In the previous paper we saw how China is working on transforming the Yuan into an internationally attractive, gold-backed currency able to compete with the dollar. We also introduced the idea that this is part of a bigger plan aimed at creating an alternative to the current international monetary system and the global governance architecture that goes with it: in the course of the past decade, China has been promoting a series of important initiatives, which clearly demonstrate how this country is working on establishing a new Asian (or ideally Eurasian) financial, economic and political order: what we could call, an ‘Asian Dream’ along the lines, and in direct competition with the now fading ‘American Dream’. Here we will analyse the various components of this grand project one by one, then we will put them together to see the full picture, consider the strategic vision behind it, and compare the project with its American counterpart in the original post WWII version (to be kept distinct from its current neoliberal degeneration). Eventually we will touch upon what sort of transformations, what sort of ‘new world dis-order’ may be ahead of us in the coming years, as we go through an uncertain phase of transition which has already started.
PART I – ANALYSING THE COMPONENTS OF CHINA’S GRAND PLAN
The components of the Chinese grand plan are: 1) establishing the Yuan as a widely accepted international currency, 2) attracting to China’s sphere of influence as many countries as possible and integrate them by means of an infrastructure-led economic development project (the BRI initiative) and 3) establishing new institutions (both financial and political) to formalise, implement and manage the project and the new relationships deriving from it. Now we need to look at the components of the grand plan one by one.
1) Establishing the Yuan as a currency that could rival with the dollar
Establishing an international currency is far from easy and it consists of two aspects: a) making it widely accepted as a means of exchange by overcoming obstacles – such as American opposition (the ‘kiss of death’) or the lack of a well developed financial market – in various ways, including backing it up with gold and b) making it attractive as a reserve currency (=store of value), an even more complicated matter, as a well developed financial market is needed for the purpose, with a deep liquid pool of investable assets. The only way to build up a successful financial market representative of real value (as opposed to a Ponzi scheme) in which central banks can safely hold their reserves of the international currency, is to have a thriving and growing economy, which is what ultimately backs the currency (gold being simply a proxy for this) by making possible to produce attractive financial returns (or at the very least the conservation of value) in an economically sustainable manner. Therefore it is also necessary to have a project of growth and expansion of the real economy (hence the BRI initiative, as we will see later).
- a) For what concerns establishing the Yuan as an international exchange currency, this has been explained in the previous paper (China Challenges the Petrodollar). China has been leveraging its economic might (its trade surpluses and its weight in the global markets) to increase the use of its currency in international transactions. Here we can sum up the main steps taken by this country over the course of several decades, with a dramatic acceleration in the past few years:
- Using its cheap and disciplined labour force to attract foreign corporations that were looking to de-localise production, eventually becoming the factory of the world, acquiring huge trade surpluses and becoming a major player in the global commodities markets
- At some point China quietly starts converting into gold more and more of its huge reserves of US Treasury bonds (accumulated as a result of trade surpluses). It is estimated that the final aim is to reach approximately 8000 tons, roughly a 4% gold-to-GDP ratio.
- In the meantime (1999), the Shanghai futures exchange was established, in order to reduce US dollar dominance in the commodities market – here gold and silver are traded, but also other commodities such as copper, aluminium, zinc and led. Yuan-denominated gold futures have been traded in the Shanghai Gold Exchange since April 2016.
- In 2016 another section, the Shanghai international energy exchange is added to the futures exchange
- In 2014 a massive deal with Russia was signed in the wake of the Ukraine/Crimea crisis. Since then China has been working on ensuring larger and larger flows of Russian oil into its oil-trading markets to build up investor confidence over time.
- Setting up an interbank payment system (CIPS) to replace SWIFT. It is not clear yet if this system is capable of scaling up to levels needed to clear and settle China’s trade, but obviously progress is being made towards the aim of becoming independent of the Western financial system if needed.
- At the same time Russia is replacing Visa with its own internal credit payment system called Mir and China has done the same – its internal system being called Union Pay.
- In June 2017 the Yuan-Ruble payment system was launched. This is a direct trading relationship between China and Russia, with trade to be settled in Yuan. This was happening already since 2014 but the arrangement has now been made permanent. The monetary systems of China and Russia are getting closer with every passing day, enabling them to increase their mutual trade without having to rely on the IMF.
- ‘Convincing’ more and more countries to trade their commodities (and especially oil) in Yuan by rewarding them with an increased market share of Chinese imports. As China is the world’s largest importer of all sorts of commodities, this is a powerful incentive.
- September 2017 – launching a Yuan denominated oil futures contract convertible into gold potentially to become the most important Asian benchmark for oil trade – this is the first step for an (unofficially) gold backed Yuan set to dethrone the petro-dollar. This trading arrangement is scheduled to go live at the end of March 2018.
To sum up: China is working on steadily increasing the use of its currency for international trade, by backing it up with gold and by using its weight in the energy and commodity markets to convince trading partners to settle trade in Yuan.
- b) The second part of the plan to displace the dollar consists in eroding its predominance also as a reserve currency. Since the financial collapse of 2008 there has been a tendency on the part of investors to flee the dollar and buy real assets instead: real estate, gold, art, the ‘land grab’, crypto-currencies and so on – but in the end there is no substitute for Wall Street and the City in terms of liquidity and flexibility. The Yuan, currently viewed as very illiquid and unstable, has a long way to go before it can become as attractive as the dollar for reserve purposes. However, important steps are being taken in this direction:
- The request to include the Yuan in the IMF’s Special Drawing Rights basket, which was granted in October 2016. Thus the Yuan has become one of the world’s official reserve currencies, albeit with a very small percentage, only 10.92.
- Plans to liberalise the country’s financial system and interest rates have also been submitted to the IMF.
- In recent years, the Chinese authorities have been letting their currency devalue/revalue more in line with market forces
- The Chinese financial authorities have also been working on increasing the international use the Yuan by means of financial instruments issued by other countries (Singapore is issuing Yuan denominated bonds, and recently also Saudi Arabia).
- In 2016 an ‘axis’ was developed between the Hong Kong Stock Exchange and the City of London to give depth to the off shore RMB market
- China still has a closed capital account but recently some rules have been issued to facilitate access for big investors to its on shore and off shore stock markets, which are becoming more and more interconnected
To sum up, the Chinese currency still has a long way to go before it can rival with western finance – even more so if we consider the political risks associated with holding Yuan denominated assets, as China is still a communist country and in many ways still a developing country with high social tensions. But there is one sure way to make quick progress: a grand design of economic integration and development on a multi-continental scale, the Belt and Road Initiative (BRI), which aims to promote infrastructure-led development in 60 countries in Asia and surrounding regions. As this initiative gets off the ground, it will result in an expanded use of the Yuan in the real economies of the Belt and Road host countries, but also in the financial markets, both on shore and off shore. Ultimately, the key to a successful financial market is the promotion of real economic growth, and real economic growth could also resolve the social tensions and the political risks associated with holding Yuan denominated assets. We must now turn to this grand economic project.
2) The Asian Dream, or BRI – Belt and Road Initiative
The $900 billion question: What is the Belt and Road Initiative? – Tom Phillips – The Guardian – 12 May 2017
China’s one belt, One Road: A reality Check – Yu Jie – head of China foresight at the London School of Economics – 24 July 2017
How did the Belt and Road initiative (BRI) come about? To use Wikipedia’s words: ‘the deliberate underinvestment in transportation infrastructure in the industrialised world after 1980 [the beginning of the Neoliberal economic paradigm] and the pursuit of short termist export-oriented development policies in most Asian and Eastern European countries has allowed China to develop quietly its pre-eminence in civil works and modern land transportation technology, including high speed rail.
The initiative was officially launched in September 2013 when President Xi Jinping used a speech at a university in Kazakhstan to call for the creation of a ‘Silk Road economic belt. The project was later expanded and re-branded with its current name. The Belt and Road initiative is an immensely ambitious development campaign aimed at boosting trade and stimulating economic growth across Asia and beyond. The Chinese authorities hope to achieve these goals by building an extensive infrastructure network connecting China to its neighbouring countries and beyond: high-speed railways, highways and truck roads, air and sea ports, utility stations and power grids, oil and natural gas pipelines and telecommunication networks. The BRI will also entail the construction of large industrial parks and special economic zones (SEZs) coupled with manufacturing plants within these areas. The project will witness investments in shipping, construction, energy, commerce, tourism, information technology, bio-technology and alternative energy. Beyond this, the BRI will also encompass trade fairs, exhibition halls and other structures that facilitate and support economic activity (and on top of it all, the initiative calls also for increased cultural exchange).
As the name suggests the Belt and Road project consists of two main prongs: the ‘Silk Road Economic Belt’ (the Belt) and the ‘21st Century Maritime Silk Road’ (the Road). The area covered by the initiative is primarily Asia and Europe, encompassing around 60 countries, but Oceania and East Africa are also included.
The Belt consists of a series of overland corridors aspiring to connect China with Europe via Central Asia and branching off also to South East and South Asia. The central corridor is largely analogous to the historical Silk Road (going trough Cental Asia, West Asia, the Persian Gulf, the Middle East and eventually reaching Europe via the Mediterranean sea). In addition to this belt, a North and a South belt are also being proposed. The North Belt would go through Central Asia, Russia and Europe. The South Belt would go to Southeast Asia, South Asia, to the Indian Ocean, and through Pakistan.
The Road is a complementary maritime route, aspiring to link China’s coastal regions, through several contiguous bodies of water, with Southeast and South Asia (branching off also to the South Pacific and Oceania), the Middle East coastal regions, Eastern Africa and all the way to the Mediterranean. The Maritime Silk Road was first proposed by Xi Jinping during a speech to the Indonesian Parliament in October 2013. Bewilderingly, the Road is not actually a road but rather a sea route. The initiative’s Chinese name – ‘yi dai yi lu’ or ‘one belt, one road’ rolls off the tongue far more easily.
Advancement of the project – Four years after the initiative was announced, we are still at a very early stage of implementation and most projects remain on the drawing board. This is no surprise, given the great political instability of many of the areas concerned, and the more or less open resistance from the West. However, some projects have indeed been completed. One of the most prominent is the $62 billion China-Pakistan economic corridor (Cpec), a web of motorways, power plants, wind farms, factories and railways, that supporters hope will spark an ‘economic revolution’ and create up to one million jobs in Pakistan. Another completed project is the railway that, starting from the city of Chongqing, goes through the Xinjiang Autonomous Region, then Kazakhstan, Russia, Belarus, Poland and finally reaches Germany and from there other European cities including London. Another completed project (at the cost of $4 billion) is Africa’s first transnational electronic railway, covering 466 miles from the Ethiopian capital Addis Ababa to the port city of Djibouti. (Other high-profile schemes at an advanced stage include a $1.1 billion port project in Sri Lanka, a high-speed rail link in Indonesia and an industrial park in Cambodia)
Magnitude of the project – The planned scale of OBOR is astronomical. The countries it plans to include comprise 55% of world Gross National Product, 70% of the world’s population, and 75% of known energy reserves. By some estimates, China plans to pump $150 billion into it every year. According to a 2017 report by Fitch ratings agency it is estimated that $900 billion worth of projects are planned or underway. The plan has the potential to massively overshadow the US’ post-war Marshall reconstruction plan, some describe Xi’s scheme as the biggest development push in human history. Anticipated cumulative investment over an indefinite timescale is variously put at $4-8 trillion. The initiative has been contrasted with the two US-centric trading arrangements, the TPP and TTIP. In order to raise the necessary funding, two major financial institutions have been created: the Asia Infrastructure Investment Bank (AIIB) which will contribute $100 billion, and the Silk Road Fund, which will contribute $40 billion. This takes us to the next section: the new institutional arrangement, both financial and political, that is being created to implement China’s ‘Asian Dream’.
3) Creating new institutions: financial (AIIB, Silk Road Fund) – and political (SCO)
AIIB – The Asian Infrastructure Investment Bank, first proposed in China in October 2013, is a development Bank dedicated, as the name suggests, to lending for infrastructure projects. Its official goals are to address the expanding infrastructure needs across Asia, to enhance regional integration, to promote economic development and to improve public access to social services. In June 2015 the Articles of Agreement, setting the legal framework, was signed in Beijing. The Bank has an authorised capital of $100 billion, 75% of which comes from Asia and Oceania. China will be the single largest stakeholder, holding 26% of voting rights and de-facto veto power. The Bank has been launched with a remarkable success, as it was joined by 57 founding member states, out of the 60 countries that have expressed an interest in participating in the BRI initiative. The gaping need for long term capital explains why many Asian and Eastern European heads of state expressed enthusiasm for the project (China has also established a special link with Eastern European countries, the 16+1 Cooperation Framework). The BRI initiative is expected to bridge the infrastructure gap present in the region, and thus accelerate economic growth across Asia Pacific, Central Asia and Eastern Europe. Experts estimate that Asia (excluding China) will need up to $900 billion of infrastructure investments per year during the next 10 years, and that current infrastructure spending is insufficient by 50%.
Silk Road Fund – it was launched in 2014 with a capital of $40 billion – the difference from the AIIB is that its role is to invest in businesses, rather than infrastructure. The Karot Hydropower Project in Pakistan, situated 50 kilometres from Islamabad, and which started in 2016, is its first foreign investment project, and it is not part of the much larger Cpec infrastructure project. The contractor is a Chinese construction corporation.
Changes in Asia’s financial architecture – With all the initiatives so far examined (the internationalisation of the Yuan, the BRI and the new financial institutions), China has effectively started to reshape the Asian financial landscape.
Asian financial architecture today is still very underdeveloped and, as a result, Asian countries still rely heavily on the global institutions established in 1944 (IMF, World Bank etc.) to regulate their international transactions and finance. Asia’s own architecture (its network of private and public financial institutions, together with their regulatory frameworks) is now out of scale with its rapid economic development, with the adverse consequence that, despite increased trade and financial ties within the region, Asian markets are still much affected by events in the USA and, in particular, monetary policy decisions taken by the Federal Reserve. Connected with this issue is the question of representation within the current global financial institutions. Asia’s share of global gross domestic product has more than doubled since 1944, but the current institutional arrangements do not reflect this shift at all. For example, despite being the world’s largest economy, China’s voting power in the IMF remains very low, even after having recently been increased to 6.16 (from 3.81%). In addition, the US maintains de-facto veto power, with its share of 16.73%. Other emerging countries are equally under represented. Likewise, China’s share of voting rights in the International Bank for Reconstruction and Development (the World Bank), is just 5%. The US share is 15%, and 45% of votes are controlled by the US and its allies, Japan and the European countries.
For what concerns development funding in Asia, the Asian Development Bank until recently continued to be the primary multilateral development bank in the region, providing financial assistance to infrastructure projects. This institution as well is dominated by Japan and the US, that together hold 31% of the capital and control 26% of the votes. China has pushed for greater representation than its current 5%, but its request has not been granted.
Given this situation, it is no wonder that China at some point started to take bold steps, and founded alternative institutions. ‘As the first multilateral development bank initiated and led by China, the AIIB seeks to challenge the duopoly of the World Bank and the Asian Development Bank in financing regional projects. This is particularly significant, as it is the first major multilateral development bank with no U.S. involvement – indeed, many countries such as the UK and Germany have joined against the wishes of the U.S.’ (Nikkei Asian Review – Tomoo Kikuchi & Chua Yeow Hwee – “Changing the financial order in Asia-Pacific” – 23/11/2015). With 57 founding members, and China having de-facto veto power, the AIIB could signal a transition in the leadership of development finance in the region.
What we can conclude so far, is that China and its allied emerging nations, finding themselves in a decisively disadvantageous position in the current US dominated system of financial (and political) governance, have taken the strategic decision to expand the world economy in order to carve out for themselves a better space in a new system that is going to be either a much expanded version of the current one, or a dual block (or possibly even multi block) version. The Belt and Road Initiative is designed precisely for that purpose: by fulfilling a real need (bridging the infrastructure and development gap in Asia and beyond) the nations involved (and primarily China) aim to fulfil also their geopolitical ambition of gaining more weight on the world stage.
Defence & security: the Shanghai Cooperation Organisation (SCO) – If it is no wonder that the so called emerging markets are becoming assertive nations with their own ambitions, it is also no wonder that the current US led (and 1% dominated) system of power is opposing strong resistance and can be expected to continue to do so for some time to come. Therefore, while the AIIB and the Silk Road Fund have been set up to finance the BRI project, there is one preliminary condition that needs to be met before the project can even start to get off the ground: being able to grant peace, order and security along its routes. Hence the need for an overarching political and military alliance aimed first of all at re-establishing peace and order in those areas affected by war and terrorism (Central Asia, the Middle East, North Africa and the Ukraine – a ‘ring of fire’ separating Asia from Europe) and then to maintain security and stability in the region. Here comes into play the strategic alliance between Russia and China, along with Iran, Iraq, Syria and various factions within the Middle East (Hezbollah etc.) which have managed to almost completely defeat ISIS, thus removing an important obstacle effectively blocking the project. For what concerns the long-term security of the trade routes and the economic area that they would connect, a more formal alliance has already been put in place, the SCO.
The Shanhai Cooperation Organisation (or Shanghai Pact) was founded in 2001 by the leaders of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. This organisation had been in place already since 1996 with the same countries except for Uzbekistan, and was known by the name of ‘Shanghai Five’. After the inclusion of Uzbekistan in 2001 the organisation changed name. In 2015 India and Pakistan started the formal process of joining it, and became full members in July 2017.
In addition to these eight full members (which together account for approximately half of the world population, a quarter of the world GDP and about 80% of Eurasia’s landmass), many other states are associated with the organisation at various levels of involvement: Afghanistan, Belarus, Iran and Mongolia are Observer States (the next level of involvement) and some of these states have expressed interest in becoming full members.
Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka and Turkey are Dialogue partners (the next level down). These countries (except for Cambodia and Turkey) along with Egypt, Syria and Bangladesh have also applied for Observer Status. In addition, Syria, Egypt, Israel, Maldives and Ukraine have applied for Dialogue Partner status. Iraq, Bahrain and Qatar have also expressed interest in joining the SCO. Vietnam also signalled its interest in becoming a Dialogue Partner in 2011. It’s not difficult to see the signs of a geopolitical earthquake in the making. It looks like many countries are keeping their feet in two shoes, maintaining good relations with the West and abiding by the rules of Western dominated governance, but quietly sneaking out and seeking involvement with the new and perhaps more promising club. What are the stated objectives of this organisation?
The SCO primary concerns, as defined by its Central Asian core members, are terrorism, separatism and extremism. Although officially the organisation does not define itself as a military block, it doesn’t rule out the possibility of a full-scale involvement of armed forces in the fight against the abovementioned threats. In October 2007 the remit was broadened to include the issues of security, crime and drug trafficking. More recently, also cyber warfare and ‘information war’ (defined as an effort by a state to undermine another’s political, economic and social systems) have been added to the list of common threats that the organisation aims to combat. It is obvious that there is an intention to organise a common defence against covert actions. For what concerns military activities, they have been expanded to include increased military cooperation, intelligence sharing and counter-terrorism. There have been also a number of SCO joint military exercises. Finally, economic cooperation is also part of the agreement, while Russia, Kazakhstan and Kyrgyzstan have formed an additional organisation for this purpose, the Eurasian Economic Union.
PART II: THE FULL PICTURE – ECONOMIC AND GEOPOLITICAL IMPLICATIONS
Nadege Rolland ‘China’s Eurasian century’ https://www.youtube.com/watch?v=DL9XtKDHPGg
Martin Jacques: ‘When China rules the world’
Kevin Rudd and Linda Jansen : China’s rise and a new world order
In May 2017 there was a two-day forum in Beijing celebrating the Belt and Road initiative, which saw the participation of thirty heads of state and governments, the representatives of about a hundred countries and the leaders of the IMF, World Bank and United Nations. The Western media have almost ignored the event, even though the project is certainly the greatest development project in human history, and it comes at a time when our so-called leaders are unable to generate any ideas on how to resolve our current crisis, and have no vision for the future. The Western leadership tends to look at this project with scepticism and suspicion, despite the fact that the Chinese President keeps on repeating that China is not seeking geopolitical dominance, but only a win-win type of economic cooperation. However, there is no doubt that such an enormous (and hugely expensive) project is motivated not just by economic objectives (expanding China’s potential markets) but also by geopolitical ambitions.
In order to understand the true nature of the project, we must look at the world from China’s point of view, and think of its strategic objectives, its vision for the future, but also its weaknesses and the obstacles along the way that it needs to overcome. In terms of strategic objectives, as officially stated by various conferences and documents of the Communist Party, by 2050 China aspires to become a prosperous nation and a world power. Understandably, China wants to vindicate the humiliations of the 19th and 20th century and resume its historic role as one of the great world civilisations. In terms of obstacles and weaknesses, there are internal ones (underdevelopment, social unrest and ethnical tensions) and external ones (mainly geopolitical and military, all connected to overcoming US resistance). Therefore, seeing the full picture means seeing how this grand plan may have been designed by the Chinese leadership to achieve its objectives and overcome China’s weaknesses.
Internal objectives and weaknesses:
- In order to become a prosperous nation (and thus avoid the very common stumbling block to economic development, the so-called ‘middle income trap’) China needs to make a difficult economic transition: from a low cost/low tech, labour intensive, industry based, export led economy – to one led by internal demand, high tech/higher wage (& cost) and more service based. This sort of transition implies deep social changes that would threaten the existing power structure in any country. In addition, for what concerns China in particular, it would mean the necessity to modernise and make more efficient the State Owned Enterprises (SOE’s) that play an enormous role in the Chinese economy (especially for what concerns heavy industry). As the SOE’s are major employers, this would lead to unemployment and social unrest, with consequent challenge to the current power structure. Therefore it is a very difficult issue to tackle.
- Rebalancing the so far very unbalanced – in favour of coastal and urban areas – economic growth, by developing internal regions and rural areas
- Keeping the country united by defusing tensions in problem areas – such as Tibet, the Western Muslim provinces, Taiwan. This leads us to the external problems, as tensions in these border regions are very often stoked by external powers as well, for geopolitical reasons.
External objectives and weaknesses:
- Stabilising via economic development the neighbouring states to the west (Central Asia) which could otherwise become hot beds of (foreign sponsored) terrorism
- Breaking through the ‘siege’ along China’s coast, that is, the fact that China is surrounded by potentially hostile nations allied to the US: South Korea, Taiwan, Japan, the Philippines (this is changing now) and Vietnam
- Securing energy sources
- Increasing power in international governance institutions and upgrading the Yuan to major international reserve currency status
To sum up all the above points, we could say that, hemmed in on its eastern flank by unfriendly neighbours (Japan, South Korea and the rest, along with the US fleet in the South China Sea) but also hemmed in economically (as Western consumers have run out of money to buy China’s exports and transforming the economy to reduce the weight of exports is risky business in social terms), there was one obvious thing to do: to turn the attention towards the vast lands lying to the West, in order to break the encirclement from the Eastern side and open up a huge potential in terms of economic and political expansion. By looking at the full picture it becomes evident that resolving China’s economic and social problems (keeping employed a huge and restless workforce while avoiding social change, boosting the economies of less developed border regions such as Xinjiang etc.) goes hand in hand with resolving its geopolitical problem (encirclement) as well as allowing this country to cast its ambitions on the world stage.
From a commercial point of view, the project is a way to link and thus to tie, many emerging markets to the Chinese economy. (Between 2014 and 2016 China’s total trade volume in the countries along the Belt and Road exceeded $3 trillion, created $1.1 billion revenues and 180,000 jobs for the countries involved [data from Tom Miller’s book China’s Asian Dream]). The ultimate aim is to create a commercial and economic area ever more self sufficient and not dependent on the West’s waning purchasing power (now also starting to give rise to protectionist inclinations).
It is obvious that commercial ties will also translate into geopolitical influence. In addition, the ports especially, but also other infrastructure will be useful for military control of trade routes. The strategic objective of the BRI is to weave a web linking more than 60 Eurasian countries together asymmetrically interdependent on China economically or sometimes politically. If the project is successful, in the long run Chinese political influence in Eurasia will grow enormously. By projecting economic power in Eurasia China can be assured of energy security, trade and investment opportunities, increased internationalisation of the Yuan, and increased political clout. This spells the beginning of the end for American dominance of the region and not just the region but of the entire world. We must now look at China’s blueprint for a ‘new world order’ through the lenses of the past, by comparing it to its American counterpart, before we can assess not so much what shape the world order might take in the future (as this is a long term question unknowable at the moment) but how this hegemonic shift is likely to affect us in the phase of transition that has just started.
Comparing the ‘Asian Dream’ with the American Dream
Although resulting from bold initiatives implying an unprecedented and massive range of action, the basic idea behind China’s project is not new: when we take the trouble to put the pieces of the puzzle together, it’s not difficult to see the signs of a grand design for the 21st Century modelled – at least for what concerns its very basic framework – along the lines of the Bretton Woods paradigm which governed the Western World for the first 30 years after WWII. Often commentators make parallels between these two arrangements, but in a rather impressionistic manner, without carefully analysing all the relevant aspects. I will now attempt to make a more comprehensive comparison, which includes the general setting as well as the institutional and monetary arrangements, and also considers the pieces of the puzzle that are still missing.
World stage at the end of WWII – there are two rival blocks contending for power and influence on the world stage: the Capitalist West and the Communist East. The US is the western world’s industrial powerhouse, as Europe and Japan lie in ruins. The US has military control of the West, but the system it represents, capitalism, has to win the hearts and minds of the masses that have turned decisively hostile after decades of war, financial collapses, austerity, economic depression and more war. As substantial parts of the western population seem to be inclined towards revolutionary change along the lines followed by Russia and China, the US establishment decides to put in place an expansive, redistributive economic model, designed to neutralise and eventually overcome widespread scepticism with a healthy dose of consumerism and the bait of the American Dream.
Current world stage: Unilateral US hegemony, consolidated after the end of the Soviet Union, is now being threatened by the emergence of a rival block led by China. Therefore we are witnessing the re-emergence of a bi-polar world, with similar competition for the hearts and minds. China is more or less the world industrial powerhouse but it hasn’t achieved political (or cultural) dominance yet, and hasn’t won a major war either. Therefore, if it wants to attract as many countries as possible to its sphere of influence, it will have to use mainly economic inducements. It is not difficult to see the BRI as the means to promote an expansive (win-win) form of capitalism, whose success is based on achieving economic development and rising living standards in the countries involved, including China. Instead of the consumerist American Dream we have the ‘developmentalist’ Chinese Dream: a promise of infrastructure-driven economic growth and prosperity.
Institutional similarities – Many commentators have pointed out that the Silk Road Fund & the AIIB can be seen as the equivalent of the Marshall Plan and the World Bank. An equivalent of the IMF is missing so far, but by replacing SWIFT and integrating the Yuan-Ruble payment systems, Russia and China are laying out the foundations – then a new regulatory framework will need to be established, and this will depend on what sort of economic paradigm will eventually be chosen. This is a question to be analysed at length in the next papers, as it is a crucial issue. In terms of military institutions, the SCO could take on the functions of an Asian NATO in due course, while the many summits, alliances and other smaller forums of co-operation that are currently being set up with other Asian countries (but with the BRICS as well), could function as regional governance institutions (along the lines of the UN, OCSE, OECD etc.)
International reserve and exchange currency – One of the main differences in this regard is that the US was able to impose its currency (and its world order) in 1944 as a result of winning a devastating hegemonic war, while China will have to build up its position step by step. If China can manage to put the Yuan at the centre of a new international monetary system, it will enjoy the privilege of being able to create money on a massive scale, and this will be a game changer. If and when this happens, China will be able to invest massively in the development and expansion of many neighbouring economies, thus not only creating an outlet for its productive capacity and a source of profits, but at the same time also boosting immensely its hegemonic influence. This is not unlike what the US did after WWII by creating money to rebuild Europe, in order to expand the markets for American goods but also, over time, to impose its culture, lifestyle and geopolitical hegemony across the Western world.
Being at the centre of a new international monetary system will go a long way towards ensuring the success of the project, and China is working, slowly but surely, on achieving this objective: building up the Yuan, unofficially backed by gold (not unlike the US dollar originally convertible into gold in the Bretton Woods monetary system) as the main international exchange and reserve currency, building up a financial market based on economic growth, and creating a web of relationships, institutions, summits and economic ties to knit together a growing group of emerging countries into a new integrated system.
Hence the reason for the sceptical approach by the Western media. It is not hard to imagine why the West looks at the BRI initiative with suspicion (at best) and why the elite currently dominating the West has been secretly committed to encircling China in various ways, most obviously with military intervention in the wake of the 9/11 events, but more recently mainly by aiding and abetting terrorism and destabilisation along the routes of the New Silk Road. This follows a long established foreign policy commitment on the part of the Western powers: sabotaging any form of political stability and economic development around the world – but most crucially in Central Asia – in order to maintain world control:
According to Zbigniew Brzezinski‘s theory [but also to Mackinder’s ‘theory of the heartland’ formulated in 1904], control of the Eurasian land mass is the key to global domination and control of Central Asia is the key to control of the Eurasian landmass….Russia and China have been paying attention to Brzezinski’s theory, since they formed the Shanghai Cooperation Organisation in 2001, ostensibly to curb extremism in the region and enhance border security, but most probably with the real objective of counterbalancing the activities of the United States and NATO in Central Asia (Wikipedia)
This is the crucial question that most people in the West don’t seem to grasp: while favouring the economic development and integration of vast Eurasian regions and most notably of Central Asia (Mackinder’s heartland) spells the end of American and western ambitions (and must therefore be suppressed at all costs from the point of view of our ruling elite) it spells the solution to Chinese internal (economic development) and external (encirclement) problems, as well as the possibility to fulfil China’s ambitions of renewed influence on the world stage. The critics of China don’t realise that while the self interest of the western elite is at cross purposes with the self interest of pretty much everybody else at this point in history, the self interest of China is actually conducive (within limits and will all the caveats that may apply to these situations) to the general good.
WHAT SORT OF TRANSITION CAN WE EXPECT?
The long-term question is: what type of world order will result from China’s project? Will it eventually lead to a Chinese dominated globalisation 2.0, a new version of the top down globalisation that we have known so far or will it bring about a more egalitarian world order? Will it maybe start in a somewhat benevolent way – along the lines of American hegemony after WWII, only to then turn sour just as American hegemony has done? Will we end up with two (or more) separate blocks? There is no way of knowing, but for the moment the question that we need to answer is not what is going to happen in the distant future but what dangers and opportunities lie ahead in the treacherous phase of transition that has just started.
China is trying to involve western countries (especially western Europe) as much as possible both in the infrastructure project and in the bank financing it (AIIB), in an effort to frustrate America’s attempts to sabotage the whole design. Many parts of the world have already switched sides, thus entering the post-neoliberal order, and the West is now at a crossroads: the majority of the population and a part of the dominant class that lives and thrives (or rather suffers these days) predominantly within the productive or ‘real economy’ has an interest in participating in the BRI projects, while the part of the elite that rules the world and thrives mainly by financial means (increasingly fraudulent ones) has a strong and stubborn interest in maintaining an increasingly untenable status quo at whatever cost (mainly austerity and war) to everybody else. For the West there is a basic trade off at stake: giving up a large chunk of geopolitical hegemony in exchange for escaping an untenable economic situation, resuming growth and returning to widespread prosperity. For most of the Western population, nowadays enjoying very few benefits from geopolitical hegemony and pretty much excluded from any meaningful participation in political life, deciding which way to go would be a no brainer, if only the political debate was framed in these terms. But unfortunately the debate is being camouflaged under a fake opposition between mainstream self-proclaimed politically correct values (democracy, liberty, tolerance, the open society etc.) vs variously demonised forms of ‘populism’. But regardless of how reality is represented in the public discourse, the fact remains that the presence of the Asian Dream re-opens the very possibility of an alternative that has been excluded from all political discourse since the times of Margaret Thatcher’s infamous TINA. While it is possible that ‘populist’ forces (both in their right and left wing versions) may mature in relatively quick terms and develop more articulated political proposals, for the time being the fight is confined mainly within the ranks of the ruling elite and mainly behind closed doors: part of the elite (linked to financial interests, transnational corporations and their bureaucratic, political, and technical support staff) is determined to hang on to the current system at all costs; the other part, more representative of national industry, the productive economy, and national interests in general, is tempted to work out a compromise with the rival block and join the coming wave of economic expansion promoted by the BRI projects, hopefully (from their point of view) from a still advantageous position. This is the state of the political confrontation in the West, very roughly speaking, because there are differences from one country to the other.
Short of waging and winning a proper ‘all out’ war (WWI & WWII style), the die-hard ‘financial’ elite has no chance of winning this confrontation in the longer term. It remains to be seen for how many more years it will be able hold out from its ‘austere’ bunker (deploying cold war style tactics) and how much more widespread suffering this hopeless stance is still going to cause. While we don’t know how long it will take and how exactly it will happen, at this point the general direction in which our economy and our politics are going to shift seems rather inescapable, and thus to a large extent predictable. The West and most notably the US and UK will have to give up quite a bit of their influence, inflate their currencies to buy up their government debt and toxic assets that no longer have a market, then put together some kind of an industrial plan and see how they can go back to paying their way in the world. Various forms of protectionism, as well as cutting deals with other countries, including arch-rivals such as Russia and China, are going to be part of the picture. Each country (but also each class or interest group inside them) will have to decide what mix of resources (including geographical position), abilities, alliances and synergies to use in the struggle for survival in the new environment. The countries with strong financial markets (the UK and USA especially but not exclusively) will also continue to use their privileged financial status to their advantage, but in a reduced manner compared to the past. Western financial markets and real estate markets are not going to disappear overnight and, for as long as China remains a communist country (and the West retains part of its glitter and glamour), they will still be attractive. There is also the possibility for the main Western financial institutions to get a new lease of life by selling their services as off-shore financial intermediaries for the growing Asian investments. The UK and the USA will try to hold on to their financial advantages (reserve status) as much as possible, possibly also by promoting the usage of newly created blockchain currencies as official IMF reserves (in an attempt to hold back a much dreaded return to gold), by abolishing cash in order to avoid bank runs (and facilitate more or less disguised forms of bail-in), and whatever other tricks they can come up with in order to shore up their discredited currencies. One ominous development which is already taking place but which may substantially increase in scale is the possibility that the stronger states will cannibalise their weaker allies via unsustainable debt repayments, consequent financial collapses (Greek style), and fire sales of their assets. All the above developments can be summed up into four main survival strategies characterising the transition phase:
- Rebuilding the economy by using various combinations of protectionism, industrial policy and doing business with the rival block
- Making the most of resources and advantages (such as geographical position) that become very valuable in the new environment
- cannibalising weaker countries (this only applies to the stronger ones)
- holding on to reserve status (this only applies to the countries whose currencies are used as international reserves and which have well developed financial markets)
We will probably see the stronger countries leverage their resources to make deals with the rival block while at the same time trying to prevent the weaker ones from doing the same, in order to keep as much power as possible in the new world order and suck up as much wealth as possible from their weaker partners. We are entering a very treacherous time, in which your worst enemies may become your allies, and your allies may well turn out to be your worst enemies in disguise. We will see some of the weaker countries do their best to escape their disadvantages and maybe even carve out for themselves a decent space in the new world order, while others, conversely, will succumb in the struggle and end up dismembered and gobbled up by their supposed allies. Therefore this is a time of great danger as well as great opportunity. Great danger of being cannibalised, but also great opportunity as the Western elite is finally weakened and a new expansive push is finally in the making. This is the time in which those collective entities (first and foremost the nation states, but also political parties and other representative bodies and tightly knit communities of various type) that are able to develop a strategy and play it out successfully on the world stage will be able to cope and even thrive with a bit of luck, while the others are likely to suffer considerably and even be dismembered and disappear. In this great uncertainty three things are certain: 1) unless we are able to see through the mist that is being cast by the media and develop an ability to detect, in each situation or event, who the players are and what game is being played (within the greater picture), we won’t be in a position to develop the strategy necessary to defend ourselves from the threats and make the most of the opportunities involved. In other words this is a time in which strategic thinking is the most crucial variable for success; 2) as we are entering an expansive phase of the world economy, potentially there is something to be gained by everybody – this need no be a zero sum game. Although with lack of strategy it may well become a zero or negative sum game for many players; 3) the sooner most players (especially the weaker countries and the working masses) are able to abandon the zero sum environment dominant in the West and join the positive sum environment being shaped in the East, the shorter, less painful and productive of better results the transition will be and the more they will be able to shape the resulting new world order in a positive manner.
In the next papers I will try to show how this Chinese–led expansive push is affording us a good opportunity to shift our economic paradigm towards a renewed (but opportunely revised) Keynesian mode, and how, in turn, such a paradigm should eventually enable us to transition towards that steady state economy which is the ultimate aim of most of our PM followers.