Later this year, COP21 and the AIIB will rewrite the economic rules of the global economy.
The Paris COP21 meeting will agree binding global commitments for 2050 carbon reductions. The China-based Asian Infrastructure Investment Bank (AIIB) will begin investing $100 billion into new global energy infrastructure — starting in Asia.
These developments, together with creation of the $100 billion South Korea-based Green Climate Fund and the start of carbon trading in southern China’s Shenzen, will collectively catalyze a self-reinforcing cycle of price signals, investment and global economic retooling.
It’s not bad progress given it’s been just nine years since Al Gore’s film ‘An Inconvenient Truth’ put climate change on the global political agenda.
The good news is that a virtuous circle appears may lie ahead in a kind of ‘Gaia Effect’ (ie self-correcting process) applied to geo-economics.
The main catalyst will be China’s $4 trillion US dollar official reserve hoard. China’s accumulated this dollar mountain through keeping the yuan artificially weak to maintain domestic employment and political stability by turning China into the low-cost “factory of the world.’
On the surface, having this hoard may sound nice. But it’s now increasingly destabilizing — both for China and the world. China’s solution to this problem is the recently announced ‘Going Out’ policy announced by Xi Jinping.
The centerpiece of this policy involves recycling China’s trades surpluses into international infrastructure projects under the names of ‘One Belt, One Road.’ These infrastructure projects are aimed at maintaining employment at China’s infrastructure state champions like State Grid Corp. of China and China National Offshore Oil Company (CNOOC).
These have become globally competitive from building up China and assimilating technology transfer from western companies. Without new projects, these infrastructure giants face layoffs that could lead to domestic economic unrest.
The ‘One Belt, One Road’ initiative, therefore, makes a virtue of necessity.
Recycled Chinese trade surpluses and carbon levies will be invested in building a revamped global energy infrastructure. This benefits everyone. But don’t mistake the ‘good reason’ for the ‘real reason.’
China needs to build export infrastructure projects as much as the rest of the world needs to have them.
This means AIIB investment recipient countries can push for a harder deal with the AIIB using Chinese precedents. For the last few decades, overseas investment in China has often been encumbered by requirements for local staffing, joint ventures, technology transfer and limited minority stakes.
Now applied in reverse, they will make China more sensitive to the abrasiveness of unilateralism.
In other words, after decades of setting the unilaterally setting the rules for foreign access to the Chinese market, China must now strike deals for access to overseas markets for its large infrastructure companies upon which Chinese political stability now hinges.
This shifts the power equation: China now must play by rules set down of host countries for infrastructure or face appropriation and nationalization of assets.
Consider the Philippines, now eight years into a global showcase 25-year contract with State Grid to upgrade the ramshackle Philippine electricity grid.
Earlier this year, the Philippines used undocumented fears of an electricity grid virus to expel State Grid technicians and replace them with Filipinos. China’s reaction was remarkably and notable — particularly in contrast with China’s tin ear political justifications of its island-building in the South China Sea.
In the South China Sea, China has aggressively rejected any criticism of its Nine-Dotted Line ambit claim to virtually all the South China Sea — and has loudly announced its intention to ignore any multilateral tribunal decisions it doesn’t like.
Contrast this with China’s response to the expulsion of its State Grid technicians from the Philippines. In response, China has limited its remarks to plaintive calls for ‘fairness.’
That’s because — with outward investment — China’s now increasingly on the other side of the equation: subject to caprice, nationalization and minority stakes in recipient countries.
All this, in turn, may encourage China to support more predictable, rules-based norms of political behavior.
Call it synergy or a death embrace. Either way, it provides a motivational framework for guessing Chinese behavior in coming years.
Without overseas infrastructure investment outlets, the AIIB will be stillborn. Ultimately, the creation of the AIIB may moderate Chinese unilateralism as China’s outward investments grow. This will benefit everyone.