China Launching New International Development Bank; Diplomacy With South Korea
June 29, 2014 • 9:06AM

China's Xi Jinping is breaking with tradition, as next week he will visit Seoul, South Korea and meet with President Park Geun-hye before going to North Korea, emphasizing the importance of South Korea to China. While dealings with North Korea are expected to play a large role in the talks, a bigger issue has arisen.

As reported unhappily by the Financial Times's Beijing correspondents June 24 and 27, "China is expanding plans to establish a global financial institution to rival the World Bank and the Asian Development Bank.... In meetings with other countries, Beijing has proposed doubling the size of registered capital for the proposed bank to $100 billion, according to two people familiar with the matter. So far, 22 countries across the region, including several wealthy states in the Middle East, which China refers to as West Asia, have shown interest in the multilateral lender, which would be known as the Asian Infrastructure Investment Bank. It would initially focus on building a new version of the silk road, the ancient trade route that once connected Europe to China.

"Most of the funding for the lender would come from China and be spent on infrastructure projects across the region, including a direct rail link from Beijing to Baghdad."

The July 3-4 dates for Xi's trip had been unofficially known for some time, but had not been confirmed by the governments until Friday. South Korea's important Joongang Daily today revealed the reason for the delay: Seoul has come under great pressure from Washington not to participate in establishing this Asia Infrastructure Investment Bank (AIIB). The Chinese government has requested that Korea announce its decision to join the AIIB during Xi Jinping's July 3 visit. According to the government and financial authorities yesterday, China has made other requests for this announcement, including when Chinese Foreign Minister Wang Yi was in Seoul in May.

Early this month, Washington told the U.S. Embassy in Seoul to convey that it is deeply concerned that Korea might join the AIIB. The U.S. government said China is highly likely to use the bank for political purposes, and if Korea joins, its credibility as a U.S. ally might be affected, Joongang Daily reported.

The "political purpose" that Washington most fears is the loss of hegemony by a crumbling Western financial system to a Eurasia-based world order. "The United States, although it showed some concern, had taken no position on Korea's joining," said a government official on condition of anonymity. "But it changed its stance quickly in June. [Putting South Korea in] a difficult situation, because taking sides with one can worsen ties with the other."

The AIIB will be a new financial institution planned by China with the aim to create a new financial order. Countries that have been asked to participate are mostly China-friendly nations, including the ASEAN countries, Pakistan and Sri Lanka. According to the Financial Times accounts, "Beijing hopes to have the bank up and running by the end of the year and has appointed Jin Liqun, former chairman of the board of supervisors for China's sovereign wealth fund and a former ADB vice-president, to establish the AIIB. Mr Jin has hired about two dozen people from Chinese financial institutions such as Bank of China and Citic."

The inclusion of the powerful South Korean economy would greatly boost the credibility of the AIIB. The new bank would also cohere with South Korea's long-range financial and development plans. President Park has a long-term plan to create a bank for Northeast Asia. It may be very relevant that the government announced June 27 that South Korea's industrial output in May saw its sharpest month-on-month drop, 2.7% since late 2008 and exports shrank.

Giving an indication of the Obama Administration response, World Bank head Jim Yong Kim told Washington media June 27 the World Bank "welcomes" China's proposed AIIB and wants to cooperate with it, and said China's Finance Minister Lu Jiwei also wanted such cooperation. The World Bank now almost exclusively finances green "environmental preservation" schemes and anti-poverty projects; despite its $165 billion capital, it makes infrastructure investments of no more than $10 billion/year, while maintaining in many fora that China's infrastructure investments are "environmentally insensitive." Paradoxically, the same World Bank estimates that Asia as a whole needs $800 billion/year in infrastructure investments through 2020!