China Threat is a theory that argues an increasingly powerful China is likely to destabilize the international regional security in the future. The term “China Threat” was first coined in the early 1990s as the economy of China continued an exceptional growth. This realist theory postulates every state in the international system seeks survival. Therefore, states aim to acquire as much power as possible that are in military terms as well as in the economic and societal sphere. Power may also be in the sense that the actor is being influential enough within the system to advance their own interests. Since the focus of the theory is China, it is argued that China will take an aggressive posture in the future, challenging the existing order and a threat to the stability of the regional security.
In 2001, when China joined the World Trade Organization (WTO), Japan, South Korea, and Southeast Asia, raised the issue on “China threat.” China was blamed by Southeast Asian countries for the source of their economic woe brought by the competition after its accession in WTO. The economic interdependence in the recent years with China has lessened their concerns. But the fear of Chinese growth at the expense of other economies has persisted across the world. In response, China claimed that it is a developing country and that its economic growth will follow the rules of market. Furthermore, China contended its WTO accession as a “China opportunity.”
Today, many states no matter where in Asia, Europe and the America continue to worry about China with regards to China Threat. With all versions of China threat theories concerning cultural, economic, political, and strategic issues, China’s rise presents risks to the international system. Recently, the issue of AIIB have sparked debates in the international affairs and have raised concerns with its consequences.
The “Asian Infrastructure Investment Bank” or AIIB is a China-led international financial institution proposed in 2013 and launched in 2014. The objective of this multilateral development bank is to finance road, rail, port, and other infrastructure construction projects in the Asia region. It is said to help narrow the financial gap of other “developing” Asian countries with China’s growth. As of April 2015, almost all Asian countries as well as other countries in the western bloc have joined. However, AIIB arise by China presents risks to the stability and order of the international regional security. Thus, reviving the famous “China Threat” theory.
The Perception of Japan and the US
Both Japan and the US are major powers in the international system that are concerned about China’s increasing power in the Asian region. Japan, a key ally of US and a neighbor country of China, is currently negotiating with the US on the issues of its TPP accession. According to the most recent result released by press, Japan Prime Minister Abe said that in the TPP there is still no consensus on automobile and agricultural produce, even though the gap between both sides was already narrowed before. For Prime Minister Abe, the TPP is the most important diplomatic and economic achievement since the Three Arrow Economic revitalization policies were released. At the same time, Japan is currently negotiating about its membership in the US-led TPP agreement. As US is wary regarding other states and allies joining AIIB, therefore it is not a good choice for Japan to follow the mainstream of accession of AIIB. This prediction is supported by the official statements of the Japanese government.
For the US, it expressed its concerns about a trend towards the constant accommodation of China which is not the best way for a rising power to engage in the international system. In addition, the rules and standards of AIIB particularly related to governance, and environmental and social safeguards are being questioned as it is a China-led institution wherein US has little power and influence. Thus, the US does not want other states, especially allies in Asia, to join AIIB.
Furthermore, both the US and Japan formed the “Asia Development Bank” (ADB) in 1966 with the same purpose of AIIB which is the promotion of infrastructure development and investment in the Asia region. Those investments are in infrastructure, health care services, financial and public administration systems which includes helping nations prepare for the impact of climate change and assist in managing their natural resources by means of loans, grants, policy dialogue, technical assistance and equity investments. Dominance by both countries in the Asian region, it underlies China's wish to establish the AIIB. Therefore, China is seen as a challenger to the existing order in the global system.
The Perception of Taiwan
As an island in Asia that is struggling for economic growth, Taiwan should have a deeper and wider access in the foreign markets. Therefore, joining AIIB can help Taiwan explore and widen its markets.
However, as China threat theory is persistently well-accepted in Taiwan, debates regarding Taiwan joining AIIB has arisen a number of points.
The debates inside Taiwan were mainly focused on the title, channel, and efficiencies of joining AIIB. Academically, a number of scholars held a conference and pointed out AIIB is not merely a bank for Asia, but for the world. AIIB will be the bank attracting capital around the world. Furthermore, Taiwan should take strategic steps with the use of other points of view, instead of being restrained to a somewhat “Cold War” thinking. On March 31st, Taiwan sent its proposal for accession through the Taiwan Affairs Office of the State Council, official institution of China and as of April, Taiwan was rejected by China without stating its reasons however mentioned to open AIIB’s door for Taiwan's membership at a later date.
In accordance with the publication by the government, joining AIIB has 80 billion dollars investment annually resulting positively as Taiwanese export and infrastructure industries awaits for huge market flows. But without participation in AIIB, Taiwan is unable to take full charge of any contract by AIIB which means tremendous loss for Taiwan economic growth. In this sense, AIIB reflects the “China opportunity” for Taiwan.
On the contrary, the actions of the Taiwanese government towards AIIB caused controversies. In theory Taiwan may benefit from AIIB but in reality it is seen with greater consequences for its future. As Taiwan started to discuss the utilities and necessities of joining AIIB, the sovereignty issue was greatly emphasized. Simply many Taiwanese are against joining AIIB as China Threat is kept in their minds. If Taiwan wants to join a China-led organization, then it has to comply with the rules set by China no matter what. But Taiwan cannot trust China easily and fully as circumstances could lead into China’s trap by means of changing the title of Taiwan. By doing so, Taiwan can be demonstrated as part of China both de jure and de facto.
Relating to the sovereignty issue, “Unilateral Dependence’ is another main concern that was brought up. Deeper cooperation with China in financial, economic, or political terms will eventually lead to Taiwan losing its bargaining power in the future as Taiwan’s independence will be given little, or worse no importance by China. Moreover, its participation in AIIB will only be in low utilities as it. AIIB is now gathering funds and not yet functioning, how could one be so optimistic that what ADB haven’t done can be achieved by AIIB? In other words, AIIB won’t be that beneficial to Taiwan at all. Altogether, Taiwan’s accession in AIIB have high risks in the future for China may abrupt such cooperation in which Taiwan is forced and will have no option but to face high adjustment costs that it cannot afford. Therefore, albeit AIIB is as good as China claims it to be, it is merely a dream for Taiwan. Taiwan still would not consent to such accession with its threat to Taiwan’s democracy and possibility of independence.
Implications of AIIB
As the world’s second largest economy, China has grown increasingly frustrated that it does not have more influence at both the IMF and IBRD as well as sees minor prospects in ADB, it seeks AIIB as an alternative. Implications of AIIB establishment to existing institutions that are US-led and view as extensions of US power is unfavorable to the current stability of the global order and international regional security.
IMF or the “International Monetary Fund” is an organization functioning to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The IMF was created in 1945 with the main purpose of ensuring the stability of the global monetary system which includes the system of exchange rates and international payments that enables countries as well as its citizens to do business with each other. In 2012, it also included all macroeconomic and financial sector issues that bear on international stability. The IMF remains to undertake reforms to secure that its governance structure sufficiently reflects fundamental changes taking place in the international economy.
IBRD or the “International Bank for Reconstruction and Development” was created in 1944 after World War II to help Europe rebuild itself. It was presented as the original World Bank institution. At present, the institution works closely with the rest of the World Bank Group providing loans and other assistance primarily to middle income countries which helps developing countries to reduce poverty, promote economic growth, and build prosperity. It provides a combination of financial resources, knowledge and technical services, and strategic advice including middle income and credit-worthy lower income countries. It can simply be described as providing innovative financial solutions as well as financial products (loans, guarantees, and risk management products) and knowledge and advisory services (including on a reimbursable basis) to governments at both the national and subnational levels. Thus, IBRD supports government efforts to strengthen not only public financial management, but to also improve the investment climate, address service delivery bottlenecks, and other policy and institutional actions.
ADB, as mentioned in the first part of the paper, is a Japan-US led development bank that dominates in the Asian region. With approximately 1.4 billion people in the region are poor and unable to access essential goods, services, assets and opportunities to which every human is entitled, ADB aims for “an Asia and Pacific free from poverty.” Thus, its commitment in helping developing countries to develop into modern economies that are well integrated with each other and the world.
Altogether, IMF, IBRD, and ADB are international institutions that have long history of accommodating the needs that a developing country needs in order to enhance its economies. On one hand, both IMF and IBRD are governed by and accountable to the 188 countries that forms a near-global membership with each state having the ultimate decision-making power within the organizations on all matters, including policy, financial or membership issues. On the other, ADB has grown to having 67 members that are 48 within Asia and the Pacific and 19 outside Asia. These institutions retains a central role within the international financial architecture and continues to adapt and manage to the rapidity of emerging markets today. Therefore, they continue to keep the stability of international security and global order.
With the AIIB at present, it presents implications to IMF, IBRD, and ADB in managing the stability of international security and global order. It mainly creates a dilemma for states in dealing with the existing institutions and the new one, furthermore with an existing superpower and an increasing power. First, states may end up having multiple membership in different development banks and institutions resulting the need to comply with the issuer’s conditions. In this case, China through AIIB may abrupt methods and use influence that are contrasting to the existing institutions and international system. This leads to the second implication which is states having to choose between US and China. It is said that AIIB is seen as the “The New World Bank” for Asia and the US is not entirely supporting the idea of it. Since all three existing institutions mentioned above are US-led and viewed as an extension of US power, AIIB will weaken US power as it aims the same purposes of the existing ones. Thus, US tries to persuade other states, especially its key allies in the Asian region not to join the new multilateral bank. And third, theoretically, an institution with more members promotes accountability. However, being led by China which is still developing and is seen as a challenger of US hegemon in the region, accountability is suspicious no matter how many members join in. China will still be concerned with its own development and with its power in the international system.
The Intentions of China
With the implications laid out, it leads to the question why does China wants to establish an AIIB? China has a number of intentions that can be fostered through AIIB’s establishment. First, in the past decade, as some specialists pointed out its comparative advantages in high speed railway technology, telecommunication, and harbor building, China has been facing difficulties in exporting. AIIB is viewed as a better way to export such technologies mentioned. Theoretically, better infrastructure can improve efficiencies of economic growth which drives greater capabilities of production and purchasing. Thus, expansion in China’s export market and strengthening good relationships. Moreover, China can absorb capital and technologies of other states to improve its less advantageous field.
Second, China is promoting the RMB internationalization through AIIB capital outflow and the RCEP integration. In theory, an internationalized currency has some benefits. First, it can lower transaction costs, which means costs of using RMB is lower after the internationalization than that of before. Secondly, it will also China will enjoy international seigniorage which means China can lend more money from other RMB-using states. Thirdly, it promotes macroeconomic flexibility which simply loosen the constraint of the balance of payments on domestic monetary and fiscal policy. Fourth, China has power and influence within the system signifies as leverage. And lastly, it can enhance reputation through the widespread international use of a currency which can promote the issuer’s overall reputation in world affairs.
Definitely RMB internationalization will positively affect China as it will enjoy wider use of RMB that will accrue China reputation and leverage to influence other states’ policies with greater power and challenge existing hegemony in different issue areas. Furthermore, China can get rid of bed debts by macroeconomic flexibilities without being constrained to barriers of balance of payment nowadays. However, by wider use of RMB, China will also be facing the defects of internationalization. The undue exchange-rate appreciation will make property value appreciate in real term. If China can’t handle this problem carefully, Chinese will face unreal deflation, causing a dead currency like German in 1920s.
In addition, excessive accumulation of liquid foreign liabilities will decrease autonomy of government policies. It is an unholy trinity that any state can only pick two out of the three factors namely policy autonomy, capital flow, and exchange-rate stability to be applied brought by globalization. Capital flow can no longer be controlled, therefore, states can pick either policy autonomy or exchange-rate stability. Since RMB internationalization would cause undue exchange-rate appreciation, China has no choice but to pick a lowered policy autonomy. As a result, CCP will inevitably face legitimacy problems if they cannot settle down all societal and economic difficulties.
RCEP is currently dealing with the reduction of trade barrier with Southeast Asian countries which will enable these states to expand export markets and further reduce costs of production. While the AIIB will deal with capital and technology export to less developed or developing countries. The former is mainly about foreign trade and the latter is about finance and investment. As a result of an expanded market, chained production line, and improved purchasing power, undoubtedly China will be able to enhance its leverage in Asia. To put it simply, AIIB is more than pure capital outflow from developed states and inflow to less developed countries, it is to strengthen China’s political influence around Asia.
Generally, China will have to work closely with its member states and take great consideration of how AIIB will prosper. Although Chinese Premier Li Keqiang affirms that AIIB is a cooperative stance, AIIB aims to strategically benefit China as its intend to greatly increasing its power (leverage and influence) in the international system but cause great consequences to the international system. Thus, it is a threat to the global stability and international regional security.
Monica Katarina Ashley Jordan,
TamKung University, Taipei, Taiwan.
National ChengChi University, Taipei, Taiwan.