China's growing economic clout

Over the past couple of months, China has played a major role in launching initiatives to increase infrastructure financing for developing countries and thus raise its global economic clout. In July 2014, China, together with the other BRICS nations - Brazil, Russia, India and South Africa - agreed to create a new development bank (NDB) that would have an initial capital of 50 billion USD.

More recently, in October, 21 Asian countries agreed to establish a new Asian Infrastructure Investment Bank (AIIB) for which Beijing will provide up to 50 percent of the initial capital.

Moreover, as the economy of the world's most populous nation continues to expand, Beijing is also trying to shape global economic governance and frame rules more favorable to its economy. It therefore bodes well for China that at the closing of the 2014 G20 Brisbane Summit this November, the country was awarded the presidency of the 2016 G20 for the first time.

Yet as analyst Hugh Jorgensen says in a DW interview, the G20 is just one way that China may seek to shape global economic governance. Jorgensen says that through a combination of pragmatism, opportunism and self-interest, China is likely to seek changes to the ‘traditional' global model while at the same time 'experiment' with new processes such as the BRICS forum and the AIIB.

DW: What would you say are the basic principles of China's approach to global economic governance?

Hugh Jorgensen: Firstly, I think it's important to note that I don't believe China has a 'grand unified theory' of global economic governance. This is due in part to the sheer complexity and diversity of opinion within China's political and decision-making apparatus, which like in any other modern state, doesn't lend itself to general statements such as 'China thinks this' or 'China thinks that'.

However, in as much as the various relevant institutions and influential figures within China can 'steer' the country towards one global economic governance decision or another, I think it's safe to say they'll end up taking actions that are mostly pragmatic, frequently opportunistic, and somewhat experimental.

There is a lot of 'learning by doing' going on, which we can see in China's engagement with the 'legacy' institutions that have traditionally coordinated the rules of the international economy - such as the IMF and the World Bank - but also experimentation with newer bodies like the BRICS' New Development Bank.

What role does China aim to play in economic governance?

Like every country, China would like to be more influential. The difference with China is that it is on the verge of becoming the world's largest economy in absolute terms (as of 2014, it is already the largest on purchasing power parity terms), which means it will have a greater ability to take decisions about how it wants to engage with other countries, whether or not other countries agree with that decision - a luxury that isn't really available to the majority of states.

But because the major economic institutions like the IMF and World Bank make their decisions on proportional voting arrangements that have barely changed since WWII, China doesn't have a formal allocation of voting influence that equates with its large share of global output.

At the same time, the existing 'rules' of the international economy, as they apply to areas like trade, finance and capital movement, have served China pretty well on the whole.

The country's admission into the WTO in 2001 has seen it turn into a global powerhouse of merchandise exports, and it has been the beneficiary of a great deal of inbound foreign investment - and it has benefited from its own outbound FDI.

So China has an interest in preserving those aspects of the international economy that have facilitated its growth, but also in pushing for a greater say in future rule making or reform. It might not have any particular agenda per se, but there are always reasons to tinker with international economic rules, and the countries with the most influence in the forums that set those rules have the greatest ability to ensure the rules are designed in a way that favors their own domestic settings.

China's pursuit of a greater role in global economic governance is pragmatic, opportunistic and self-interested. These basic principles are likely to continue shaping China's engagement with the governance architecture.

How could the G20 presidency in 2016 help China shape global economic governance?

China's 2016 G20 Presidency will not produce a 'big reveal' of the country's 'masterplan' for the future governance arrangements of the global economy. But the G20 leaders have collectively committed to revitalize the major institutions of the global economy, and to push for a more inclusive approach to the way in which economic rules are determined.

China can use the opportunity to remind its fellow G20 economies of this commitment, and to berate the US for failing to pass the IMF quota reforms - not too loudly though, as this could make Congress even less likely to approve the reform.

China might also use its G20 presidency to promote its own work in bodies like the Asian Infrastructure Investment Bank, the BRICS' New Development Bank, and maybe even the Shanghai Cooperation Organization Bank, if it is up and running by then.

China's official stance is that these initiatives are meant to complement the work of the 'traditional' financing institutions like the World Bank, and 2016 would present a platform for China to explain how this would work in practice.

What role do you believe China will play during its presidency of the G20 in 2016?

There are always ongoing elements within the G20 agenda, such as global financial reform, revitalization of the international economic agencies and the monitoring of trade protectionism within G20 countries, to name just a few.

In terms of new agenda items, or focusing the 2016 presidency on a particular issue area - the 2014 Australian G20 presidency attempted to put 'jobs and growth' at the center, for example - it is potentially a little early to say.

The safest guess would be that the 2016 presidency will probably have a strong emphasis on development. Chinese officials like to claim they are representatives of developing countries in forums like the G20, and China's massive currency reserves means it has a lot of capacity to finance development projects throughout the world, and to experiment with initiatives like the AIIB, or the BRICS' NDB.

Could the AIIB or NDB replace financial institutions such as the IMF and the World Bank in the near future?

No. For one, the AIIB, as the name suggests, is focused on Asia, so it's 'rival' is more the Asian Development Bank than the World Bank. The NDB does have a large capital fund on paper - 50 billion USD now, to increase to 100 billion USD over time - but a lot of this is set aside as contingency reserve arrangements for when one of the BRICS countries gets into trouble. These factors all point to the main reason why these new experiments, though interesting, are unlikely to kick-start a revolution in global economic governance on their own.

The five BRICS countries are at such different stages and levels of development and wealth that it would be nonsensical to view the NDB as a rival to the IMF or the World Bank, but it is certainly a signal that the longer China feels it is not adequately represented in the Bretton Woods Institutions (BWI), the more it will be prepared to disengage from the BWI-centred system.

That would be an unfortunate outcome for those who believe that while the BWI-centered system isn't perfect, it is nevertheless the best thing going around when it comes to negotiating global economic rules.

How could China successfully push to reform global financial institutions?

China can strengthen its case for reform by meaningfully engaging with the existing system and demonstrating its commitment to partaking in predictable and rules-based economic exchanges.

But at some point, working with China to ensure it is adequately represented within the BWI-System will mean the G7 countries, particularly the US, are going to have to make good on their commitments to facilitate a greater role for China within the existing system, rather than incentivizing China to experiment with alternative models.

Hugh Jorgensen is currently completing post-graduate studies in the Netherlands. Previously he worked as a Research Associate with the G20 Studies Centre at the Sydney-based Lowy Institute, where his work focused on economic, political and governance aspects of the G20 agenda.