World Economy

US Economic Power Wanes, China Increases Influence

US Economic Power Wanes, China Increases InfluenceUS Economic Power Wanes, China Increases Influence

 Since the aftermath of the global financial crisis, America’s overseas economic power has increasingly waned. Lower gross domestic product (GDP), expensive decade plus wars, higher unfunded liabilities and anemic employment figures have negatively affected America’s economic reach.

 Larry Summers, who served two US Presidents (Clinton and Obama), opined on the country stating that its “losing its role as the underwriter of the global financial system,” SWFI (Sovereign Wealth Fund Institute) reported.

On the other hand, since inception, the United States continues to excel at becoming a destination for global capital thanks to relatively open markets, a sizeable middle class segment, private property rights, deep liquidity and an innovative populace.

Beijing is determined to augment its economic and political influence in global trade and finance, expanding into markets in Africa and Latin America, while deepening its financial firepower in Southeast Asia. A number of reluctant executives of these countries have inked deals with the Chinese (desperately needing the capital), usually exchanging money for natural resources.

This is changing as securing natural resources is not a primary reason for China. Chinese developers are investing more capital into sub-Saharan Africa, creating urban developments such as Modderfontein New City project, a 1,600 hectare development in Johannesburg.

China’s sovereign wealth fund, the China Investment Corporation (CIC), made a first major investment in South Africa when it bought a 25% stake into Shanduka Group – a major owner of McDonald’s franchises.

The AIIB is headed by Jin Liqun, the man who was behind the CIC. Jin Liqun was the former vice president of the Asian Development Bank and China’s vice minister of finance.

Losing Face

In March, Britain, a historical staunch US ally, joined the Asian Infrastructure Investment Bank (AIIB), China’s counter to the US led World Bank.

The UK Treasury examined the structure and governance arrangements of the AIIB. An important note is that London is keen on becoming the largest offshore center for the renminbi. Other nations applying include: Saudi Arabia, France, Germany and Italy.

South Korea and Australia also plan to join the AIIB, understanding that China’s influence is growing and US influence is waning (at least economically speaking) in the region. North Korea’s application to the AIIB was rejected.

Since 2010, the US Senate refused to ratify governance reform at the World Bank, which would have bolstered the bank’s financial resources, but given expanded ownership weight to countries like China and Brazil versus proportionally shrinking European economies like France.

The lack of reform at the World Bank and failure to boost commitments from its nation partners has solidified the case for alternative development banks.

Not surprisingly, Brazil, Russia, India and China launched the BRICS Bank (now called New Development Bank) soon after. Furthermore, Asia’s massive infrastructure gap is too much for the World Bank to tackle alone. And by dissuading its natural allies to join the Chinese-backed institution, America cements greater isolation among major donor nations, endangering future investment access.

The AIIB plans to invest $100 billion in infrastructure projects across Asia. Summers writes, “But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.”