P

resident Xi Jinping of China (PRC) recently introduced three brilliant initiatives that are interconnected to reshape a new international economic and political order. These indicate the readiness of the PRC to take a greater role in managing the global economy and assume leadership in a new international economic and political system.

The first initiative was proposed in September 2013 to reestablish the traditional land and maritime silk roads linking three continents: Asia, Africa and Europe. The '€œSilk Road Economic Belt'€ will reopen the links between China and Europe through Middle Eastern, Central Asian and southern European countries. The maritime route passes through the South China Sea, ASEAN countries, the Malacca Strait and the Indian Ocean all the way to East and South Africa.

The second initiative is to create the Asia Infrastructure Investment Bank (AIIB). China pledges US$40 billion to build modern and high speed transportation systems to replace the old mule and camel caravans to save travel time and transportation costs.

For this initiative, China is building new harbors and ports in the Indian Ocean Rim, including in Kelantan, Malaysia, Myanmar, Sri Lanka and Pakistan. The three continents lined by silk routes are highly populated and rich in natural resources that are important markets for Chinese exports and sources of energy and raw materials for its manufacturing industry. The exports include services such as construction, railways and other engineering from China.

The third initiative is to internationalize its currency, the Renminbi (RMB). The increasing trade and investment from the PRC with countries in the land and maritime silk routes will rapidly increase the role of RMB as an international currency.

The meeting of the 57 founding member countries of AIIB in Singapore in May 2015 agreed that the head office of the bank would be located in Beijing and use English as its operating language.

According to its Article of Incorporation, AIIB will be overseen by a nonresident and unpaid board of directors. This and the plan to maintain lean staff, will save operating costs and shorten the decision making process.

Voting members are distributed according to a complex formula. Each founding member receives equity plus 600 votes plus other factors such as its capital contribution and the size of its economy. At least 75 percent of share votes are reserved for members located in the Asia-Pacific region and the other 25 for members from rest of the world. At present 37 founding members of AIIB are in Asia-Pacific, 19 from Europe, two from Africa, namely Egypt and South Africa, and Brazil, representing Latin America.

Being the biggest shareholder, China has veto power over major decisions involving structure, membership, capital increases and other significant issues that require a '€œsuper majority'€ of at least 75 percent of the votes.

Traditionally, ASEAN countries are suppliers of raw materials for manufacturing industries in the PRC as well as markets for its exports. The global supply change that breaks up the production process into geographically separated stages has increased the exportation of industrial spare parts and components from ASEAN to the PRC.

The increasing use of RMB as a store of value shows the trust that the international community puts on its stability as a safe asset and confidence in its future role in the international monetary system.

The PRC is now the second-largest economy, after the US, with a large share of global trade and huge foreign exchange reserves. Because of these factors, the RMB has been used by its trading partners as a medium of exchange and a unit of account for pricing and settlement of bilateral trade with the PRC.

The use of RMB in regional trade is rapidly increasing after the authority in the PRC allows a number of domestic enterprises in selected cities to settle trade in RMB. Imports are increasingly settled in renminbi but exports are still mainly settled in US dollars. Starting from a small amount, a number of countries such as Belarus, Cambodia, Malaysia, Nigeria, the Philippines, South Korea, Chile and Russia have been holding RMB in their international reserves as an insurance against balance of payments pressures.

Personal use of the RMB is encouraged by allowing financial institutions in Hong Kong to open renminbi denominated accounts and its use for cross-border settlements, including sending remittances to mainland China. On a limited basis, the authority in the PRC allowed some domestic banks to issue renminbi-denominated bonds, popularly known as dim sum bonds and Panda bonds, in Hong Kong in June 2007.

This allowed Chinese banks and companies to tap low-cost financing in international markets without exchange-rate risks. The issuers were gradually expanded to non-bank companies and to other jurisdictions such as Singapore.

The PRC and Japan are now important providers of emergency swap facilities or liquidity support to central banks of many emerging economies in the ASEAN+3 region during the time of crisis. In addition, the PRC wants a greater role as a provider of development aid and finance.

Together with the other four BRICS countries (Brazil, India, Russia and South Africa), China recently established a new BRICS development bank headquartered in Shanghai.

The establishment of the BRICS development bank and AIIB is a welcome initiative given the declining lending capabilities of the World Bank and Asian Development Bank (ADB) after the global financial crisis in 2008-2009. The building of infrastructure projects provide fiscal stimulus for the stagnated world economy.

Under the Chiang Mai Agreement (CMI) of 2000, the ASEAN+3 countries '€” China, Japan and South Korea '€” established emergency swap arrangements to provide liquidity support for the member countries that experienced a short-run balance of payment deficits. The objective of this initiative is to prevent crisis and systemic failure in a country and subsequent regional contagion as occurred in the Asian financial crisis in 1997. The CMI has two components, namely: (i) a network of bilateral swap and repurchase arrangements (BSA), which is an expansion of the ASEAN Swap Arrangement of 1977 and (ii) the multilateral swap arrangements of 2008.

The multilateralization of the CMI is a great leap forward in traditionally less politically cohesive ASEAN+3 countries as they transfer some of their national powers to a regional supranational authority, namely, the Chiang Mai Initiative Multilateralization (CMIM). The PRC makes a significant contribution to the pooled funds in the CMIM.

The currency swap facilities together with the BRICS development bank and the AIIB will further promote the use of RMB in international trade and financial transactions. The availability of BSA and CMIM minimized systemic liquidity disruptions and helped reduce the cost of borrowing foreign exchange in particular currencies.
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The writer is emeritus professor of economics and was the dean of the economics department at the University of Indonesia (1998-2001), the senior deputy governor of Bank Indonesia (1999-2004) and head of State Audit Agency (2004-2009). This part of the opinion piece should have preceded the other part, which appeared on Wednesday, June 24, 2015