China’s New Investment Bank: Either Join Or Lose Out

By John Richardson

THE UK, first of all, agreed to join the China-led Asia Infrastructure Investment Bank (AIIB) and now France, Germany and Italy have followed suit.

Encouragingly, also, in one of the few good decisions since he came to office, Australia’s Prime Minister Tony Abbott is considering reversing a decision not to join the AIIB.

Very often, Western politicians make the right decisions for the wrong reasons. “I think David Cameron [the UK’s prime minister) has only agreed to join the AIIB because a Focus Group told him it was a good idea. With the General Election due this May, it’s all about short-term popularity,” said a chemicals industry source the other day.

Likewise, I think that Tony Abbott is floundering because of his inward focus on an almost entirely irrelevant issue for Australia – immigration – whilst he and his leadership team have completely missed the implications for Australia of China’s economic about-turn, Again, I therefore think that a reverse-decision on the AIIB would be about shoring-up support ahead of Australia’s next Federal Election, which must take place no later than January 2017.

Still, though, it is better to be right for the wrong reasons than not right at all – and joining the AIIB will, I think, turn out be a smart move in the long term.

Here is why:

• IF, and as you can see that’s a big IF, China can get beyond its current economic crisis, it has a long term vision. However flawed that vision might turn out to be, at least it is a long term vision. The contrast with the West – for example, the EU – is very marked indeed.
• Like it or not, you have to get used to the fact that China has a very good chance of supplanting the US as the dominant global economic power. History looks set to repeat itself. Compare the US in the late 19^th-early 20^th Centuries  with China today.
• So  either you partner China or face being shut-out of what could be a monumental shift in the world order.

What are the exact benefits of signing up to the AIIB? Here are some initial thoughts.

One of the main roles of the AIIB will be to fund China’s New Silk Road – better rail, road and maritime links with neighbouring Southeast Asian countries and much of the rest of the world

Why the New Silk Road? One reason is that China urgently needs to address chronic income inequality between its developed coastal provinces and its less-developed inland regions. This income inequality has been made much worse by the pretty much disastrous 2008-2013 economic stimulus programme.

So the idea is to move lower value manufacturing from the developed provinces, where rising labour costs are, anyway, making this kind of manufacturing uncompetitive, to the inland provinces.

Very poor provinces such as Yunnan will then be able to ship their products much more efficiently to neighbouring countries – and to Western markets – via the New Silk Road.

China might need some Western help in developing all of this infrastructure.

The bigger prize, though, is the potential explosion in consumer spending – if and when China achieves its objective of narrowing the gap between its developed and developing regions. Western consumer-goods companies stand to gain here.

To  give you an idea of the scale of this consumer-spending opportunity, Guizhou, China’s poorest province, had per capital GDP of just Yuan 22,922 ($3,701) in 2013. In contrast, its richest province, Tianjin had per capital GDP of Yuan 99,607 ($16,083). If you move inland, also, populations can be huge. To use Guizhou again it has 35 million people versus 9 million in Tianjin.

Here are two more opportunities for countries that join the AIIB:

1. In the second part of my discussion of the New Silk Road in January, I used the made-up example of a smartphone manufacturer in coastal Guangdong province moving components for final assembly to a lower labour cost assembly plant in Yunnan. The smartphones would then be shipped along the New Silk Road to markets in the West. This is part of China’s attempt to escape the “middle income trap” by moving up the manufacturing value chain – as well as growing its inland provinces. It will need more Western technologies to achieve this former objective.
2. China intends to grow its “sphere of influence” – again via the New Silk Road – with neighbouring poorer countries such as Lao. Cambodia and Myanmar. These neighbouring countries could also enjoy consumer-led economic booms as a result. This is yet another opportunity for the West.

Here is something else to consider, also: As China becomes more and more self-sufficient in chemicals and polymers, it will be able to pick and choose from where it imports any deficits that remain. Clearly, the countries with which it enjoys the closest relationships will be in the best positions.

So where does leave the US? In a position where it cannot afford to be angry over China’s new investment bank as it, too, runs the risk of being shut out.

But, of course, it is angry with the UK – and now probably France, Germany and Italy as well – for joining the AIIB. “China bashing” is always good for winning votes in the States, but I cannot see what other purpose it saves.

A more sensible approach would have been if the US had acceded to China’s earlier requests for a prominent role in the World Bank and the International Monetary Fund, but it might well be too late for that now.

Climbing down on the AIIB is probably, therefore, the next best thing that the US can do.

If it doesn’t here is one major consequence for its petrochemicals industry: US polyethylene (PE) producers will find it much harder to find Chinese buyers.

And without China, the US PE business would be in an awful mess, given the scale of expansions in the US.