because you need RMB, that does not mean Chinese Central bank can print more...
No. AIIB is an International bank, they lend money out, that's it. They can give out loan in RMB, for all they care, but the country on the receiving end does not spend RMB. What you are saying have no relation at all. Unless one of the rule to join AIIB is to give up settling with USD and peg their own currency in RMB, which I am not aware of.
World traded with China long before AIIB come out of a drawing board. That does not change that fact then, and why would it change the fact now?? What AIIB hand out is irreverent, they can hand out RMB to loan applicant, but at the end of the day, the applicant may or may not spend RMB just because the loan is in RMB. Hence AIIB have no to little impact to world currency status to begin with. hack, there is a good chance AIIB actually would use USD to settle, that would save a lot of money exchanging the loan.
SelfServeFive
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- Feb 7, 2015
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LOL at Michael Pettis, the scholar hack who predicted a hard landing for China since 2008 until 2014. Now that China successfully engineered a soft landing, Pettis is back in business spewing more smart-sounding but completely wrong rubbish.
Jlaw
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- Nov 6, 2013
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No. They are saying this to make us thump our chest and become complacent. 西方屎橋should we take that as a compliment
Obambam
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- Jan 17, 2011
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Dude, you are so retarded. Don't you think I can look up the Spanish meaning as well?
Anyway, in my prvious post I said something about the Arabs and thier skills. Well guess what, the US has more skills up their sleeves. They can make a dead boy alive again ... well, just to get him shot dead a few 1000 miles away by the Taliban.
That definitely went whoosh over my head. How was that possible?
Keel
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- Sep 29, 2014
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M Pettis is a watered down version of G Chang and many ignoramus who do not know the difference between a "pegged currency" vs "currency swap" wont hesitate to burn huge amount of incense and make him god of China prophets
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