How China grew desperate to conceal its power from the world

The creation of the prosaic-sounding Asian Infrastructure Investment Development Bank (AIIB) has landed the biggest blow to America’s superpower status in the post-war era.

Such is the verdict of former US Treasury Secretary Larry Summers, one of the West's foremost public intellectuals and a man whose voice reverberates around the corridors of the world’s chancellories.

Mr Summers has hailed the birth of the China-led institution as the moment the US lost its role as “the underwriter of the global economic system”.

“I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it,” opined the former president of Harvard and one time candidate to take over the US Federal Reserve.

^{Larry Summers: US bungling over AIIB is a "salutary wake up call"}

He is only the latest in a chorus of former Washington insiders who are heralding the Communist nation's attempts to rival US hegemony in the “soft power” stakes.

What is the AIIB?

The brain-child of Chinese premier Xi Jinping, the AIIB aims to plug chronic infrastructure gaps across Asia. With 46-founding members as it stands, the lender has been dubbed the “World Bank for Asia”, closely mimicking rival organisations such as the Japanese-led Asian Development Bank.

Principally, the bank would act as a funnel for pumping China's massive foreign exchange reserves into projects to build roads, bridges and mobile phone towers everywhere from Myanmar to Iran.

Beijing has already committed to providing at least $50bn of the $100bn capital needed to jump start the initiative.

Critics however, argue the AIIB is simply a ruse for Beijing to expand its strategic presence in the developing world.

China retorts that the international lender will bolster the financial firepower needed to address a $700bn shortfall in infrastructure investment which existing institutions cannot meet and which will provide a collective economic benefit to the world.

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The AIIB's inception has been long in the making. A foundational agreement to establish the bank was first signed by 21 Asian countries in November.

But it was the response of the United States which precipitated a diplomatic row of far greater significance than the establishment of a development bank.

Washington’s closest European allies chose to openly flout the unsaid prohibitions over their membership. France, Germany, Italy and the UK will all now be founding members of the AIIB when it is due to launch at the end of the year.

Britain's decision to become the "first Western nation" to submit its interest drew an apoplectic response from the White House.

“We are wary about a trend of constant accommodation of China, which is not the best way to engage with a rising power,” said one US official.

Undeterred, much of the rest of the developed world has followed the UK’s lead and thrown their hat into the AIIB’s ring.

Washington, seeing the fledgling institution as a proxy in the Sino-US rivalry, spectacularly misjudged the mood of its transatlantic allies. The rush to participate in the AIIB highlighted that no major economy was willing to bypass the opportunity to co-operate with the globe's rising power.

^{China's Xi Jinping wants the AIIB to rival the IMF and World Bank}

Previous abstainers Australia and South Korea are likely to join the ranks of the AIIB later this year. Japan, the last nation professing fealty to the White House, has said it will hold talks with Beijing over its involvement later in the summer.

Upon submitting its application for founder status, even Israel chose to rub salt in the wounds of its erstwhile ally, championing the AIIB as "one of the most important initiatives in terms of Chinese foreign policy and in particular for President Xi Jinping."

Having failed so dramatically to corral its allies into shunning China's overtures, Mr Summers and many others are now urging the US to "wake up to the new economic era."

"Childish paranoia"

The Obama administration’s knee-jerk reaction has been roundly castigated.

“We screwed up,” was the blunt assessment of indefatigable former US secretary of state, Madeleine Albright.

“We should not have done it this way and frankly, I think we miscalculated that other countries wanted to be part of the Chinese initiative. All of a sudden, everyone wants to be in it.”

Beijing, regaling in US folly, dismissed Washington’s attempts to scupper the AIIB as “childish paranoia”.

But China's ambitions would have come as no surprise to a reflexive US.

Beijing has long been stymied by an intransigent US Congress over its attempts have a greater say in the Western-dominated International Monetary Fund and the World Bank - the AIIB's rivals.

“The US only has itself to blame” says Eswar Prasad, a former China chief at the IMF, who argues the AIIB's objectives are “above reproach”

Others such as Kenneth Rogoff, a former chief economist at the Fund, say its high time China began to assume a more prominent role in the world’s biggest lending institutions, commensurate with its financial firepower.

A quiet retreat or Devil's bargain?

China watchers see the creation of the AIIB as marking a watershed in Beijing's foreign policy.

The diplomatic fallout may have captured the headlines, but China's gradual move into multilateralism has been interpreted as a retreat, rather than a power grab, by the Asian giant.

In building a multinational lender and courting Western backers, the Chinese are taking a conscious "step backwards" from a perceived aggressive and overwhelmingly bilateral conduct of its relations with smaller countries, according to Ho-Fung Hung associate professor of Sociology at Johns Hopkins University.

"It’s a concession that China’s established practice of promoting bilateral initiatives in the developing world has backfired," wrote Mr Hung in the New York Times, arguing that essentially all "multilateral institutions are inherently restricting."

Others agree that China’s drift towards institutionalism is partly an admission that it can no longer wield brute financial force in return for political influence.

"The Chinese want to use their vast capital resources but in a way which does not breed resentment in recipient countries," adds Mr Prasad.

“Until recently, China has been less savvy about its approach to international investment."

China’s presence in Africa over the last decade is a prime example of where its overtures have not always been welcome with open arms. Nigeria's central bank governor famously warned of "a new form of imperialism" in the continent, urging Africans to “wake up to the realities of their romance with China.”

Money comes with strings attached. Bilateral investment relations have allowed Beijing to dictate terms in what was often seen as a “bargain with the devil” adds Mr Prasad.

The AIIB is the latest bid to enhance China’s “soft power” credentials under its current premier. Beijing has made a concerted effort to develop regional trade partnerships, hosted the Asia Pacific Economic Cooperation conference last year and has retreated from its stand-off with the Japanese over a disputed set of islands.

^{China is moving to become a more benevolent world leader, say analysts}

The AIIB is also testament to China's growing self-confidence at its place in the world, notes Fred Bergsten senior fellow at the Peterson Institute in Washington

"It's less a step backwards than it is a progression," says Mr Bergsten, a former senior U.S. Treasury official, who sees parallels with the US’s move to establish international institutions as it emerged as the world’s dominant power after the Second World War.

"The AIIB indicates a maturity from the Chinese. They can now use the bank to lever their own money, achieve multiplier effects through the participation of other countries and eventually tap private capital markets."

Mr Bergsten maintains however that bilateralism will continue to be the order of the day in the overwhelming majority of China's relations with the rest of the world.

“Chinese investment has always elicited a lot of misreaction. But it’s fair to say they have learnt their lesson.”

Trading power for legitimacy

Smarting from an embarrassing misstep, the US has begun to manoeuvre a quiet U-turn on the AIIB.

Washington now says it welcome China’s foray into infrastructure spending, insisting only that it wants to ensure the AIIB’s governance structure adheres to international environmental and labour norms.

The final shareholder model of the bank is likely to determine the extent to which China will have truly traded power for legitimacy.

The early signs are promising.

The AIIB is likely to adopt a model where members’ voting rights will be based on economic size and performance, a departure from the capital ratio structure that has seen the World Bank attract criticism for being captive to the interests of dominant Western powers.

A touted three-tier management structure is also likely to mitigate against the bank becoming a de facto arm of the Chinese treasury, say observers.

“With all the criticism and suspicion that this all a big cover for Chinese power, Beijing will lean over backwards to adhere to best practice,” says Mr Bergsten.

“They will make sure they are holier than the Pope.”

With the hurdles to US opposition tumbling, Washington is likely to complete its volte face and join the ranks of the AIIB once a new administration takes office in the White House.

“China is likely to hold out an olive branch by saying it wishes Washington to come on board the AIIB in future years,” says David Marsh from the Official Monetary and Financial Institutions Forum.

“The world’s two main economic powers have locked horns over establishing a major development bank that could rival the twin Bretton Woods institutions – and Beijing has emerged, for the first time, as the clear winner,” adds Mr Marsh.