Come to Asia and you will hear a growing chorus of concern that China is building a sphere of influence in the region. To promote Chinese foreign investment, there is the Asian Infrastructure Investment Bank (AIIB), in which the government is poised to take a 30% share. And there is China’s “One Belt, One Road” initiative to construct a Silk Road Economic Belt extending through Central Asia, and a Maritime Silk Road linking China with Southeast Asia, the Indian Ocean, the Middle East, and ultimately Europe.
On the financial side, China is promoting wider international use of its currency, the renminbi. And it is increasingly asserting its interests militarily, fortifying the disputed Spratly Islands and constructing runways capable of accommodating fighter jets.
When contemplating these initiatives, it is important to take a nuanced view. There is no question that China’s new island-based outposts in the South China Sea pose a threat not just to the security of Vietnam, the Philippines and other neighboring countries, but also to their mineral and fishing rights. The international community has a shared interest in discouraging such activities.
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But China’s economic initiatives, which promise benefits both at home and for the country’s partners, are a different matter. For China, the AIIB and Silk Road projects offer alternatives to unproductive domestic investment. Laying the foundations for increased trade among China, South Asia, and emerging Central Asia represents a better outlet for the Chinese construction sector than building more ghost towns at home.
Countries in these other regions, for their part, also will benefit from the additional trade. A Chinese-led infrastructure bank that helps meet their extensive infrastructure needs could integrate these countries more deeply not just with China but also with the rest of the world.
The worry is that China, as the AIIB’s largest shareholder and contributor, will dominate the bank and distort its decision-making. The result, skeptics say, is that AIIB-financed rail and road projects will lead only to China, while recipients grow more dependent – and not just financially – on their powerful funder.
But the fact that more than 50 countries, including advanced economies with democratic values, have joined the AIIB means that it will be possible to monitor its actions. China promises that the new bank will be open and transparent. It should be given the benefit of the doubt, at least until there is evidence to the contrary.
Similarly, renminbi internationalization should be encouraged rather than resisted. To be sure, wider international use of the renminbi as a vehicle for cross-border trade and investment will heighten other countries’ dependence on renminbi-denominated credit in times of crisis. Acknowledging this, the People’s Bank of China has negotiated currency swap lines with other central banks and has designated one of the country’s five large state-owned commercial banks as official clearing bank to settle transactions in renminbi in a variety of foreign financial centers.
Meanwhile, China has asked the International Monetary Fund to include the renminbi in the basket of currencies comprising Special Drawing Rights, the Fund’s unit of account. That is an outcome that the rest of us should welcome, because it would give China a greater stake in a multilateral institution that oversees the operation of the global monetary system.
Renminbi internationalization is also desirable insofar as it gives the world another source of global liquidity besides the dollar. When things go wrong financially in the United States, as they did in 2008, other countries will be able to tap a backup supply of emergency credit.
Indeed, China has designated clearing banks for, and negotiated swap lines with, countries in not just Asia but in Europe and the Western Hemisphere as well. Rather than attempting to build a monetary bloc in Asia, China appears to be seeking to elevate the renminbi to the status of a true global currency that might one day rival the dollar. Given the advantages of having more than one emergency lender and multiple sources of international liquidity, this can only be a good thing for the rest of the world.
No question, China is feeling its oats and asserting itself more forcefully. Where China’s actions threaten its neighbors, as with its territorial claims in the South China Sea, they should be strongly sanctioned and resisted. But where its policies promise economic benefits for other countries, as in the case of infrastructure finance through the AIIB and the Silk Road initiative, they should be encouraged. This is equally true of initiatives like renminbi internationalization, which will integrate China more deeply into the global economy, giving it a bigger stake in the stability of the international system.
Rather than recoiling in fear, the international community should encourage China’s constructive engagement. The first step toward that goal should be to take a more nuanced view of China’s recent initiatives.
Barry Eichengreen is a professor at the University of California, Berkeley, and the University of Cambridge. His latest book is Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History.
Copyright: Project Syndicate, 2015.
www.project-syndicate.org
