Global Economic Governance in the Wake of the Asian Infrastructure Investment Bank: Is China Remaking Bretton Woods?

Journal of World Investment & Trade 19 (2018) 542–569

Chien-Huei Wu Institute of European and American Studies, Academia Sinica, Taipei, Taiwan [email protected]

Abstract

This article examines China’s participation in the trade, monetary and development assistance fields and concludes that China’s rise does not undermine the centrality of the Bretton Woods institutions or Word Trade Organization (WTO) in global economic governance. Whereas China’s participation in the WTO presents some challenges to the long dominance of the United States and the European Union, it reaffirms the central role of the WTO. China’s monetary strategy also indicates the continuing importance of the International Monetary Fund (IMF) in the international monetary regime. Whereas the Asian Infrastructure Investment Bank (AIIB) introduces some competition to the World Bank and the Asian Development Bank (ADB), China’s efforts in establishing new multilateral development banks are mainly driven by its frustration with stalled reforms of the Bretton Woods institutions. By and large, China’s economic emergence does not challenge, but reaffirms, the post-World War II global economic architecture.

Keywords

Bretton Woods – World Trade Organization (WTO) – global economic governance – Asia Infrastructure Investment Bank (AIIB) – Transatlantic Trade and Investment Partnership (TTIP) – BRICS – International Monetary Fund (IMF) – Reminbi – special drawing rights

* Associate Research Professor, IEAS, Academia Sinica, PhD in Laws (European University Institute).

1 Introduction

The post-World War II economic architecture underpinned by the Bretton Woods system was a political and intellectual product of the transatlantic alliance. With the Transatlantic Trade and Investment Partnership (TTIP), the European Union (EU) and the United States hoped to forge a closer alliance and advance a new horizon of governance in international economic law. However, such a stronger partnership, and the attendant high expectations, face challenges not only from within the transatlantic block but also from emerging economic powers – the BRICS countries (Brazil, Russia, India, China and South Africa) in general and China in particular. This challenge can be seen in the upset and disappointment expressed by the United States when the United Kingdom, followed by Germany, France and the Netherlands, decided to join the Asian Infrastructure Investment Bank (AIIB), which is seen as a rival to the Bretton Woods institutions (and to the Asian Development Bank (ADB)) and may reshape the Bretton Woods system.1 Whether or not the assertion that the AIIB is reshaping the Bretton Woods system is true remains to be seen; nonetheless, doubtless the AIIB presents great challenges to the transatlantic alliance and, consequently, transatlantic governance. In this context, this article aims to examine transatlantic governance in the wake of the AIIB, which can be seen as part of China’s tripartite efforts to internationalize its economy: firstly through its accession to the World Trade Organisation (WTO); secondly, through the internationalization of its currency by bilateral currency swap agreements (‘swaps’), off-shore currency exchange, and successful efforts to include the Chinese Yuan into a basket of currencies of special drawing rights (SDR) in the International Monetary Fund (IMF); and thirdly, through establishing a lending bank under the initiative of the AIIB. On the one hand, China’s challenge to transatlantic economic governance is comprehensive, involving trade, monetarism, and development. On the other hand, China’s efforts to internationalize its economy mirror those of Japan during the 1970s and 1980s, which in turn, reinforces the underlying structure of the Bretton Woods system. The substance of this article will cover three fronts. In the trade aspect, the article will examine China’s role in trade negotiations in multilateral fora and ask how conventional trade negotiation patterns dominated by the EU and United States have been challenged and reshaped. In the monetary dimension,

1 Yelin Hong, ‘The AIIB Is Seen Very Differently in the US, Europe and China’ (The Diplomat, 8 May 2015) accessed 22 June 2016.

Journal of World Investment & Trade 19 (2018) 542–569 544 Wu this article investigates China’s efforts to internationalize its currency and looks at the progress of IMF reform, asking whether the dominance of the transatlantic alliance in the Bretton Woods institutions is justified, and how it might be challenged. Thirdly, in the development dimension, this article explores whether China’s lending activities, largely led by the China Export- Import Bank, and now informed by the perspective of the AIIB, may present a threat to the good governance disciplines set forth by the World Bank in its lending activities. The remainder of this article is organized as follows. Section II traces the role of Bretton Woods institutions and the General Agreement on Tariffs and Trade (GATT)/WTO regime in global economic architecture and explores how the dominance of the transatlantic alliance in global economic governance is challenged by the rise of China in international relations. Section III examines three dimensions of China’s efforts to internationalize its economy: trade, monetarism, and development. The article then concludes that China is not forging a new Bretton Woods and GATT/WTO architecture; on the contrary, it is reinforcing the underlying role the Bretton Woods institutions play in global economic governance.

2 Bretton Woods, Global Economic Governance and the Rise of China

2.1 Bretton Woods and the Global Economic Architecture Even before World War II came to an end, political and intellectual leaders in the United States and Europe had started to outline the architecture of post-war global governance, which is manifested economically in the Bretton Woods institutions and the GATT regime and politically in the United Nations system.2 Over the past few decades, the United States and Europe have contributed to the formulation and shaping of the international agenda. In fact, they are the main driving force behind these post-war global institutions and multilateral regimes.3 Institutionally, the Bretton Woods institutions privilege the United States by giving it veto power in major decision-making processes.

2 On the origin of Bretton Woods institutions and the GATT, see Raymond F Mikesell, The Bretton Woods Debates: A Memoir (Princeton University Department of Economics 1994); Douglas A Irwin, Petros C Mavroidis and Alan O Sykes, The Genesis of the GATT (CUP 2008). 3 Hungdah Su, ‘EU–Taiwan Relationship Since 1981’ in Thomas Christiansen, Emil Kirchner and Philomena B Murray (eds), The Palgrave Handbook of EU-Asia Relations (Palgrave MacMillan 2013) 23.

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Operationally, the United States and Europe continuously occupy the highest positions of these two institutions. Ideologically, the Bretton Woods institutions (and the GATT/WTO regime) prioritize market economy, rule of law and democratic governance, a trifecta encapsulated in the so-called Washington Consensus.4 The dominance of the United States and Europe in global economic governance was nonetheless challenged by first Japan in the 1970s and then the BRICS in the late 1990s and into the new millennium. With fast-moving economic growth, BRICS countries claim that the current global economic architecture favours the transatlantic partners and aim to assert a greater presence in global economic governance.5 Moreover, emergent countries display a weak sense of ownership of the rules underlying the global economic architecture given their absence or weak voice when these rules were shaped. Therefore, the challenges presented by the emergence of BRICS countries, China in particular, is an alternative development path other than the prescription of the Washington Consensus and a competition for new rules for the global economic order. In the first place, the fast pace of China’s economic growth lends strength to the argument that economic growth does not necessarily rely on political free- dom and human rights protection, or even effective property rights. Economic liberalization can be insulated from political reform. This development model differs from the path consistently advocated by the Bretton Woods institutions. Moreover, China’s anxiety for reshaping the rules of the global economic order has moved China to join the free trade agreement (FTA) race and to establish the AIIB. In response, the transatlantic alliance has aimed to, in part, pre- empt China’s efforts in pursuing new rules by setting global standards with the TTIP negotiations. Nonetheless, the transatlantic alliance diverges as to whether to join the AIIB or not. In view of these divergences, the return of China to prominence in international economic relations is sometimes seen as a threat.

4 For a clear depiction of this controversial concept of Washington Consensus, see John Williamson, ‘What Washington Means by Policy Reform?’ in John Williamson (ed), Latin American Adjustment: How Much Has Happened? (Peterson Institute for International Economics 1990) ch 2; John Williamson, ‘What Should the World Bank Think About the Washington Consensus?’ (2000) 15 World Bank Research Observer 251; on the critique of Washington Consensus, see Joseph Stiglitz, ‘More Instruments and Broader Goals: Moving Toward the Post–Washington Consensus’ (The 1998 WIDER Annual Lecture, Helsinki, 7 January 1998) accessed 22 June 2016. 5 Su (n 3) 29.

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2.2 China’s Threat and the Socialization of International Relations The ‘China threat’ thesis covers different grounds. To begin with, the rise of China may be seen as a threat to the existing great powers, notably, to US hegemony. Secondly, the rise of China may destabilize and undermine Asia-Pacific regional security. Thirdly, the rise of China may pose challenges to the international legal order.6 The ‘China threat’ thesis is vividly captured by the words of Robert Kagan in 1997:

The Chinese leadership views the world today in much the same way Kaiser Wilhelm II did a century ago: The present world order serves the needs of the United States and its allies, which constructed it. And it is poorly suited to the needs of a Chinese dictatorship trying to maintain power at home and increase its clout abroad. Chinese leaders chafe at the constraints on them and worry that they must change the rules of the international system before the international system changes them.7

The ‘China threat’ thesis presents several arguments. First, China acts in accordance with the values and rules of the Chinese Communist Party, which is incompatible with Western values. Besides, with a qualitative change of China’s political, economic and military power, China would, following the steps of major great powers, strive to pursue hegemony, at least in the Asia-Pacific region.8 Furthermore, it is submitted that China’s political elites and academic analysts tend to be suspicious of multilateral organizations, ranging from economic, environmental, and non-proliferation to regional security, since they regard the norms advanced by these organizations as fronts for other powers. They view ‘complaints about China’s violations of international norms or laws as part of an integrated Western strategy, led by Washington, to prevent China from becoming a great power’.9 As a consequence, China, along with its alliance of the ‘dissatisfied’, looks for the correction of its marginalization

6 Cf Emma V Broomfield, ‘Perceptions of Danger: The China Threat Theory’ (2003) 12 Journal of Contemporary China 265. Broomfield categorizes China threat into ideological threat, economic threat and military threat. 7 Robert Kagan, ‘What China Knows We Don’t: The Case for a New Strategy of Containment’ (Carnegie Endowment for International Peace, Washington DC, 20 January 1997) accessed 22 June 2016. 8 Denny Roy, ‘The “China Threat” Issue’ (1996) 36 Asian Survey 758, 758–762. 9 Thomas J Christensen, ‘Chinese Realpolitik’ (1996) 75 Foreign Affairs 37, 38.

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 547 and underrepresentation in the current global order and advocates for the re-distribution of global power and the rewriting of global rules.10 However, the ‘China threat’ thesis receives a large number of criticisms. Methodologically, the ‘China threat’ is a hypothesis about the future whose supporting examples are imperfect analogies, such as Kaiser Wilhelm’s Germany. The theoretical foundation of the ‘China threat’ thesis suffers from two contradictions. Firstly, it is based on the assumption of China’s grand strategy, which is no more than a guess as to China’s future. Secondly, the history of international relations has already witnessed exceptions to offensive realism, where a rise of one great power does not necessarily lead to conflicts or wars. Strategically, the ‘China threat’ thesis is a dangerous self-fulfilling prophecy. Arm-waving by policy-makers in Washington may force China to militarize itself, which escalates the tensions.11 In the context of global legal order, Yong Deng and Thomas G. Moore argue that, while China has attempted to assert its voice, its positions are hardly confrontational. ‘China has resisted the norms and principles of the liberal international economic system no more than most developing countries.’12 Although China has expressed a clear dissatisfaction with both the overall structure of global order and China’s role and power status within it, the aim of China is to ‘reform the system, not overthrow it, and to reform it responsibly from within.’13 Moreover, scholars of state socialization argue that a newcom- er to an international regime would learn to adopt the norms, values, atti- tudes and behaviours accepted and practiced by the system14 and that actors thus in the end adopt the beliefs and behaviour patterns of the surrounding culture.15 In the following, I would argue that while the return of China to international relations weakens the dominance of the transatlantic alliance, it does not undermine the global economic order underpinned by the Bretton Woods institutions and the GATT/WTO regime. Rather, it re-affirms the centrality of these institutions in global economic governance.

10 Shaun Breslin, ‘China and the Global Order: Signalling Threat or Friendship’ (2013) 89 International Affairs 615, 617. 11 Khalid R Al-Rodhan, ‘A Critique of the China Threat Theory: A Systematic Analysis’ (2007) 31 Asian Perspective 41, 62–64. 12 Yong Deng and Thomas G Moore, ‘China Views Globalization: Toward a New Great-Power Politics’ (2004) 27 The Washington Quarterly 113, 125. 13 Breslin (n 10) 617. 14 Alastair Iain Johnston, ‘Treating International Institutions as Social Environments’ (2001) 45 International Studies Quarterly 487, 495. 15 Ryan Goodman and Derek Jinks, ‘How to Influence States: Socialization and International Human Rights Law’ (2004) 54 Duke L J 621, 626.

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3 China’s Efforts in Internationalizing Its Economy

3.1 Trade Dimension Since opening-up in 1978, China’s policy of pursing export-oriented trade has constituted the driving force behind its economic growth. Given the critical role international trade came to play in its economy, China soon recognized the compelling need to join the regulatory regime on multilateral trade and, in 1986, applied to ‘resume’ its status as a contracting party to the GATT, and subsequently for membership in the WTO. Following 15 years of negotiations, China’s accession to the WTO – which was equally important to both China and the WTO – was finalized during the 2001 Doha Ministerial Conference.16

3.1.1 The Meaning of WTO Membership for China On the China side, the WTO rules and good governance obligations con- tained in China’s accession protocol have contributed to the locking-in of the progress of economic and legal reform.17 With WTO membership, China is able to participate on an equal footing in the multilateral trading system and enjoy the same rights and obligations as others under WTO agreements. So far, China has benefitted greatly from the WTO dispute settlement mechanism in safeguarding its economic interests,18 the best examples being the US–Anti-Dumping and Countervailing Duties19 and EC–Fasteners cases.20 As is well-known, China’s accession protocol is not a standardized instrument, but contains a number of substantive China-specific obligations,21 including a special method for calculating the dumping margin not based upon a strict

16 On this topic, see eg Deborah Z Cass, Brett Williams and George Robert Barker, China and the World Trading System: Entering the New Millennium (CUP 2003); Henry Gao and Donald Lewis, China’s Participation in the WTO (Cameron May 2005). 17 See eg Chien-Huei Wu, ‘How Does TRIPS Transform Chinese Administrative Law?’ (2008) 8(1) Global Jurist 1. 18 See eg Henry Gao, ‘Aggressive Legalism: The East Asian Experience and Lessons for China’ in Henry Gao and Donald Lewis (eds), China’s Participation in the WTO (Cameron May 2005) 315–51; Chien-Huei Wu and Kuei-Chih Yang, ‘Aggressive Legalism: China’s Proactive Role in Renewable Energy Trade Disputes?’ (2015) 13(3) Oil, Gas, and Energy 1. 19 WTO, United States–Definitive Anti-Dumping and Countervailing Duties on Certain Prod- ucts from China, Report of the Appellate Body (11 March 2011) WT/DS379/AB/R. 20 WTO, European Communities–Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, Report of the Appellate Body (15 July 2011) WT/DS397/AB/R. 21 See eg Julia Ya Qin, ‘“WTO-Plus” Obligations and Their Implications for the World Trade Organization Legal System – An Appraisal of the China Accession Protocol’ (2003) 37 Journal of World Trade 483; Julia Ya Qin, ‘WTO Regulation of Subsidies to State-Owned

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 549 comparison with domestic prices or costs in China.22 Based on this provision, the EU and United States treat China as a non-market economy (NME) and apply different rules in anti-dumping investigations against Chinese products. Moreover, the United States and EU tend to impose simultaneous anti-dumping and countervailing duties Against Chinese products with a view to offering additional protection to domestic industries. In US–Anti-Dumping and Countervailing Duties, the United States was found to have violated WTO law since it failed to guard against the possibil- ity of a ‘double remedy’ being imposed by concurrent anti-dumping and anti- subsidy duties against Chinese products. According to the Appellate Body, a ‘double remedy’ may arise from the simultaneous imposition of anti-dumping and countervailing duties against the same product. ‘Double remedies’ are likely to occur in cases where an NME methodology is used to calculate the margin of dumping; however, ‘double remedy’ does not, as such, mean a simultaneous imposition of anti-dumping and countervailing duties. Rather, it refers to circumstances in which the simultaneous application of anti- dumping and countervailing duties on the same imported products results, at least to some extent, in twice offsetting the same subsidization.23 In other words, a simultaneous imposition of anti-dumping and countervailing duties does not necessarily lead to offsetting the same subsidization twice, but tends to arise when a NME methodology is used since the investigating country would choose a third surrogate/analogue country to determine the normal value of products originating from a nonmarket economy country. In this case, this normal value based on the third country price already reflects the effects of subsidization in calculating dumping margin. Therefore, anti-dumping duties have remedied the injury caused by the subsidization of a nonmarket economy country; if additional anti-subsidy duties are imposed, it is likely that double remedies occur.

Enterprises (SOEs) – A Critical Appraisal of the China Accession Protocol’ (2004) 7 Journal of World Trade 863. 22 WTO, Report of the Working Party of the Accession of China, Report of the Working Party (1 October 2001) (China’s Accession Protocol) WT/ACC/CHN/49, para 15(a)(ii) [The im- porting WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.]. 23 US–Anti-Dumping and Countervailing Duties, Appellate Body Report (n 19) para 541; see further Renato Antonini and Eva Monard, ‘The Concurrent Imposition of Anti-Dumping and Countervailing Measures on Non-Market Economies: Time for a Clean Sheet for (Chinese) Paper Approach’ (2011) 17 International Trade Law & Regulation 87, 87–96.

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In the context of the EU approach, one of the key features of anti-dumping investigations against Chinese products is the application of a ‘one country, one duty’ rule. China has successfully challenged the WTO-consistency of the EU’s practice of ‘one country, one duty’.24 The Appellate Body in EC–Fasteners, relying upon the terms ‘shall’ and ‘as a rule’ in Article 9.2 of the Anti-Dumping Agreement, interpreted the obligation to determine an individual dumping margin as mandatory.25 The Appellate Body further clarified that the ‘flexibil- ity’ permitted in Paragraph 15 of China’s Accession Protocol relates solely to price comparability in determining the normal value of a good. It does not offer any space for the ‘one country one duty’ rule.26 In these two cases, China used the WTO dispute settlement mechanism as a forum for defending its economic interests. Although the special price comparison provided in Paragraph 15 of China’s Accession Protocol is unfavourable to China, China nonetheless succeeded in preventing the United States and EU from further manipulating the WTO-plus rules in China’s Accession Protocol. In addition to the judicial protection offered by the WTO dispute settlement mechanism, China has striven to take advantage of the WTO as a negotiating forum to forge new, more favourable trade rules. This trend should be seen in the context of trade remedy rule negotiations, as China is a major target for the use and abuse of trade remedies. Apart from the multilateral forum, China has also used bilateral free trade agreement negotiations as a means of redressing unfavourable trade rules against China. The most salient example is the recognition of China as a market economy in these bilateral FTAs. China’s ambition to forge new trade rules is also present in the so-called mega FTA negotiations,

24 According to Article 9(5) of the Council Regulation (EC) No 1225/2009, ‘an anti-dumping duty shall be imposed in the appropriate amounts in each case, on a non-discriminatory basis on imports of a product from all sources found to be dumped and causing injury, except for imports from those sources from which undertakings under the terms of this Regulation have been accepted.’ Unless, the investigated Chinese producer prove that it fulfills criteria to be granted market economy treatment or individual treatment, a single duty will be non-discriminatorily imposed against all Chinese producers. As this ‘one country, one duty rule’ was held WTO-inconsistent, the EU amended this rule with the adoption of the Regulation (EU) No 765/2012 of the European Parliament and of the Council. see further, Chien-Huei Wu, ‘Key Issues Regarding the EU’s Concurrent Imposition of Anti-Dumping and Countervailing Duties Against Chinese Coated Fine Papers: Analogue Country, Market Economy Treatment, Individual Treatment, and Double Remedies’ (2015) 10 Asian Journal of WTO and International Health Law and Policy 263, 285–287. 25 EC–Fasteners, Appellate Body Report (n 20) para 354. 26 ibid para 290.

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 551 especially the Regional Comprehensive Economic Partnership (RCEP), to which the United States responded by saying that ‘[the United States] can’t let countries like China write the rules of the global economy.’27

3.1.2 The Meaning of China to the WTO The accession of China to the WTO is of equal importance to the WTO, as it carries symbolic and substantive implications. Symbolically, China’s move to begin its process of accession to the WTO was viewed as the most significant event of the first seven-years of the WTO and made the WTO seem a truly ‘world’ trade organization.28 Substantively, bringing China into the purview of the WTO and subjecting China to its regulation has widened the influence of the WTO. On the eve of its accession to the WTO, China was ranked the fourth largest exporter and importer of merchandise trade (the EU being counted as whole), accounting for 5 and 4.3% respectively of total trade volume.29 By 2013, China had become the world’s largest exporter and second largest importer in merchandise trade, accounting for 11.7 and 10.3% respectively of total trade volume.30 The accession of China to the WTO has significantly changed conventional patterns of negotiation and dispute settlement practices. In the GATT era, negotiation processes were dominated by the so-called Quad (the United States, EU, Canada and Japan). Today, it is nearly impossible to move forward during the negotiation processes without China on board. Aaditya Mattoo and Arvind Subramanian observe that there is a great shared, but unuttered, fear in the Green Room, where the key negotiations take place, about the competition from an increasingly dominant China.31 They see China’s pursuit of influence in the WTO as ‘an elephant in the Green Room’, which may ruin the delicate balance between the existing trade powers. Sungjoon Cho provides another example of how China, in conjunction with India, Brazil and other developing countries, opposed the EU-US joint paper which proposed to limit

27 The White House Press Release, ‘Statement by the President on the Trans-Pacific Partnership’ (5 October 2015) accessed 22 June 2016. 28 John H Jackson, ‘The Impacts of China’s Accession to the WTO’ in Cass, Williams and Barker (n 16) 19–30. 29 WTO, International Trade Statistics 2001 (World Trade Organization 2001) 22. 30 ibid 26. 31 Aaditya Mattoo and Arvind Subramanian, ‘China and the World Trading System’ (2012) 35 The World Economy 1733, 1737–38.

Journal of World Investment & Trade 19 (2018) 542–569 552 Wu the elimination of export subsidies to ‘products of particular interests to developing countries’ by formatting the G-21 group at the Cancún Ministerial Conference.32 With the opposition G-21 group, the EU-US joint paper did not obtain sufficient support and the final outcome turned out to be the phasing out of all export subsidies.33 With respect to dispute settlement, before China’s entry into the WTO, much attention was paid to transatlantic disputes, such as EC–Biotech Products; now, China-related disputes have become the focus of academic work and policy debates. Since China joined the WTO in 2001, it has gradually learned, especially through third party participation, how to shield its economic interests through the WTO dispute settlement mechanism. As can be seen from the chart below, China-related disputes account for a large share of the total WTO disputes initiated in every single year. In 2009, half of the total disputes initiated were China-related. Also, within those China-related disputes, the percentage of disputes in which China is the complainant is increasing. This suggests that the entry of China into the WTO has not only brought a flood of complaints against China’s failure to honour its WTO obligations, but

Source: World Trade Organization. Chronological List of Disputes Cases. Retrieved from and accessed 11 March 2018.

32 EU-US Joint Paper (13 August 2003) art 3.1 (stating that ‘[w]ith regard to export subsidies: Members shall commit to eliminate over a year period export subsidies for the following products of particular interest to developing countries …; for the remaining products, Members shall commit to reduce budgetary and quantity allowances for export subsidies’). The joint paper is reproduced in Martin Khor, ‘Comment on the EC-US Joint Paper on Agriculture in WTO’ Third World Network (14 August 2003) accessed 22 June 2016. 33 Sungjoon Cho, ‘A Bridge Too Far: The Fall of the Fifth WTO Ministerial Conference in Cancún and the Future of Trade Constitution’ (2004) 7 JIEL 219, 244.

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 553 also opened a door for China to complain against other WTO members for their own WTO-incompatible trade measures.

3.1.3 Interim Conclusion China’s accession to the WTO was the first step toward China’s integration into the global economy. Bringing China into the world trading system made the WTO into a true ‘world’ trade organization, as China captures a lion’s share of international trade volume. China’s participation in the WTO, both during Doha Round negotiations and through WTO dispute settlement mechanisms, have significantly changed conventional practices previously dominated by the United States and EU. However, China’s pursuit of WTO membership, and its role therein, by no means challenges or undermines the leading role of the WTO in the international trading system. On the contrary, it strengthens the legitimacy of the WTO while at the same time making it more difficult to reach a deal without China on board. Moreover, China’s policy in the WTO is to strive to upgrade its status from that of a ‘second-tier’ member to a normal one. The application of Paragraph 15 of China’s accession protocol, and US and EU treatment of China as a non-market economy, are a stigma China is keen to be rid of. Whereas the former expired in December 2016, it is still not entirely clearly whether the United States or the EU will be willing to grant China market economy status in the near future. Thus, China’s participation in the WTO can be characterized in terms of ‘a trade giant looking for recognition’ – a con- dition which indeed reaffirms the importance of the post-World War II global economic architecture.

3.2 Monetary Dimension The internationalization of China’s currency is coupled with China’s export- oriented development model. With its tremendous trade surplus and accumulation of foreign reserves, China is now striving to translate its foreign reserves into capital for the internationalization of its currency. Despite constraints such as a lack of capital account liberalization and the underdevelopment of its financial markets, China has made great efforts to internationalize its currency. The objective of the internationalization of Chinese currency has been pursued via two tracks: trade and finance, with the first strategic goal (accomplished in 2015) being the inclusion of the Chinese Yuan as part of the basket of currencies that make up the SDR. As Benjamin Cohen observes, the trade track focuses on the use of Renminbi (RMB) in international trade activities. China has concluded a number of swaps to facilitate the use of RMB as a means of payment; at the same time, private actors are allowed to invoice and settle their trade transactions with Chinese RMB instead of using conventional

Journal of World Investment & Trade 19 (2018) 542–569 554 Wu major currencies, such as the dollar. The finance track emphasizes building up a Yuan deposit market and Yuan-denominated bonds through offshore trading centres.34 Similarly, the SWIFT white paper on RMB internationalization sees a three-phase path of Chinese currency internationalization, first for trade finance, then for investment, and finally as a reserve currency.35 Below, I will discuss China’s two-track strategy to achieve its medium-term goal for the inclusion of Chinese Yuan in the SDR, which was accomplished by the IMF Executive Board’s decision on 30 November 2015.

3.2.1 Trade Track Its large trade volume is undoubtedly an important asset for China to internationalize its currency. To allow and encourage private actors to invoice and settle their international commercial transactions in Yuan, domestically China has adopted regulations to permit clearing in RMB in cross-border trade,36 and externally has concluded a number of swaps with third countries. Prior to 2009, China had already permitted private actors in Guangdong to settle their cross-border trade activities in RMB with Hong Kong and Macau, and private actors in Guangxi and Yunnan to settle their transactions in RMB with Southeast Asian Nations. Based on these experiences, the State Council decided to allow private actors in the five designated cities, including Shanghai, Guangzhou, and Shenzhen, to settle their transactions in RMB. Such a move may contribute to favourable borrowing costs, reduced foreign exchange risks, and possibly improved supplier access to RMB payment options.37 According to SWIFT, the Chinese Yuan in 2015 overtook the Japanese Yen as the fourth- largest world payment currency, accounting for 2.79% of global payments in August 2015. In October, China fell back to fifth-largest with a share of 2.45%, but the trend favouring increased use of the Chinese Yuan in trade payments remains unchanged.38

34 Benjamin J Cohen, ‘The Yuan Tomorrow? Evaluating China’s Currency Internationalisation Strategy’ (2012) 17 New Political Economy 361, 362. 35 SWIFT, RMB Internationalization: Perspectives on the Future of RMB Clearing (SWIFT 2012) 1. 36 The People’s Bank of China, the Ministry of Finance, ‘Measures for the Administration of Pilot RMB Settlement in Cross-border Trade, Announcement [2009] No. 10’ (1 July 2009) accessed 22 June 2016. In June 2010, China extended its pilot program to 20 provinces of China and opened cross- border trade settlement in RMB completely in August 2011. 37 SWIFT (n 35) 2. 38 SWIFT Press Release, ‘RMB Falls Back to Position #5 as an International Payment Cur- rency’ (29 October 2015) accessed 22 June 2016.

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In parallel with China’s liberalization of the use of RMB for private actors in settling cross-border transactions, China has also concluded a number of swaps with third countries. Swaps were originally concluded between China and Southeast Asian nations based on the Chiang Mai Initiative, with a view to help shield the latter nations from foreign exchange rate fluctuations. The same purpose is also evident in the situation post-2008, when China looked to western countries to conclude swaps. As a side benefit, swaps with the central banks of China’s major trading partners, including the United Kingdom, the EU, and Brazil, may also enable foreign central banks to supply Chinese RMB to their domestic residents for regular use in bilateral trade activities, which indirectly encourages the commercial use of Chinese currency.39 A list of China-swaps is shown below.

Nr. State Date of signature Scale Term (Rnl: Renewal) (Bn: Billion; Tn: Trillion) (Yrs)

1 Hong Kong 2009.1.20 CNY 200 Bn/HKD 227 Bn 3 2011.11.22 (Rnl) CNY 4000 Bn/HKD 505 Bn (Rnl) 2 South Korea 2009.4.20 CNY 180 Bn/KRW 38 Tn 3 2011.10.26(Rnl) CNY 360 Bn/KRW 64 Tn(Rnl) 3 Malaysia 2009.2.8 CNY 80 Bn/MYR 40 Bn 3 2012.2.8 (Rnl) CNY 180 Bn/MYR 90 Bn (Rnl) 2015.4.17 (Rnl) – 4 Belarus 2009.3.11 CNY 20 Bn/BYR 8 Tn 3 2015.5.10 (Rnl) CNY 7 Bn/BYR 16 Tn (Rnl) 5 Indonesia 2009.3.23 CNY 100 Bn/IDR 175 Tn 3 2013.10.1(Rnl) CNY 100 Bn/IDR 175 Tn (Rnl) 6 Argentina 2009.4.2 CNY 70 Bn/ARS 38 Bn 3 2014.7.18 (Rnl) CNY 70 Bn/ARS 90 Bn (Rnl) 7 Iceland 2010.6.9 CNY 3.5 Bn/ISK 66 Bn 3 2013.9.11 (Rnl) CNY 3.5 Bn/ISK 66 Bn (Rnl) 8 Singapore 2010.7.23 CNY 150 Bn/SGD 30 Bn 3 2013.3.7 (Rnl) CNY 300 Bn/SGD 60 Bn (Rnl)

39 Cohen (n 34) 363.

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Table (cont.)

Nr. State Date of signature Scale Term (Rnl: Renewal) (Bn: Billion; Tn: Trillion) (Yrs)

9 New Zealand 2011.4.18 CNY 250 Bn/NZD 5 Bn 3 2014.4.25 (Rnl) 10 Uzbekistan 2011.4.19 CNY 0.7 Bn/UZS 167 Bn 3 (expired) 11 Mongolia 2011.5.6 CNY 5 Bn/MNT 1 Tn 3 2014.8.21 (Rnl) CNY 15 Bn/MNT 4.5 Tn (Rnl) 12 Kazakhstan 2011.6.13 CNY 7 Bn/KZT 150 Bn 3 2014.12.14 (Rnl) CNY 7 Bn/KZT 200 Bn 13 Thailand 2011.12.22 CNY 70 Bn/THB 320 Bn 3 2014.12.22 (Rnl) CNY 70 Bn/THB 370 Bn 14 Pakistan 2011.12.23 CNY 10 Bn/PKR 140 Bn 3 2014.12.23 (Rnl) CNY 10 Bn/PKR 165 Bn (Rnl) 15 UAE (expired) 2012.1.17 CNY 35 Bn/AED 20 Bn 3 16 Turkey 2012.2.21 CNY 10 Bn/TRY 3 Bn 3 17 Australia 2012.3.22 CNY 200 Bn/AUD 30 Bn 3 2015.3.30 (Rnl) CNY 200 Bn/AUD 40 Bn (Rnl) 18 Ukraine 2012.6.26 CNY 15 Bn/UAH 19 Bn 3 2015.5.15 (Rnl) CNY 15 Bn/UAH 54 Bn 19 Brazil 2013.3.26 CNY 190 Bn/BRL 60 Bn 3 20 UK 2013.6.22 CNY 200 Bn/GBP 20 Bn 3 2015.10.20 (Rnl) CNY 350 Bn/GBP 35 Bn 21 Hungary 2013.9.9 CNY 10 Bn/HUF 375 Bn 3 22 Albania 2013.9.12 CNY 2 Bn/ALL 35.8 Bn 3 23 European 2013.10.8 CNY 350 Bn/EUR 45 Bn 3 Central Bank (ECB) 24 Switzerland 2014.7.21 CNY 150 Bn/CHF 21 Bn 3 25 Sri Lanka 2014.9.16 CNY 10 Bn/LKR 225 Bn 3 26 Russia 2014.10.13 CNY 150 Bn/RUB 815 Bn 3 27 Qatar 2014.11.3 CNY 35 Bn/QAR 20.8 Bn 3 28 Canada 2014.11.8 CNY 200 Bn/CAD 30 Bn 3 29 Suriname 2015.3.18 CNY 1 Bn/SRD 0.52 Bn 3 30 Armenian 2015.3.25 CNY 1 Bn/AMD 77 Bn 3

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 557

Nr. State Date of signature Scale Term (Rnl: Renewal) (Bn: Billion; Tn: Trillion) (Yrs)

31 South Africa 2015.4.10 CNY 30 Bn/ZAR 54 Bn 3 32 Chile 2015.5.25 CNY 22 Bn/CLP 2200 Bn 3 33 Tajikistan 2015.9.3 CNY 3 Bn/TJS 3 Bn 3 SUM CNY 3312.2 Bn

Source: The People’s Bank of China accessed 22 June 2016.

3.2.2 Finance Track The finance track of China’s efforts to internationalize the RMB is carried out mainly through offshore RMB centres. As of 1 December 2015, 16 cities have opened RMB offshore centres. A list of offshore RMB centres and the corre- sponding clearing banks is shown below.

Nr. City Designated banks Time of (CNY Bn) establishment SWAP RQFII Deposit volume

1. Hong Kong Bank of China Dec 2003 400 270 895.37 (Hong Kong) Ltd.* (1st & biggest) 2. Macau Bank of China Sep 2004 – – 80.22 (Macau Branch) 3. Taipei Bank of China Dec 2012 – *** 60.26 (Taipei Branch) 4. Singapore Industrial and Feb 2013 300 50 322 Commercial Bank of China (Singapore Branch) 5. London, China Construction Jun 2014 200 80 54.24 U.K. Bank (London) (GBP Ltd.* 5614 Mn) 6. Frankfurt/M., Bank of China – Jun 2014 350** 80 11.7 Germany Frankfurt Branch

Journal of World Investment & Trade 19 (2018) 542–569 558 Wu

Table (cont.)

Nr. City Designated banks Time of (CNY Bn) establishment SWAP RQFII Deposit volume

7. Seoul, South Bank of Jul 2014 360 80 26.92 (USD Korea Communication – 4.22 Bn) Seoul Branch 8. Paris, France Bank of China – Sep 2014 350** 80 700 Paris Branch 9. Luxembourg Industrial and Sep 2014 350** 50 8.9 Commercial Bank of China (Luxembourg Branch) 10. Doha, Qatar Industrial and Nov 2014 35 30 11.5 Commercial Bank of China (Doha Branch) 11. Toronto, Industrial and Nov 2014 200 50 – Canada Commercial Bank (Canada) Ltd. 12. Sydney, Bank of China Nov 2014 200 50 635.5 Australia (Sydney Branch) 13. Kuala Bank of China Jan 2015 180 – 115 Lumpur, (Malaysia) Ltd.* Malaysia 14. Bangkok, Industrial and Jan 2015 70 – – Thailand Commercial Bank of China (Thai) Ltd.* 15. Santiago, China May 2015 22 50 – Chile Construction Bank (Chile Branch) 16. Budapest, Bank of China Jun 2015 10 50 – Hungary (Hungary Branch)

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 559

Nr. City Designated banks Time of (CNY Bn) establishment SWAP RQFII Deposit volume

17. Johannesburg, Bank of China Jul 2015 30 – 24 South Africa (Johannesburg Branch) 18. Bueno Aires, Industrial and Sep 2015 70 – – Argentina Commercial Bank of China (Argentina Branch)

* According to People’s Bank of China’s 2015 Report on RMB Internationalization, several designated banks are limited companies (Ltd.). ** Luxembourg, France and Germany benefit from the currency swap agreement between the People’s Bank of China and the European Central Bank. *** The allocation of Taiwan’s RQFII quota is conditional on the finalization of a prior trade agreement. Source: Payment and Clearing Association of China ; Research School of Finance, Actuarial Studies and Statistics, Australia National University ; Bank for International Settlements ALL accessed 22 June 2016.

The operation of offshore RMB centres is normally governed by two legal instruments. Firstly, the People’s Bank of China (PBoC) will conclude a memorandum of understanding (MoU) on clearing and settlement with the central banks of the relevant countries where the offshore centres are located. These MoUs provide for the designation of clearing banks in charge of the monetary clearing and settlement and relevant regulation for such designated banks as well as the use of currencies of the contracting parties in international trade activities.40 Based on these MoUs, the PBoC and the counterpart central banks then designate the clearing banks in accordance with their domestic regulations. In practice, the PBoC signs an agreement with the designated clearing

40 See eg Cross-Strait Memorandum of Understanding on Monetary Clearing and Settlement (signed 31 August 2012, entered into force 6 September 2012) arts 1.2; 1.3 and 1.4.

Journal of World Investment & Trade 19 (2018) 542–569 560 Wu banks in order to operationalize the clearing and settlement activities. While these clearing agreements with the designated banks do not address directly the operation of offshore RMB centres, the designation and operation of such clearing banks is nonetheless a prerequisite for the proper functioning of an offshore RMB centre. Therefore, such agreement constitutes the second legal instrument governing the operation of the offshore RMB centres. The operationalization of offshore RMB centres can be mapped in three directions: from individuals to corporations; from current account to capital account; from inward investment to outward investment. In accordance with the liberalization process of Chinese RMB and the diversification of the activities covered by the RMB offshore centres, China may from time to time revise its MoUs with foreign central banks and clearing and settling agreements with the designated banks. To date, Hong Kong is the most developed and most important offshore RMB centre, in large part due to its long-term operations.41 The development of the Hong Kong RMB offshore centre thus illustrates nice- ly the finance track of China’s efforts to internationalize the RMB. The operation of the Hong Kong RMB offshore centre kicked off in 2003 with the PBoC (Hong Kong)’s designation as the clearing bank, starting with the activities of deposit, currency exchange, and money transfer by Hong Kong residents and then extending to Hong Kong registered corporations. The re- quirements of residency or Hong Kong registration were later removed, allow- ing non-residents and non-HK registered corporations to benefit from these services. With the accumulation of deposits from individuals and enterprises, the second direction of the development of the Hong Kong RMB offshore centre relates to the liberalization of current account trading to capital account trading. In 2010, the Hong Kong RMB offshore centre was allowed to provide financial services regarding RMB payments arising from international trade activities, with capital account trading still subject to great controls. Thirdly, investments in RMB started from the liberalization of RMB foreign direct investment (RFDI) to investment in China with RMB accounts in Hong Kong, and then was extended to qualified foreign institutional investors (RQFII) to invest in China’s securities markets in 2011. In the same year, outward foreign

41 On the development of Hong Kong RMB offshore, see generally, Hong Kong Monetary Authority, Hong Kong – The Premier Renminbi Business Center (January 2016) accessed 22 June 2016; see also Hung‐Gay Fung and Jot Yau, ‘Chinese Offshore RMB Currency and Bond Markets: The Role of Hong Kong’ (2012) 20 China & World Eco‑ nomy 107.

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 561 direct investments in RMB from China were permitted under pilot programs on RMB settlements.42 Finally, the activities of the Hong Kong RMB offshore centre also cover the issuance of RMB denominated bonds – the so-called Dim Sum bonds.43 Such services were first made available to Chinese financial institutions in 2007 but soon extended to all companies. Currently, both Chinese enterprises and foreign enterprises may issue RMB-denominated bonds in Hong Kong. In addition to Dim Sum bonds, RMB denominated bonds also include Lion City bonds, issued in Singapore, and Formosa bonds, issued in Taiwan. Moving beyond corporate bonds, the United Kingdom is planning to issue the first Chinese RMB denominated sovereign debt issued outside China.44 The increasing use of RMB in bond markets also contributes to the internationalization of Chinese currency.

3.2.3 Strategic Goal China’s pursuit of the inclusion of the Yuan as part of a basket of currency in the SDR has a long history, and it heated up in 2009 after the proposal of the Governor of PBoC, Zhou Xiaochuan, on the Reflection of the Reform of the International Monetary System.45 In that proposal, Zhou argued for the substitution of the US dollar as a world currency by an SDR reflective of the current strength of currencies in the international economy. Zhou’s proposal was advanced in the aftermath of global financial crisis, when the call for reform of the international monetary system was at a peak, in particular at the G20 meeting.46 In this context, inclusion in an SDR was widely regarded as the major objective of China’s monetary reform and Yuan diplomacy.

42 The People’s Bank of China, the Ministry of Finance, ‘Administrative Measures for the Pilot RMB Settlement of Outward Direct Investment, Announcement [2011] No. 1’ (6 January 2011) accessed 22 June 2016. 43 On this topic, see eg Hung-Gay Fung, Derrick Tzau and Jot Yau, ‘Offshore Renminbi- Denominated Bonds: Dim Sum Bonds’ (2013) 46 Chinese Economy 6. 44 Lucy Meakin, ‘U.K. to Sell First Yuan-Denominated Bonds for Currency Reserves’ (Bloomberg, 12 September 2014) accessed 22 June 2016. 45 Zhou Xiaochuan, ‘Guanyu Gaige Guoji Huobi Tixi de Sikao [Reflection of the Reform of International Monetary System]’ (The Wall Street Journal, 23 March 2009) accessed 22 June 2016. 46 Ngaire Woods, ‘Global Governance After the Financial Crisis: A New Multilateralism or the Last Gasp of the Great Powers?’ (2010) 1 Global Policy 51, 51–52; Gregory T Chin,

Journal of World Investment & Trade 19 (2018) 542–569 562 Wu

That being said, China’s pursuit of SDR inclusion was seriously consid- ered only up until the completion of the 2010 SDR valuation review, which found that the Chinese Yuan did not yet meet the criteria for being included in the basket of SDR currencies. In the post-2008 financial crisis reform of the international monetary system, one key element was the push to establish objective criteria for the SDR. As explained by the IMF staff paper on Criteria for Broadening the SDR Currency Basket, the eligibility criteria comprise two elements. A currency must be issued by Fund members or a custom union composed of Fund members which are large exporters and determined by the Fund to be ‘freely usable’.47 ‘Freely usable’ can, in turn, be more finely distin- guished as meaning ‘widely-used’ and ‘widely-traded’. The IMF staff paper further proposes several indicators for these sub-concepts. ‘Widely-used’ is to be determined based on currency composition of official reserve banking liabilities, currency denomination of international banking liabilities, and currency denomination of international debt securities; ‘widely-traded’ is to be determined based on the volume of transactions in foreign exchange spot markets with bid-offer spreads as a secondary indicator.48 Alternatively, the staff paper proposes a tailor-made definition explicitly for the asset characteristics of the SDR: the reserve asset criterion, defined as ‘a foreign currency-denominated external claim that is readily available and liquid’.49 In order to qualify as part of the basket of SDR under this reserve asset criterion, a currency should be available to be bought and sold at any time and at minimal cost, with adequate risk management options and without un- duly affecting its value. Further, the staff paper conducted a scenario analysis based on these two criteria in ascertaining the likelihood for those currencies outside the current basket to be included in the SDR basket by overtaking the share of the fourth-largest traded currency. The reserve asset criterion appears more likely though still challenging if the candidate currency grows at 50% per annum due to the inertia and network externalities connecting with the criterion of ‘widely-used’.

‘Remaking the Architecture: the Emerging Powers, Self‐Insuring and Regional Insulation’ (2010) 86 International Affairs 693, 693–695. 47 IMF, ‘Criteria for Broadening the SDR Currency Basket’ (IMF, 23 September 2011) 4. The linkage between the criterion of ‘free usable’ currency as set out for in Article XXX(f) of the IMF Articles of Agreement and SDR eligibility is only done in the 2000 IMF Executive Board Decision No 12281-(00/98) G/S adopted 10/11/00, in IMF (ed), Selected Decisions and Selected Documents of the International Monetary Fund (IMF 2014) 858. 48 IMF, ‘Criteria for Broadening’ (n 47) 10–19. 49 ibid 19.

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In its 2015 review of the valuation method of the SDR,50 the IMF chose to stick to the existing criteria: a currency of the largest IMF member exporters, and being freely usable. The exporter criterion is easily satisfied by China’s RMB; however, whether the RMB may be regarded as ‘freely usable’ is not entirely clear. In terms of being ‘widely traded’ and ‘widely used’, China’s RMB has markedly improved since 2010, whereas the existent four SDR currencies have remained largely unaffected by this increase, which might be explained by the full impact of China’s RMB liberalization having not yet fully materialized.51 China’s pursuit of the internationalization of Chinese RMB finally yield- ed fruit and achieved its strategic medium-term goal at the meeting of 30 November 2015, when the Executive Board of the IMF decided to include Chinese RMB in the basket of SDR currencies with a weight of 10.92%, exceed- ing those of the Japanese Yen and British Pound. According to the Executive Director of the IMF,

[T]he Executive Board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepen- ing of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.52

3.2.4 Interim Conclusion China’s recent monetary policy has been characterized by its pursuit of the internationalization of the Chinese RMB, with the strategic – and now successfully accomplished – medium-term goal being the inclusion of RMB into the basket of SDR. This objective was achieved via the trade and finance tracks. China’s pursuit of the inclusion of RMB in the SDR has both symbolic and sub- stantial meaning. Symbolically, it means China’s RMB is recognized as being freely usable, and that it is one of the major currencies of the international monetary system. Substantially, together with a series of financial reforms, this

50 IMF, ‘Review of the Method of the Valuation of the SDR – Initial Consideration’ (3 August 2015) accessed 22 June 2016. 51 ibid 30. 52 IMF Press Release, ‘IMF’s Executive Board Completes Review of SDR Basket, Includes Chinese Renminbi’ (30 November 2015) accessed 22 June 2016.

Journal of World Investment & Trade 19 (2018) 542–569 564 Wu moves China closer to currency convertibility. Therefore, China’s monetary policy in the context of the international monetary regime is not indifferent or hostile to the IMF; on the contrary, China is striving to win the endorsement of the IMF for its progress in financial reform, which in turn itself reinforces the role of the IMF in global economic governance.

3.3 Development Dimension

3.3.1 China as a Development Actor With respect to the development dimension, China’s emergence as a key actor in development cooperation has been well-documented53 and widely debated,54 especially as China tends to channel its development assistance bilaterally with no strings attached and bypasses the multilateral fora underpinned by the World Bank and the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (the OECD DAC). Chinese development cooperation has been characterized by its role in assisting with the building of physical infrastructure and trade-related investments, which account for a large proportion of China’s direct investments. With respect to physical infrastructure, these projects are normally funded by Chinese banks, such as the China Export-Import Bank, and carried out by Chinese enterprises. Trade-related investment is usually conducted by invest- ing in resource-rich countries so that the raw materials can subsequently be exported to the investor country for industrial use.55 Moreover, the hands-off approach exacerbates worries that ‘easy money’ may undermine democra- cy, good governance, environmental or human rights protections in partner countries.56 Worries about China as a competitor in development cooperation are thus amplified by the establishment of the AIIB.

53 See eg Harry G Broadman, Africa’s Silk Road: China and India’s New Economic Frontier (The World Bank 2007). 54 See eg Deborah Brautigam, The Dragon’s Gift: The Real Story of China in Africa (OUP 2009); Uche Ewelukwa Ofodile, ‘Trade, Empires, and Subjects – China-African Trade: A New Fair Trade Arrangement, or the Third Scramble for Africa’ (2008) 41 Vand J Transnatl L 505; Chris Alden, ‘China in Africa’ (2005) 47 Global Politics and Strategy 147. 55 See eg Thomas Lum, Hannah Fischer and Julissa Gomez-Granger, ‘China’s Foreign Aid Activities in Africa, Latin America and Southeast Asia’ (Congressional Research Service 25 February 2009); Penny Davies, China and the End of Poverty in Africa – Towards Mutual Benefit? (Diakonia 2007) 25–27. 56 On such worries and their critique, see eg Ngaire Woods, ‘Whose Aid? Whose Influence? China, Emerging Donors and the Silent Revolution in Development Assistance’ (2008) 84 International Affairs 1205.

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3.3.2 The Establishment of AIIB The proposal to establish a multilateral financial institution to promote regional interconnectivity and economic integration in Asia was advanced by Chinese President Xi Jinping and Premier Li Keqiang during their visit to Southeast Asian countries in October 2013. This initiative was resisted by Japan and the United States, given that another regional bank in Asia would compete directly with the ADB and less directly with the World Bank in view of the overlapping membership between the AIIB, on the one hand, and the ADB and World Bank on the other.57 When the United Kingdom and other European countries decided to join the AIIB, the United States was indeed disappointed. The apparent success of the move, thus far, is deemed a great feather in the cap for China’s international diplomacy. Some observations can be made with regards to the establishment of the AIIB. To begin, it was originally reported that China had agreed to give up its veto power in exchange for the participation of European countries. Clearly, this expectation was not fully realized since, according to the Articles of Agreement, China holds 30.34% of AIIB shares and enjoys 26.06% of voting rights, which enables it to veto decisions when the subject matter necessitates a special majority of three-fourths of the voting rights. Secondly, whether the AIIB will compete or conflict with the ADB or the World Bank is not entirely clear at this stage. China’s efforts to establish a regional bank under its control follow in Japan’s footsteps in establishing the ADB, through which Japan exer- cises influence over Asian countries, in particular Southeast Asian countries. That said, the Articles of Agreement of the AIIB speak to a certain effort to ease concerns over a ‘race to the bottom’ in lending activities by inserting a paragraph instructing the AIIB to ‘ensure that each of its operations complies with the Bank’s operational and financial policies, including without limitation, policies addressing environmental and social impacts.’58 How this provision is to be implemented in the AIIB’s lending activities will depend heavily on the bank’s operating principles and lending policies. Thirdly, some commentators have linked the establishment of AIIB to the stalled reforms of the Bretton Woods institutions.59 For example, Laurence Summers, former US Secretary of the Treasury, argued that the failure of the United States to honour its IMF

57 The Articles of Agreement of the Asian Infrastructure Investment Bank (signed 29 June 2015) (Articles of Agreement of AIIB) art 3.1. 58 Articles of Agreement of AIIB, art 13.4. 59 The US Congress finally in December 2015 granted its approval on the 2010 quota and governance reforms. See IMF Press Release, ‘IMF Managing Director Christine Lagarde Welcomes U.S. Congressional Approval of the 2010 Quota and Governance Reforms’

Journal of World Investment & Trade 19 (2018) 542–569 566 Wu reform commitments and its actions to prevent some countries from providing or receiving funds via the IMF forced China to champion a new regional financial institution.60 The arrogance of the United States in this respect betrays an ignorance of present-day global reality.61 Ben Bernanke, former chairman of the Federal Reserve in an interview expressed the same idea, arguing that the impasse of the US Congress in approving reforms to the IMF to accommodate emerging powers pushed China to go for the AIIB.62 Even assuming that there will be competition or conflict between the AIIB and the ADB or the World Bank, the gravity of this impact remains uncertain. Moreover, such concerns seemed to be addressed by the leaders of the United States and China during Chinese President Xi’s state visit to the United States in 2015, after which the two countries are reported to have declared a truce over the AIIB.63 China secured the United States’ support for playing a greater role and taking more responsibility in global governance, the first step of which would be increasing China’s contributions to the International Development Association of the World Bank. The United States also reaffirmed that the process of reforming the Bretton Woods institutions would continue and expressed its support for the inclusion of the RMB in the SDR basket. In return, China assured the United States that the AIIB and any future institutions in which China is involved would adhere to the highest international environmental and governance standards.64

(December 18 2015) accessed 22 June 2016. 60 Laurence Summers, ‘Time US Leadership Woke Up to New Economic Era’ (Financial Times, 5 April 2015) accessed 22 June 2016. 61 Laurence Summers, ‘Grasp the Reality of China’s Rise’ (Financial Times, 8 November 2015) accessed 22 June 2016. 62 David Palling and Josh Noble, ‘US Congress Pushed China into Launching AIIB, Says Bernanke’ (Financial Times, 2 June 2015) accessed 22 June 2016. 63 Shawn Donnan, ‘White House Declares Truce with China over AIIB’ (Financial Times, 27 September 2015) accessed 22 June 2016. 64 ibid.

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The détente seems to be confirmed by the press release accompanying the fact sheet on US-China economic relations issued shortly after Xi’s visit.65 According to the press release,

[t]he US and China recognize shared interest in promoting a strong and open global economy, inclusive growth and sustainable development, and a stable international financial system, supported by the multilateral economic institutions founded at the end of World War II that have bene- fited the peoples of both nations. … China has a strong stake in the main- tenance and further strengthening and modernization of global financial institutions, and the United States welcomes China’s growing contributions to financing development and infrastructure in Asia and beyond. … The international financial architecture has evolved over time to meet the changing scale, scope, and diversity of challenges and to include new institutions as they incorporate its core principles of high standards and good governance.66

As this press release shows, China’s efforts to establish a new multilateral development bank serves as a catalyst to make reform of the Bretton Woods institutions more inclusive, representative and responsive. On the other hand, existing institutions may contribute to the shaping and formulating of operating principles and lending policies of new institutions with a view to ensur- ing high standards and good governance. In short, while the AIIB may well

65 The White House Press Release, ‘Fact Sheet of U.S.-China Economic Relations’ (25 September 2015) accessed 22 June 2016. 66 ibid. The press release continues to note: ‘The United States and China commit to strengthening and modernizing the multilateral development financing system. Both countries resolve to further strengthen the World Bank, Asian Development Bank, African Development Bank, and Inter-American Development Bank by enhancing their financial capacity, reforming their governance, and improving their effectiveness and efficiency. Consistent with its development, in addition to being a shareholder and borrower, China intends to meaningfully increase its role as a donor in all these institutions. Both sides acknowledge that for new and future institutions to be significant contributors to the international financial architecture, these institutions, like the existing international financial institutions, are to be properly structured and operated in line with the principles of professionalism, transparency, efficiency, and effectiveness, and with the existing high environmental and governance standards, recognizing that these standards continuously evolve and improve’.

Journal of World Investment & Trade 19 (2018) 542–569 568 Wu compete with the World Bank (and the ADB), China is still striving for a greater role in the Bretton Woods institutions as well.

3.3.3 Interim Conclusion The emergence of China in the developing world and its increasing role in development assistance have presented great worries to traditional donors due to the concern that the ‘easy money’ obtained from China would worsen the environmental, human rights and governance standards in partner countries. Moreover, China’s development model seems more attractive to developing countries than the prescription offered by Western donors since leaders in developing countries are not obliged to engage in political reform and human rights protection. This worry sometimes leads commentators to speak of an ideological threat to Western values. Such a threat – if real – could be exacer- bated by the establishment of the AIIB, which is seen as a competitor to the World Bank and the ADB. However, these fears seem misplaced. China’s AIIB initiative in fact originates from its weak voice in the IMF and World Bank. Its disappointment with the lack of progress in the IMF’s reform prompted China to go for a development bank where it has greater voice. This is actu- ally a ‘voice and exit’ strategy, which is familiar to observers of international relations. Seen in this light, AIIB is a card played by China to advance the IMF reform and China’s strategy seems to be bearing fruit in light of the US Congressional approval of the IMF reform package. While the AIIB inevitably brings competition into the development assistance world, the competition between the AIIB and the World Bank and ADB is not necessarily lethal. A cooperative relationship between the three institutions may be sorted out and thus benefit partner countries. In fact, a cooperative relationship has already existed between the World Bank and the China Export-Import Bank. In 2007, the World Bank and the China Export-Import Bank signed a Memorandum of Understanding aimed at building collaboration between the two organizations for development, with a particular focus on Africa.67 In a word, whereas China’s engagement in development assistance and the establishment of the AIIB bring competition to existing donors and the World Bank and ADB, such

67 The World Bank Press Release, ‘China Eximbank and World Bank Come Together to Sign Cooperation Memo’ (21 May 2007) accessed 22 June 2016 (stating that ‘[s]enior managers of The Export-Import Bank of China and the World Bank came together today in Washington to sign a Memorandum of Understanding aimed at building collaboration between the two organizations for development, with a particular focus on Africa’).

Journal of World Investment & Trade 19 (2018) 542–569 Global Economic Governance in the Wake of the AIIB 569 competition does not necessarily weaken the role of the World Bank. It may serve as a helpful catalyst to reform the Bretton Wood institutions in ways that better reflect global realities today.

4 Conclusion: Is China Remaking Bretton Woods?

This article examined the impact on the Bretton Wood institutions and the GATT/WTO system arising from China’s return to international economic relations. The Bretton Woods institutions and the GATT/WTO regime are political and intellectual products of the transatlantic alliance and constitute the backbone of the post-war global governance architecture. However, China’s rise is from time to time referred to as a threat to existing major powers, Western values and the international legal order. The ‘China threat’ thesis has its sup- porters and opponents. This article, by examining China’s participation in the trade, monetary and development assistance fields, concludes that China’s rise does not undermine the centrality of the Bretton Woods institutions and the GATT/WTO regime in global economic governance. Specifically, I have argued that China’s accession to the WTO was important to both the WTO and China itself. Whereas China’s participation in the WTO presents some challenges to the long dominance of the United States and the EU, it reaffirms the central role of the WTO in the world trading system. Indeed, China is striving to upgrade its status from that of a second-tier member and acquire recognition as a market economy. China’s monetary strategy also indicates the continuing importance of the IMF in the international monetary regime, from which China seeks recognition. This is best illustrated by China’s efforts to internationalize the RMB and to have it included in the SDR basket, which reaffirms the pivotal role of the IMF in international monetary policy. With regards to development policy, whereas the AIIB does introduce some competition to the World Bank and the ADB, China’s efforts in establishing new multilateral development banks are mainly driven by its frustration with stalled reforms of the Bretton Woods institutions. These moves, in fact, follow in the footsteps of Japan in establishing the ADB. To conclude, whereas China’s economic emergence does introduce some competition, it does not challenge, but reaffirms the post-World War II global economic architecture.

Journal of World Investment & Trade 19 (2018) 542–569