It was not long ago that our perception of China was of a country that provides low-cost labour for foreign companies and a holiday destination to which travelers shop for cheap products.
By now, many of us know three things:
(1) in many parts of China labour cost is no longer cheap;
(2) cheap production is being outsourced by China to other developing countries; and
(3) it is probably cheaper to buy luxury branded goods in New Zealand than in China.
China’s financial power and a few new friends
In July this year, we witnessed one of those moments where China demonstrates its significant presence in the world, this time in the financial and development space.
Brazil, Russia, India and China (a grouping commonly known as the “BRIC”), along with South Africa set up the New Development Bank (NDB). The key role of the NDB is to finance infrastructure and sustainable development projects in BRICS and other developing countries.
The NDB’s initial authorised capital is US$100 billion, with a first investment of US$50 billion contributed equally by the five partners. The first chair of Board of Governors will be nominated by Russia and the first chair of the Board of Directors will be nominated by Brazil.
The first president of NDB will come from India, and the presidency rotates every five years.
The bank will be headquartered in Shanghai and with the first bank center located in South Africa.
In addition, a US$100 billion Contingent Reserve Arrangement (CRA) will be created to help countries forestall short-term liquidity pressures. China contributes 41 percent of the funding, though all parties have equal voting rights.
Alongside the creations of NDB and CRA is the news relating to the financial strengths of Chinese banks.
The Banker magazine’s ranking of the world’s top banks in 2013, sees four of the top 10 largest (by assets) and 10 of the top 50 largest banks come from China. This is led by the Industrial & Commercial Bank of China (ICBC), which boasts a whopping US$3.18 trillion worth of assets.
The results come as no surprise to those who have been paying attention to the banking sector.
A new world order in the making?
The above are just a couple of the illustrations of the increasing financial power of China and its organisations.
The acronym “BRIC” was coined more than a decade ago. For years, we largely referred to developing or emerging economies when we used “BRIC”. By itself, there is no structure or boundary to the “BRIC”, nor is there an entity that it represents.
The creation of NDB represents the first such entity, with the addition of South Africa in the equation.
NDB’s creation was largely grounded on the premise that the World Bank has not even come close to serving the large group of developing countries. The same can be said of the International Monetary Fund.
Therein lies this opportunity for the larger developing countries to take a lead.
China has capitalised on this opportunity well.
It’s not hard to see how the tables can be turned, given that there are more countries in the developing economies category than there are in the developed economies category.
But would the NDB be willing and able to take the added risks of projects in developing countries that would normally be eligible for funding with the World Bank and the International Monetary Fund?
Of course it doesn’t make sense for NDB to do so.
But it is likely that the risk profile and expectation of NDB differs from that of their Western counterparts. This also means the chances for riskier projects to be funded by NDB is higher as well.
The United States may not be pleased with China taking a back seat on various international affairs.
China decides to do so by being involved in the development of developing countries. If this route goes well, the United States might think China may be doing too much !
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Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here
3 Comments
The Chinese grip on Africa has increased dramatically since a lot of the western powers pulled out.Power stations,Railway infrastructure etc are just some of the things China is assisting with.Two or 3 months ago conflict broke out in an African country(again) and the Chinese sent a fleet of ships to help evacuate over a million Chinese.They ain't going tobe leaving Africa anytime soon.
China wants Australia and South Korea to be founding members of this bank but America opposes this.
Australia though sounds like it wants to join this bank.
AUSTRALIA is close to joining a Chinese government plan to create a $50 billion infrastructure bank despite US objections about the way the cash could be used to extend China’s power throughout Asia.
Australia wants to sign a free trade agreement with China soon so there could well be a lot of horse trading going on behind the scenes.
Note that China has just imposed tariffs on Australian coal but not on Indonesian coal as Indonesia as part of Asean has a free trade agreement with China.
This all sounds like the China Choice that everyone(especially Hugh White) has been talking about for the last few years. The Ausies and NZ'ers have been saying that we don't have to choose between China and America. It sounds like they were wrong.
This new bank and the politics behind it is much more interesting than anything that the G20 can come up with.
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