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China makes its play for international finance, and the West better listen

 
Published Feb. 5, 2016

Over the last decade, China has been steadily laying the foundation of an international financial and monetary system centered on the yuan.

Initial progress was slow, but it gained momentum over the past two years. Then last August these determined efforts began hitting speed bumps. If China can regain its economic footing — an open question — its ambitions may be realized in the next decade.

Such a development would empower Beijing and diminish both the dollar's centrality in the global economy and American power. The greenback is at the center of world trade, investment, debt markets and foreign exchange trading. Upon the dollar the United States has built a global economic order that reflects its interests and has stood the test of seven decades. The International Monetary Fund and World Bank propagate and proliferate American economic ideas around the world in exchange for financial assistance. Demand for the dollar as a reserve currency is so strong, it drives down borrowing costs for the U.S. government by $100 billion a year, making it easier to finance the world's strongest military.

Beijing seems to have similar aspirations. Yet Washington has been slow to accommodate China's rise. For five years, Congress refused to approve IMF quota reform — a process that would give China more influence within this important financial institution.

Then last year, the U.S. Treasury publicly hinted at its opposition to including the yuan in the IMF's elite SDR basket of currencies. ("SDR" stands for "special drawing right," a kind of artificial currency that can be used within the IMF by member countries.)

Washington finally acquiesced on both counts last year, but not before Beijing had launched its own international financial institution — the Asian Infrastructure Investment Bank (AIIB), an entity that Washington famously tried to abort.

China has also helped create two more international financial institutions in conjunction with the BRICS nations (Brazil, Russia, India, China and South Africa): the New Development Bank (NDB) and Contingent Reserve Arrangement (CRA). China also boasts two credit ratings agencies that have emerged on the global stage since 2008.

But all of this remains in the very early stages. Over the next 10 years, things could unfold in three very different ways.

1. The United States could successfully incorporate China into the existing international financial order. If the United States allows China to become a prominent stakeholder in its international financial institutions, if it does not try to blunt global use of the yuan, then Beijing should see fewer incentives to create new structures.

But incorporation is about more than just a seat at the table. Washington needs to actually listen to Beijing's economic ideas and allow Beijing to exercise leadership. America's continued refusal to join the Asia Infrastructure Investment Bank sends an unpleasant message to China: We are willing to work with you, but only on our turf.

2. If Washington fails at incorporation, an alternate future may emerge where China builds a rival financial and monetary order. Its three shiny new international financial institutions would develop into important providers of development and emergency finance. This would give developing countries the ability to shop between the World Bank and then to the Asia Infrastructure Investment Bank to see which institution is willing to give them the best deal with the fewest strings attached. This development would dilute the Washington-based international financial institution's ability to promote political and economic policies that reflect American interests.

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The yuan's use as a key global currency might gain a greater foothold among countries that hold negative views toward American preponderance — a trend already identified in one study.

3. Of course, there's another possibility. If Beijing fails to guide its economy through a wrenching economic transition, China's global ambitions could fall short. Chinese leaders are currently taking on an incredible experiment. They are simultaneously attempting to shift from an export-led growth strategy to a consumption-based growth model, to open up their hermetically sealed domestic financial markets to a global pool of investors, and to move the yuan from its fixed exchange rate to a market-driven one.

But there is a growing possibility that China could experience a significant financial crisis over the next few years. In the short term, these developments are forcing Beijing to turn its attention inward. Global ambition, for the moment, may have to be put on hold.

Any one of these futures is plausible. None is inevitable. One thing is certain, however. China, its currency, and its role in the international financial and monetary systems will continue to demand the attention of the world and — most importantly — America's leaders.

Daniel McDowell is an assistant professor of political science in the Maxwell School at Syracuse University specializing in international political economy. He is a regular contributor to World Politics Review (www.worldpoliticsreview.com), which provided this article to the Times.