Wednesday, June 24, 2015

Re-Interpreting China's New Economic Foreign Policy.

Over the past year, China’s increased drive to re-align international institutions has led many observers to view these moves as further indicators that China will surpass the United State’s influence in Asia specifically, but also other emerging markets. In July 2014, China led the introduction of the New Development Bank, a financial institution created to counter the International Monetary Fund and World Bank in the Brazilian, Russian, Indian, Chinese, and South African spheres of influence. In May 2015, Chairman Xi began a tour of South America as part of a program called International Capacity Cooperation. Although many see these actions as signs of China’s growing strength, they should actually be seen as signs of China’s weakness.

For members of the New Development Bank, the stated goal is to allow each member to have investment opportunities outside of their countries (mainly China), and have access to capital for domestic infrastructure projects (mainly everyone but China). The more important function deals with currency bailouts. As the Washington Post explained:
"BRICS countries have also created a $100 billion Contingency Reserve Arrangement (CRA), meant to provide additional liquidity protection to member countries during balance of payments problems."
The BRICS were the biggest beneficiaries of the Quantitative Easing program launched by the Federal Reserve. As yields were artificially pushed down, borrowers could access more artificial credit and savers had to seek out more risky investments in the developing world. Now, the monetary authorities of these countries may understand that as this flow of artificial credit slows or reverses, they will be hit the hardest. The Contingency Reserve Arrangement could possibly slow down the process once it begins.

On the real economy front, China’s investment in and exports to developing countries are being promoted by Chairman Xi through the International Capacity Cooperation program. Xinhua explained the focus of this proposal:
"The government has issued a list of prioritized sectors in which it wishes to enhance such cooperation, including steel, non-ferrous metals, construction materials, railways, electric power, chemicals, textiles, automobiles, telecommunications and machinery."
These sectors received much of the new credit that was created by the People’s Bank of China in response to the Global Financial Crisis. Now, they are dealing with excess debt and low demand for all the capacity they brought online. Instead of being seen as China’s growing strength in the world, they should be seen as recognitions by the Chinese authorities that China overbuilt capacity and will run out of dollars when it has to repay its debts.

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