Major change is underway in China under President Xi Jinping. And this is not ’sound-bite’ policy change, created for the evening news bulletins. Instead this is long-term strategy, intended to rebuild the economy for decades ahead.
As a result, Western policymakers have largely missed its implications, and are having to scramble to catch up.
One example is the sudden scramble to join China’s new initiative for an Asian Infrastructure Investment Bank (AIIB). Last week’s decision to join by the UK set off a wave of membership applications from Germany, France, Italy, Switzerland and Luxembourg – all rushing to sign up before the 31 March deadline.
There is nothing very controversial about the role of the AIIB, itself. As Reuters notes:
“Western countries had long urged Beijing to recycle some of its trade surplus into building transport, energy and telecommunications networks in developing nations”
The AIIB has been established to do exactly this, implementing Xi’s concept of the new “Silk Roads” that I discussed last November. But it highlights how China wants to have more control over policy, rather than always being dependent on the World Bank and Asian Development Bank, currently dominated by the United States and Japan.
The problem is that the US Congress has refused to ratify a 2010 agreement to give greater voting rights in the IMF to China and other emerging economies. As US Treasury Secretary Jack Lew said last week:
“It’s not an accident that emerging economies are looking at other places because they are frustrated that, frankly, the United States has stalled a very mild and reasonable set of reforms in the IMF.”
Now the US is being abandoned by the other major Western nations on this issue. Put simply, they are fearful of missing out on the trade potential created by the arrival of the AIIB. As Republican Senator Jeff Sessions of Alabama acknowledged:
“I think this could be an unfortunate event and it might be bigger than we understand today.”
Another change is highlighted in the chart above, which shows how China is steadily reducing its lending bubble:
- It focuses on total social financing as this includes official lending and the informal shadow banking system
- It shows this funding on an annual average basis to avoid seasonal volatility
- Lending peaked back in May 2013, soon after Xi came to power, at Rmb 1.57bn ($250bn) per month
- It has since fallen 14% to Rmb 1.36bn/month, a major fall in just 2 years
This fall has taken place gradually, with no media fanfare. So those who focus on short-term news items have missed its implications. But as a senior chemicals executive, long resident in China, told me over the weekend:
“China has definitely changed, especially in construction related sectors.”
In reality, the issue with the AIIB and China’s lending are therefore very similar:
- China is the world’s second largest economy, and yet its voting power at the IMF is just 1/6th of the US. As Lew and Sessions now recognise too late, it was naive to think it would put up with this position forever
- Equally, its lending bubble since 2009 had become unsustainable. It simply couldn’t keep lending vast sums to build empty apartments in ghost cities
But how many companies have revisited their Business Plans to take account of President Xi’s new policies? Not many, I fear.
As a result, like Western policymakers with the AIIB, they are now going to have to scramble to catch up very quickly.
TUESDAY MORNING UPDATE The BBC reports 30 countries have now signed up to join the AIIB, all rushing to catch the 31 March deadline. The IMF has also offered to co-operate with it.