Asia has a new development bank. In early April, the list of 46 countries that decided to contribute to its capital was closed. The creation of the Asian Infrastructure Investment Bank is a success for Chinese economic diplomacy, given the completion of an initiative that initially met with fierce opposition from the United States. Alongside the World Bank, whose activity is mostly under US influence, and the Asian Development Bank, which is closer to Japan, Asia will now have a third source of international financing with China as its main shareholder this time around... Of course, one might see this as yet another sign that the world balance is shifting and that China is assuming an even more central role in the new order. However, this political interpretation needs to be considered from a more economic angle: with this initiative, China is trying - by creating new financing channels - to remove the constraint weighing on global growth in general and its growth in particular since the 2008 crisis.

For an entire period in the 2000s, China succeeded in exporting the savings surplus it tended to generate by relying on the financing channels of developed economies. While China's savings

partially funded the rest of the world's debt, and especially that of US households, the majority of the risks associated with the loans granted was borne by the operators of the Western financial system. Meanwhile Chinese operators, namely the PBoC, were content to assume foreign exchange risk alone. The 2008 crisis brought these international savings transfers to an abrupt end and forced the Chinese authorities, in a bid to stop their economy from suffocating, to try to internally absorb a larger share of the savings being generated. Hence the ensuing explosion in domestic credit, a trend that quickly reached its limits: just like what happened in the US years earlier, real estate prices shot through the roof and investment in new construction soon became excessive.

By now taking the initiative as an international investment bank, the Chinese authorities are starting down a new path: this time by agreeing to take on part of the risks involved, they are looking to put at least part of the savings that the global economy will continue generating, if they can be mobilised through financing channels, to work for the development of Asia. Of course, insofar as the projects will largely call on Chinese goods and services, this initiative will also stimulate growth in the Chinese economy. Nonetheless, this is a good example of what is horribly lacking in today's global economy: capable supranational organisations, at a point in time where national governments have ceased to serve as lender of last resort (and long-term investor), a role that usually belongs to them. By standing in for the governments, these supranational institutions can help stave off the risk of long-term stagnation currently hovering over the global economy, if their activity develops quickly.

The extraordinarily low level of long rates is not exclusively due to central bank intervention, after all. It also reflects the lack of financing channels that can put the world's savings potential to use in investment projects offering less-than-immediate but still relatively guaranteed returns. The World Bank, which boasts unparalleled expertise in the development of material and social infrastructures alike, should long have met this need by increasing the size of its operations. But it hasn't. With Europe timidly putting the Juncker Plan into operation, China's initiative is quite appropriately drawing attention to the deficiencies of the international financial system. Building new supranational financing channels and thus expanding the capacity of those already in place would not only stimulate the global economy - which sorely needs it - but would also ultimately improve its development outlook.

 

Anton Brender
Chief Economist

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Anton Brender

Chief Economist






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