governance, political economy, institutional development and economic regulation

Socializing the Dragon

dragon

(photo credit; http://www.mrwallpaper.com)

China has “bested” its way onto the big boys table through three critical initiatives which bore fruit since President Xi took over as China’s numero uno in 2013.

The first was the founding of the BRICS New Development Bank (NDB), headquartered at Shanghai. Symbols speak louder than words. The logo of the NDB is eerily reminiscent of Chinese communist logos of yester-years encased in two encircling stalks of wheat or maybe olive branches, as in the UN logo. At its center is a round blob with geometric shapes embedded- a suitably vague and nondescript statement of intent, possibly illustrating that the Bank can go any which way and has endless opportunities.

Whilst the first President of the Bank is an Indian corporate guru -K. V. Kamath, no one is under any doubt that it is China which will call the shots, exactly as the US does in the World Bank or Japan in the Asian Development Bank. This is fair since she who pays the bills gets to call the tune.

The second success was to get thirty eight regional and twenty non-regional countries, including members of the G8 except the US, Japan and Canada who kept away, to sign up as Prospective Founding Members of the Asian Infrastructure and Investment Bank which is to be based in Beijing. The candidature of North Korea and Taiwan was refused by China. The former because it is a renegade and the latter because China does not recognize Taiwan as a sovereign country.

The third success completes the trilogy of China’s financial hegemony. China has offered to fund the European Infrastructure Fund at a time when Europe’s powerhouse- Germany and the European Union are engrossed in managing the financial bog of a potential “Greek exit” from the Euro and the likely ensuing turmoil. Massive investments in infrastructure are viewed as one way to kick starting growth in Europe, which has lagged recovery post the 2008 crisis. With Europe agonizing over how much more pain it can take, China’s generous offer of financial support is well timed.

China gets it fiscal muscle from its foreign exchange reserves of over US$ 3.7 trillion. These are down from their peak last year of nearly US$4 billion but remain the largest reserve ever. The annual trade surplus is a healthy US$300 billion plus. Its budget deficit, albeit increasing is still low, though off-balance sheet borrowing by state owned enterprises and the iffy quality of bank assets could cloak an incipient problem.

Its diplomatic and economic muscle is evident from its success in cowing down the meek protests by the Philippines and Japan against its assertive claims over small islands in the South and East China Sea. Far-off South Africa, the continents most developed economy, has repeatedly refused to give a visa to the Dalai Lama since 2009, reportedly out of deference to Chinese sentiments. The Dalai Lama, who is resident in the gorgeous Indian mountain paradise of DharamshaIa, is not recognized by China as the titular head of the Tibetans. China promotes an alternative in the Panchen Lama who is resident in Tibet.

Only the feisty Mrs. Merkel, Chancellor of Germany has had the gumption to ignore China’s ire and met formally with the Dalai Lama. Now with China bailing out Germany-till now the primary “money bag” for the reconstruction of Europe – the jury is out whether Mrs. Merkel would be inclined to repeat this diplomatic equivalent of thumbing her nose at China.

There are two jewels China still seeks. First is to implement President Xi’s vision of reviving the ancient silk route from Western China to Europe. The second is to develop a maritime silk route in the Indo-Pacific region from Myanmar via Bangladesh to India and Sri Lanka. Possibilities exist of extending this further West to Pakistan (where China is already developing the Gwadar port) and Iran where India is tentatively engaged in a similar venture at Charbahar.

These Chinese financed beltways will straddle Asia physically. If China pulls it off they are sure benefit the economies of the continent by reducing transit cost and linking local markets better. But the key issue spoiling the party is sovereign doubts about China’s true intentions in proposing these extravagant infrastructure plans.

Action speaks louder than words. Chinese overseas investment, particularly in Africa, is perceived to be driven too narrowly by self-interest. Its muscular approach to safeguarding what it considers its justified claims in the South and East China Sea give rise to fears of territorial expansionism.  Despite the fact that the India-China border has been peaceful for the last forty years the fear of conflict is ever present.

China needs to demonstrate that it has crossed the hump of middle-income prickly aggression into the beneficent altruism of a self-confident, high income country. It needs to take on an international commitment which demonstrates its resolve to make the world a better place.

It has already taken the first step by voluntarily capping carbon emission by 2030 including by increasing the share of clean energy to 20%. The voluntarism is praise worthy. But a bird in hand is always more credible than two in the bush by 2030.

Stabilizing Afghanistan presents an existential challenge which China can use to establish its credentials as an international force of substance. This single initiative can start a virtuous cycle of development in the “roundabout of Asia”- as president Ghani of Afghanistan, terms his country- with spill over benefits across the region.

China is well placed to substitute the US in leading this effort. It has a close relationship with the Pakistani army and civil leadership which are crucial to contain the Taliban. It has the resources. The US is reported to have spent around US$ 800 billion in Afghanistan, over the thirteen year from 2001 to 2014. This is not a scary number for China, especially since there are spin off benefits- bringing to the international market the huge copper and iron ore deposits in Afghanistan; honing the experience for the Chinese army and equipment in the field and creating a stable buffer in Afghanistan which can sever the existing arc of terror and violence that extends today through Syria, Iraq, Iran, Afghanistan to Pakistan.

The real question is will President Xi bite this bait to flex muscle productively or shall transactional engagements remain the order of the day for China.

1061 words

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