China will grow larger

Originally published in the Informanté newspaper on Thursday, May 21, 2015.

By the end of June 2015, China will have launched its own international financial institution. Called the Asian Infrastructure Development Bank, or AIIB, it is poised to become a real alternative to the current development banking systems such as the World Bank, the International Monetary Fund and the Asian Development Bank. But unlike these incumbent institutions, it will not be led by the United States.

And while its working capital of US$ 50 billion is smaller than that of the World Bank (US$ 2.2 trillion) or the Asian Development Bank (US$ 160 billion), it has managed to attract 57 potential founding members – many of them traditionally staunch US allies. In fact, despite concerted US pressure, its European allies have all joined as founding members of this new bank, alongside its erstwhile enemies such as Russia, and, of course, the BRICS countries. 

And with Japan, Canada and the United States being the only developed economies not participating, the AIIB has painted a picture of an increasingly isolated United States alongside China’s growing role in international finance. In fact, it could be argued that one of the main motives for China in founding the AIIB is the hold up of voting share reform in the IMF, World Bank and other international institutions – a hold up that is mainly due to an un-cooperative US Congress.

While this China-led development bank marks a major shift away from traditionally US-dominated multilateral institutions, China has been quick to assure everyone that it “is not another US,” and does not seek “Yuan hegemony.” Though this may be true, it will nevertheless accelerate the dedollarization of world finance, and weaken the dollar’s position as a world reserve currency.

However, other actions by the People’s Republic of China shows the other side of the coin. Since 2009, it has signed currency swap agreements with 31 counterparties – ostensibly to support trade and investment, and promote the international use of the Yuan. A map of the counterparties looks like a veritable who’s-who of international trade – with the glaring exception, of course, of the United States.

Still, China has not been isolated from the lacklustre growth in the world economy following the financial crisis. Indeed, some estimates put China’s growth rate going forward at only 3.8%. But that is still ahead of most other G20 economies, which worryingly show sign of asset price inflation while simultaneously showing signs of economic deflation. 

And while China’s public debt is one of the highest in the world, at US$ 1.8 trillion, it is comparatively low when compared to the United States, at US$ 15 trillion, especially when you consider China’s Public Debt to GDP is at only 17.3%, compared to the United States at 89.3% of GDP. Namibia itself is at 30.2% of GDP.

But for a single fact, one could almost believe China poses no threat to the US and the US Dollar hegemony over the world. For the past several years, China has been buying oil from Iran in Yuan. This has, in effect started to establish a petroyuan market for oil. And as previously mentioned in the Informanté, the petrodollar has been the basis for the US Dollar gaining its status as a reserve currency.

With Iranian sanctions close to being lifted, it seems China has quietly established a petroyuan market to counter the petrodollar market. The use of the Yuan to settle oil trades is set only to increase, with China viewed as a rising power, and the United States as a declining hegemon. Whatever China’s economic growth, the role of the Yuan seems to have been embedded in a post-US world. Only time will tell if the Chinese Yuan will truly unseat the dollar.