19 Αυγούστου 2015

I) The Shanghai Cooperation Organization expands into South Asia II) The Long Road to Currency Multipolarity.

The Shanghai Cooperation Organization expands into South Asia

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Last month, India and Pakistan were accepted as full members of the Shanghai Cooperation Organisation (SCO), a platform to discuss politics, economics and security matters in Eurasia. While some observers doubt the organization's importance, the step is likely to have three main beneficiaries: China, Russia, and the region as a whole.

Benefits for Beijing
India's and Pakistan's inclusion are good news for Beijing, as it turns the organization into an ideal negotiating platform for China’s regional investment plans. Once sanctions on Iran will be lifted, Tehran’s accession seems only a question of time. An expanded SCO allows China to promote the Silk Road Economic Belt, China-Pakistan Economic Corridor (CPEC), Bangladesh-China-India-Myanmar (BCIM) Corridor and Central Asia-China Gas Pipeline with policy makers in Delhi, who regard China’s growing presence in the region with suspicion. China's Silk Road Fund in particular may be seen as a threat by Russia and India, who will rightly interpret China's efforts as a challenge to their own attempts to assume regional leadership.

From a geopolitical point of view, the organization’s significance (though still largely symbolic) is often seen as a potential counterweight to the Western security institutions, primarily NATO. Yet contrary to some would expect, the SCO, which was founded in 2001 in Shanghai by the leaders of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan, will not rival or balance NATO frontally. Rather, it provides an alternative platform that will seek to play an increasingly important role in the agenda-setting process of geopolitical issues that affect Asia – ranging from terrorism emanating from Afghanistan and instability in Central Asia to China’s attempts to finance the region’s physical integration. The question of whether China still prioritizes SCO in this context is secondary: Rather, it will provide Beijing with additional autonomy and yet another option for forum shopping.

Benefits for Moscow
For Moscow, the organization's benefits are more basic. The SCO's mere existence reduces the West’s capacity to diplomatically isolate countries that it believes do not play by the rules. Russia may not always get what it wants in the SCO – particularly now that India has joined the grouping – but its membership increases its legitimacy and reduces its dependence on Western partners (even though it cannot compensate for the economic losses generated by the sanctions). India's accession increases the SCO's standing: Not only does it now include the majority of people in Asia (and a sizeable portion of mankind), but, including the world's largest democracy, it can no longer be seen as a club of autocrats.

The organization has often been understood in the context of defending autocracy and limiting US influence in the region, and in 2005, the group called on Washington to set a timeline for the removal of its military bases in Central Asia. Russia’s Foreign Minister Lavrov has argued that the SCO is a key element of a new “polycentric world order.” At the Dushanbe summit in 2000, members agreed to "oppose intervention in other countries' internal affairs on the pretexts of 'humanitarianism' and 'protecting human rights;' and support the efforts of one another in safeguarding the five countries' national independence, sovereignty, territorial integrity, and social stability.”

During summits, discussions usually revolve around Central Asian security-related concerns, often describing the main threats it confronts as being terrorism, separatism and extremism, and policy responses are sought in the realm of military cooperation, intelligence sharing, and counterterrorism. Regular military exercises are being held since 2003. In 2014, China hosted the SCO’s largest-ever series of military drills, which included China and Russia conducting joint naval exercises in the Mediterranean. That may be little more than symbolism, but matters greatly to Russia, in need of demonstrations of support.

The Shanghai Cooperation Organization is in the midst of a broad transformation as it has started dealing with economic issues, including the potential creation of an SCO development bank. Other new issues concern infrastructure, transnational border and water disputes, and cultural exchange programs. Russia has also proposed linking the Eurasian Economic Union (EEU), which consists of Armenia, Kazakhstan, Belarus and Russia, with China’s Silk Road Economic Belt.

Benefits for the region
All these topics will play a decisive role in the geopolitical future of Eurasia, a region that seems to regain its importance as Russia turns its back on the West, and as China is articulating its strategy to strengthen its presence in Central Asia and beyond. Asia is a region with a relatively low institutional density, and increasing the number of high-level fora that bring leaders together must be welcomed, considering the many potential points of friction that exist between countries in the region.

In this sense, the Ufa Summit already produced a very tangible benefit -- have India's Narendra Modi shake hands with Pakistan's Nawaz Sharif, during what was the first meeting between the two leaders since May 2014 and came after increased border hostilities in the past few months and India’s cancellation of secretary-level talks last year.

Oliver Stuenkel

The Long Road to Currency Multipolarity

Κείμενα περί Κίνας

Last week, in an effort to help protect currencies in the Southeast Asian region against global headwinds, Indonesia proposed a broader use of the Chinese yuan in the ASEAN region in order to better synchronise with China as Asean's largest trading partner. The timing of the statement was noteworthy, as it occurred at the end of a week that, some argue, badly affected the Chinese government's international reputation of being the world's leading technocrats, firm in control of the second largest economy. Quite to the contrary, China's decision to de-peg the yuan from the dollar, only to hastily spend U$ 200 bn to prevent the currency from devaluating, make the Chinese leadership seem hesitant and divided about the speed of market liberalization. It is a cautionary tale for those who had predicted more profound reforms, a necessary step to start challenging the US-dollar's global dominance, the bedrock of US hegemony.

China is seeking to establish, since 2009, a controlled internationalization of the yuan. The creation of the China International Payments System (CIPS) is a key element of this strategy, as is the plan to transform Shanghai into a global financial center.

As Hu Jintao explained in 2011,

The current international currency system is the product of the past. As a major reserve currency, the US dollar is used in considerable amount of global trade in commodities as well as in most of the investment and financial transactions…It takes a long time for a country's currency to be widely accepted in the world. China has made important contribution to the world economy in terms of total economic output and trade, and the renminbi has played a role in the world economic development. But making the renminbi an international currency will be a fairly long process.

The reasons for such a strategy are clear. The global dominance of the US-dollar provides the United States with a tremendous privilege. It costs less for US-Americans to borrow, allowing the government to fund deficits and firms to raise money that would otherwise not be possible. Put differently, the United States has to work less to retain the confidence of global investors, and the pressure to reduce government debt is lower than in economies whose currencies matters little in the international system.

In addition, it allows Washington to wield its political influence far more effectively. The United States can impose sanctions many countries are forced to follow. After all, most international bank needs access to the US-American banking system, for which it needs an US-American license. Therefore, banks worldwide have to accept whatever sanctions the United States impose – as seen in the cases or Iran and North Korea.

Even though the Chinese government’s goal is to limit the US-dollars dominance and create “currency multipolarity” in the medium or long-term, the he internationalization of the yuan will take place in small and experimental steps, as those are less likely to generate instability or anxiety in the domestic or international economy. Giving the yuan more freedom would weaken the currency, potentially spurring capital flight (as happened in the past weeks). Since Beijing started pursuing its yuan internationalization, the use of the currency to settle trade with China has increased strongly. Almost 30% of China's global trade is now settled in yuan. The Chinese currency is already accepted as a form of payment in Mongolia, Pakistan, Thailand, and Vietnam.

In addition to the creation of CIPS and the promotion of Shanghai, China is also seeking to have the yuan included in the basket of currencies in International Monetary Fund (IMF)’s Special Drawing Rights (SDRs). However, the IMF’s precondition is that that China should remove restrictions on foreign capital flows and shift to a flexible exchange rate system.

With any such momentous policy changes, decision-makers in Beijing are far from united regarding the internationalization of the yuan. State-owned enterprises and banks are generally reluctant to internationalize the Chinese currency, as the necessary liberalization would reduce their control over key decisions that affect China’s export-led development model. In the same way, the Ministry of Finance, the National Development and Reform Commission (NDRC), and the State Asset Supervision and Administration Commission (SASAC) are not among the move’s strongest supporters. On the other hand, liberal forces led by the People’s Bank of China (PBoC) are in favor of internationalization as this would help them to push through important domestic financial and monetary reforms. After the recent stock market crash, their internal standing is almost certain to have suffered. In addition, their strategy may be dangerous. As Mallaby and Wethington argue,

Only once the domestic financial system has been fortified in this manner is it safe to open the economy to foreign capital inflows, allow the exchange rate to float, and let the country’s money circulate offshore. Currency internationalization should be the endpoint of reform, not the starting point.

The speed of internationalization thus does not only depend on China’s growth trajectory, but also on internal power dynamics. This is particularly so because there are sound economic arguments that transforming the yuan into a global reserve currency could have downsides for China’s economy, too: It would lead to foreigners buying and holding massive amount of yuan, which could lead to a permanent appreciation, thus hurting Chinese exports. In addition, if the US-dollar ever lost its role as uncontested reserve currency, depreciation would almost certainly ensue, negatively affecting the value of China’s dollar reserves.

The perhaps most important move to internationalize the yuan are the numerous swap agreements with central banks, RQFII programs to liberalize capital markets, etc. Since 2008 China has also agreed some $500 billion in currency swaps with nearly 30 countries, including Argentina, Canada and Pakistan.

Although CIPS is, at first glance, little more than a platform to facilitate transactions, its medium- to long term consequences could be significant. It will allow banks and companies to move money around the global on a financial superhighway delinked from the US-centered dollar structures. Being excluded from the US-American system will thus no longer as terrifying as it once was, reducing US leverage over perceived wrongdoers. However, it is too soon to say whether the yuan may ever be able to challenge the US-dollar as the world’s main reserve currency. The challenges China faces are formidable. Not only must the yuan be universally convertible, the country would also have to create a transparent and liquid bond market. Government intervention during market turmoil in July and August 2015 shows that China still is a long way off allowing the markets to self-regulate. In the same way, it is hard to imagine how the yuan could compete with the dollar without a more transparent legal system, which would enhance trust in the government. Injoo Sohn points to additional difficulties:

The absence of formal alliances also seems to constrain the scope of China’s political leverage to internationalize its currency. The dollar internationalization of the early postwar years was supported not only by the United States but also by key Western European allies – China does not enjoy such support as it pursues RMB internationalization. The Cold War period gave U.S. allies more political incentives to maintain economic and financial ties with the United States through the offshore dollar market. With political confidence and trust, London banks started to lend out Eurodollars to other corporate customers in Western Europe in the 1970s.

What we can say is that, compared to the transition from the British pound to the US-dollar in the mid twentieth century, risks were manageable largely because both the pound and the dollar were convertible into gold at fixed rates. In the same way, policy makers in Washington and London were largely aligned on many broader issues concerning global order. Washington and Beijing, by comparison, think of their bilateral relationship far more in the context of ambiguous mutual dependence and suspicion.

Oliver Stuenkel

Oliver Stuenkel is an Assistant Professor of International Relations at the Getúlio Vargas Foundation (FGV) in São Paulo, where he coordinates the São Paulo branch of the School of History and Social Science (CPDOC) and the executive program in International Relations. He is also a non-resident Fellow at the Global Public Policy Institute (GPPi) in Berlin and a member of the Carnegie Rising Democracies Network. His research focuses on rising powers; specifically on Brazil’s, India’s and China's foreign policy and on their impact on global governance. He is the author of the IBSA: The rise of the Global South? (Routledge Global Institutions, 2014) and BRICS and the Future of Global Order (Lexington, 2015) and the forthcoming Parallel Worlds: How emerging powers are remaking global order (Polity, 2016).