What happens in China, doesn’t stay in China

Author: Yizhe Daniel Xie, Waseda University

The experience that Chinese leaders gain in domestic politics has a big impact on how they view and handle international issues. Many China watchers and political analysts often overlook these domestic roots of Chinese foreign policy, particularly in China’s push to reform the international financial system.

The announcement of the establishment of a BRICS Development Bank on 15 July, at the sixth BRICS summit in Brazil, represents an important victory in China’s campaign to reform the world’s financial system and acquire more influence in international institutions. This success comes on the back of persistent Chinese pressure on the West, following the global financial crisis, to allow emerging economies to have a bigger presence in the financial system.

However, analysts are mistaken to frame this quest for greater influence as purely a function of Chinese foreign policy interests. In effect, both the BRICS Development Bank and the broader strategy it complements are rooted in the domestic concerns of reform-minded leaders of the Chinese Communist Party.

Despite its centralised political system, China’s economic reforms were never an easy process and reformers usually met severe resistance from vested interests.When fierce resistance by interest groups threatens or defers policy implementation, Chinese leaders adopt a different tack — leveraging power from an external force or simply creating, directly or by proxy, another similar institution to compete with and put pressure on the existing one to press for change. For example, when reform was mooted for state-owned enterprises (SOEs) there was strong intra-party opposition. Then premier Zhu Rongji, a reformist, responded by promoting China’s accession to the World Trade Organization to attract multinational national corporations to China to compete with SOEs. Ultimately, the SOEs had no choice but to acquiesce to reform.

The same phenomenon is at play in China’s attempts to reform the international financial system. As it emerges as the world’s second largest economy, China sees the World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB) as no longer reflecting its size and international standing. By partnering with other emerging economies, such as India and Brazil, China actively seeks to demand a commensurate increase in voting rights in the two Bretton Woods institutions (the World Bank and the IMF) at the G20 Summit and other international conferences.

Despite a few amendments, China’s voting share in the World Bank and IMF remains below 5 per cent, which is about a quarter of the US share and only slightly more than half that of Japan.Moreover, in the ADB, the United States and Japan hold the two largest proportions of shares with 12.78 per cent each, while China holds only 5.45 per cent. Chinese frustration is further compounded by the fact that its economy is approximately 1.9 times larger than Japan, which has also handpicked every ADB governor since its inception in 1966.

China became more assertive and less patient in the international arena when Xi Jinping took charge in November 2012. This can be seen in China’s efforts in reshaping the international financial system. Under Xi’s proposed Chinese dream’, China as a major emerging power will no longer passively accept the reform impasse in existing organisations that are dominated by the established economies of the West. That the present system is unlikely to accommodate China was evidenced by the refusal of the US Congress to ratify an IMF reform package.

In response to this situation, and replicating its domestic reform strategy, the Chinese government has worked to set up parallel international institutions to rival the existing Bretton Woods framework and the ADB. To drive this process, President Xi picked Finance Minister Lou Jiwei, who steered the founding of the Chinese sovereign wealth fund, the China Investment Corporation (CIC). The creation of the New Development Bank, and the Contingent Reserve Arrangement, is indicative of this broader strategy and a milestone of Xi’s proactive foreign policy.

It will not be the last.

Lou has indicated clearly that China is committed to creating the Asian Infrastructure Investment Bank (AIIB). The bank is expected to come online with a mandate to challenge the Japan-led Asian Development Bank and thereby craft the Asian financial markets and regional politics in its own image.

That said, China’s motivation to create the BRICS Development Bank and the AIIB is not exclusively aimed at pressing the West and Japan to reform international institutions. China also has substantial interests in spending its oversized US$3.9 trillion in foreign reserves, internationalising the renminbi and securing contracts for its own companies while expanding its political and financial clout. Like many countries, Chinese leaders perceive foreign policy as an extension of their own domestic affairs.

Yizhe Daniel Xie is a graduate student at Graduate School of Asia Pacific Studies, Waseda University in Tokyo and a special correspondent of Yazhou Zhoukan. Previously he worked at Goldman Sachs in Beijing and IBK Securities (Industrial Bank of Korea) in Seoul.

He thanks Tiago Mauricio, a WSD-Handa non-resident fellow at Pacific Forum, CSIS, for his support and comments.  

SHARE: