The Asian Development Bank’s (ADB) annual meeting in Bali, Indonesia in May was occasion for China to showcase its growing role in the region’s economy. But it was also a reminder of the limits to Beijing’s influence posed by its need to be seen to be cooperative at both regional and global levels.
The most important agreement announced during the meeting was not from the ADB itself but from the ASEAN+3 group (the 10 members of the Association of Southeast Asian Nations plus China, Japan and South Korea). After years of talk, they have created what amounts to an East Asian mini version of the IMF – a US$120 billion fund which will in essence provide ASEAN members with foreign currency backing from the richer three. China is an equal partner with Japan in this, each providing US$38.4 billion.
However, the fact that contributions will be made in US dollars and other reserve currencies is a reminder of how far China still has to travel before its own currency, as yet not fully convertible, can play a major role in a region where the dollar is still king.
Beijing has courted other countries in attempts to break the dollar’s dominance as a transaction currency. Its chief means of doing this is through bilateral currency swaps with foreign central banks to help them sustain currency stability. But the practical value of renminbi swaps is undermined by the fact that China’s currency is not readily tradable. While Beijing is slowly allowing some immediate neighbors to use the renminbi for trade settlement, it will be a long time before this becomes significant.
China’s huge dollar reserves and continuing external surplus also mean there will be a restricted supply of its currency offshore for several years. Foreigners will have access to renminbi bond issues in Hong Kong, but they will be driven more by a desire to create a market than by an actual need for Chinese borrowers to go offshore for capital.
In short, the availability of long-term, low-rate dollar financing is far more likely to help China expand its markets in Asia, particularly for large engineering and construction projects that ASEAN members often struggle to raise funds for.
China’s other big contribution to the region would be to diversify its investment portfolio and buy the sovereign, local currency debt of its southern neighbors. This would enable these nations to increase capital spending – again, on all-important but still-lacking infrastructure projects – without subsequent risk of a foreign debt crisis. Australia, for example, has massive foreign debts, but as half are Australian-dollar denominated the currency risk is taken by the lenders, not the borrowers.
The ADB and the ASEAN+3 group are working together on developing regional local currency bond markets. But it will need tax changes to encourage more cross-border trading, and more adventurous attitudes by pension and other funds for the market to grow as fast as it should.
A lender reinvigorated
With private capital scarcer than it has been in recent years, multilateral lenders are also regaining significance. The ADB, under pressure to help members sustain growth as exports and tax revenues falter, aims to increase its lending by 50% over the next two years compared with pre-crisis levels.
What is interesting about the ADB’s growing importance in the region is that it hasn’t been matched by increased Chinese influence over the bank’s operations – certainly compared with Japan’s strong position in the organization. Beijing is likely to push for a bigger role and may be behind efforts to see that, for the first time, the next president of the ADB is not Japanese. But it also has to face the fact that India has a strong presence in the bank’s management.
Nor can China be seen to be pushing too hard for regional arrangements when its over-riding goal is for a bigger say in global institutions.
If Beijing fails to be accorded its due at the IMF and elsewhere it may indeed focus on building up pan-Asian or East Asian groups like ASEAN+3. But for now, the government sees it role – and its trade needs – in global terms. Furthermore, if the ADB is correct in assuming that Western import demand has ceased to be a growth driver in East Asia, China must cast its net even wider, targeting the likes of South Asia, South America and Africa as well as its domestic and regional markets.