China’s Strategy of Engagement with Developing

Countries and Its Influence on the International Order.

Derren Teesdale
BA Diplomacy and International Relations
Department of Politics and International Relations

Dissertation submitted to
London Metropolitan University
June 6, 2018

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Napoléon Bonaparte - “China is a sleeping giant. Let her sleep, for when she wakes she
will move the world.”

Abstract:

As China’s economic might has grown so has its capacity to influence and effect the
outside world, for a country the size of China this was inevitable. How China would
integrate into the institutions and whether China would fully respect those values and
norms would be key to how China would influence the international order. The US-led
order is structured on several pillars; values, laws, institutions, and founded on legitimacy.
For decades developing countries have been without an alternative to the liberal order, its
norms and prescriptions, and US leadership. Gradually, some countries have become
disillusioned with the international order, its institutions, US financial complacency, and
unilateral action. China’s enormous economic capacity and ambition bring it into
contention with the status quo order. China is subtly configuring the international
environment through policies designed to provide dissatisfied countries with an alternative
pole. These policies and initiatives have legitimate claims of supporting continued
development, but they also have the potential to create an anti-liberal bloc from emerging
economies dissatisfied the international order. China is quietly staking its claim towards
alternative leadership based on legitimacy and provision of public goods in supporting the
development of other developing countries.

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Table of Contents
Abstract 2

Abbreviations 4

I. Introduction 7

II. How China’s History Shaped 21st Century China 9

II.I China’s Rise 9

II.II Literature Review 11

III. The Geo-Economics of China’s Trade and Aid with Developing Countries 15

III.I Introduction 15

III.II Concepts of Political Influence and Definition of Geo-economics 15

III.III The Sources and Destinations of China’s Outbound Flows 16

III.IV Chinese Geo-Economic Initiatives and Developing Countries 17

III.IVa Case Study 1: Market-Economy Status 18

III.IVb Case Study 2: UN Voting Alignment 20

III.V Conclusion 21

IV. Reserve Currency: China’s Attempts to Internationalize the Renminbi 22

IV.I Introduction 22

IV.II Criteria of an International Currency 22

IV.III Macro-Analysis 22

IV.IV Micro-Analysis 24

IV.V Conclusion 27

V. China, the AIIB, and Soft Power Influence 29

V.I Introduction 29

V.II Domestic Reasons and Regional Issues, the AIIB and the OBOR 29

V.III Similarities and Differences, Fears and Reassurances 30

V.IV The AIIB, Chinese Influence and the International Order 32

V.V Conclusion 34

VI. Overall Conclusion 35

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VII. Bibliography 37
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Abbreviations or Acronyms
ABC – The Agriculture Bank of China

ADB – Asian Development Bank

AFC – Asian Financial Crisis

AIIB – Asian Infrastructure Investment Bank

AOA - Articles of Agreement

ASEAN – Association of Southeast Asian Nations

BOC - The Bank of China

CACF - China-Africa Cooperation Forum

CAFTA - China-ASEAN Free Trade Agreement

CBRC - The China Banking Regulatory Commission

CCB - The China Construction Bank

CCP – Chinese Communist Party/ Communist Party of China

CDB – Chinese Development Bank

CIC - The China Investment Corporation

CMI – Chiang Mai Initiative

CNH – Offshore Renminbi

CNY – Onshore Renminbi

CSA – Currency Swap Agreements

EIB – European Investment Bank

EU – European Union

EximBank - Export-Import Bank of China

FDI – Foreign Direct Investment

FTA - Free Trade Agreement

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GDP – Gross Domestic Product

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GFC - Global Financial Crisis

GNP – Gross National Product

ICIB - The Industrial and Commercial Bank

IMF – International Monetary Fund

IMS - International Monetary System

MES - Market-Economy Status

MFA - Ministry of Foreign Affairs

MOF - The Ministry of Finance

MOFCOM - Ministry of Commerce of the People's Republic of China

MOU - Memorandum of Understanding

NDB - New Development Bank

NDRC - The National Development and Reform Commission

OBOR – One Belt One Road

ODA – Official Development Assistance

OECD – The Organization for Economic Co-operation and Development

OFDI – Outward Foreign Investment

PBoC – People’s Bank of China

PLA – People’s Liberation Army

PPP – Purchasing Power Parity

PRC – People’s Republic of China

OFII – Qualified Institutional Investors

RQFII – Renminbi Qualified Institutional Investors

RMB – Renminbi/Yuan

RnD – Research and Development

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SAFE - State Administration of Foreign Exchange

SASAC – The State-owned Assets Supervision and Administration Commission

SCO – Shanghai Cooperation Organization

SDR – Special Drawing Rights

SEZ - Special Economic Zones

SOE – State Owned Enterprises

SRF – Silk Road Fund

STFZ - Shanghai Free Trade Zone

SWF - Sovereign Wealth Funds

TPP – Trans-Pacific Partnership

TVU - Township and Village Enterprises

WB – World Bank

WTO – World Trade Organization

UN – United Nations

UNGA - United Nations General Assembly

US – United States of America

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I. Introduction.

There are certain prerequisites that signify a countries power potential; territorial
size, population size, abundance of natural resources, and self-belief. China possesses
them all in relative equilibrium thus China’s potential is enormous such that it makes other
nations wary (Kissinger1 2011, 34). Despite books such as Martin Jacques fatalistically
titled ‘When China Rules the World’2, China’s continued rise has not been, and is still not,
without considerable obstacles. In particular the omnipotence of US global power and
influence. Whilst some factors remain unchanged3, the world has changed in some
profound and consequential ways. Technology has spatially impacted the world creating a
highly interconnected network of countries, a rising power will have global repercussions.
Secondly, technology has allowed for the invention of weapons that could potentially
destroy the human race. The early years of the 21st century have witnessed significant
events4 which have propelled the US and China on concurrently divergent trajectories. For
these reasons, and others, the rise of China is globally significant.

The argument put forth in this dissertation is that the Chinese Communist Party
leadership seeks to realize ambitions of a powerful China. For Chinese leaders this only
natural. However, these ambitions will lead to rivalry with the US and provide a challenge
to the international order and norms such as democracy and human rights. China’s
ambitions require it to undermine the economic power and influence of the United States.
Chinese leaders’ objective is to push back against US power and influence, which hems
China in at every turn, to create some much-needed political space. This is achieved by
loosening the economic and financial dependence other states have on the US and its
institutions by using China’s huge economic resources to provide attractive alternatives.
China envisions a multipolar world whereby China will be supported by other rising
nations. This will create a world more amenable to Chinese ideas, less controlled by
Washington, and allow China to continue rising and realize it enormous potential. This
analysis will attempt to determine how successful Chinese initiatives have been so far and
if there is an emerging pattern of states being significantly affected by China’s gravitational
pull.

The first chapter will initially provide an overview of China’s unparalleled economic
rise from its decades of backwardness under Mao Zedong to the second-largest economy.

1 “Well, you can just stop and think of what could happen if anybody with a decent system of government got
control of that mainland. Good God.… There’d be no power in the world that could even—I mean, you put
800 million Chinese to work under a decent system… and they will be the leaders of the world.”
― Henry Kissinger, On China
2 Others in the camp are Kerry Brown’s book ‘China’s World’, Arvind Subramanian’s Eclipse and Geoffrey

Murray’s China: The Next Superpower.

3 In particular geographical features and perspectives derived historical experience.
4 Bill Clinton had recommended US cooperation with China and WTO membership during his presidency

which ended in January 2001. The US would agree to China becoming a member of the World Trade
Organisation (WTO) in December 2001 which would have significant impact on its economic growth. By
December 2001 the new US president was George W. Bush and the US had just suffered the greatest attack
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on its territory which saw the US consequently engage in two debilitating wars in Iraq and Afghanistan. This
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would be quickly followed by the financial crisis of 2007/8 which originated in America with the Lehman
Brothers Investment Bank collapse and would compound US atrophy.
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Secondly, it will map out the trends and themes in the literature regarding the rise of China
and a possibly declining US including the debate over whether China’s rise can occur
peacefully or not. Finally, the first chapter will conclude with an overview of the various
reasons why Chinese leaders choose a geo-economic approach to a military one.

The second chapter will outline and analyze China’s aid and trade activities to
determine whether there is a trend forming of fewer states receiving US backed aid
packages and trade deals and if China is filling the void. It will then attempt to discern
whether there is a cohesive pattern of China using this to realize certain political
objectives. The final part will determine whether China’s objectives were realized and
whether they amount to a significant undermining of US economic influence. China’s
usage of Sovereign Wealth Funds (SWFs) and State-Owned Enterprises (SOEs) will be
factored into the equation to understand whether Beijing uses either of these as actors to
support its geo-economic foreign policy initiatives.

The third chapter the issue of two currencies: the current world reserve currency the
Dollar and the Chinese attempts to offer the Renminbi as a viable alternative. This will look
at Chinese attempts to undermine the credibility of the Dollar and its concomitant efforts to
boost the credibility of the Renminbi. The evidence of any increase in the credibility will be
drawn from a significant usage of the Renminbi in transactions and trade being concluded
by nations that would have otherwise used the Dollar. To add further support (or not) to
reports of Chinese attempts of Renminbi promotion the chapter will provide a breakdown
of whether there has been a notable increase in the Renminbi holdings of nations’ foreign
reserves. Additionally, the chapter will include the involved activities of several other rising
major powers; notably Russia, Brazil, Iran, Turkey and India.

The final chapter will focus on the Western-led institutions, the World Bank (WB)
and the Asian Development Bank (ADB), which have been the traditional conduits for the
financing of large-scale infrastructure projects and the Chinese alternative in the Asian
Infrastructure Investment Bank (AIIB). The analysis will be on whether the AIIB is a
compliment to the WB and the ADB or whether it is proving to be the bank of preferred
choice for developing nations eager to avoid the liberal-democratic conditions the US and
allies force on them. The chapter will incorporate an assessment of China’s grand project
One Belt One Road, and its significance in influencing the economic and funding
preferences of nations across Central Asia and the Middle East. This dissertation will then
draw the findings from each chapter together and present a summation of the results that
the analysis has provided in the conclusion.
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II. How China’s History Shaped 21st Century China.

II.I China’s Rise.

It was Asia, and in particular China, where the greatest wealth and power resided
for decades before it shifted to Europe around the 18th century. China considered itself the
centre of the universe5 and was referred to as ‘The Middle Kingdom’. A series of defeats to
imperialist European powers precipitated what is indelibly known in China as its century of
humiliation6. This loss of status and humiliation for a nation with a heightened sense of its
magnificent 5,000-year history and culture is ingrained in the minds of every Chinese
today7. America is not the only country with a belief in its own exceptionalism. This
underpins the belief that they are simply returning to their rightful place at the apex of
world power (Jacques, 2009, 421-2; Murray, 1998, 1). These are narratives that Chinese
leaders frequently use to unite and galvanize Chinese people since the reforms and disuse
of ideological narratives.

It is useful to place China’s recent rise into the context of its 20th century upheavals.
Following the warlord years 1916-1928 there was a short-lived Nanjing Decade of
stabilization under the Nationalists. This was interrupted by clashes with Mao’s
Communists and the Japanese invasion of 1936 and the ensuing 2nd World War. Then
came the Chinese civil war, concluded in 1949, from which point the Communist victors
went on to implement their Marxist-Leninist based policies of collectivization, state
ownership of the means of production and the centrally-planned economic system. The
collectivization of agricultural production would partly lead to declining yields, but with a
rising population would result in disastrous famines which along with the Great Leap
Forward of 1958 would see over 40million people die of starvation and a legacy of
widespread malnutrition. Decentralization of the economy realized a breakdown in industry
and transport.

This was later compounded by the Cultural Revolution - 1966 to 1976 - in which
Mao instigated widespread purges of the middle class and intellectuals he considered
counterrevolutionaries which created a radical faction called the ‘Red Youth’ who wrought
chaos across the country as basic institutions began failing. The economy and the
population were left in an impoverished state. Since its victory over the Nationalists the
Communist Party of China (CPC) had largely maintained international isolation. This
changed in the early 1970s when they courted the US through diplomatic overtures.

5 Several significant discoveries or inventions were made in China; the compass, gunpowder and paper.
Surrounding nations would pay it tribute, either as part of a war settlement or as acknowledgement of
China’s superiority, and foreign dignitaries would have to perform the co-tow before the emperor if they were
fortunate to be granted an invitation (Varrall, 2015, 8). These are facts frequently recounted not just by
Chinese elites but Chinese school children alike who are regularly taught about the greatness of their culture
and civilization (Li, 2012, 34).
6 A period blighted by foreign incursions and subjugation, culminating in the Japanese invasion in the 1930s

and ending in the allied victory over Japan in 1945.

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7 One reason they are not able to forget, other than the horrors suffered through that period, is due to the
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governments frequent reminders of the past through textbooks and events and which largely provides the
basis for the growing nationalism today.
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 After the visits of Kissinger and President Nixon between 1971-2, and the death of
Mao, Deng Xiaoping instigated market-oriented economic reforms and the opening up of
China from 1978. This would gradually materialize in staggered price liberalization, the
creation in the agriculture sector of the more profitable Township and Village Enterprises
(TVU), experiments with a string of special economic zones (SEZs) along China’s east
coast which would invite foreign direct investment (FDI) due to low tax rates, and Chinese
companies would subsequently gain much needed foreign expertise and technology.
Importantly, they legalized the possession of private property and the opportunity for
private enterprise for the first time in decades.

Despite events8 that disrupted its development and growth rates China has
transitioned from a low-income to a middle-income ranked economy in approximately
thirty-forty years. The size of China’s economy was 3.8% and 4.2% of the global total
compared to 26.8% and 20.4% for the US in 1950 and 1970 respectively, as of 2015 it is
17.1% to 17.5% (Holdony, 2017). By 1995, World Bank figures placed China’s GDP at
US3.8trillion which was 56% of US GDP for the same year (Yan, 2006). Comparing
China’s GDP of $11.2trillion and over $12trillion for 2016-17 with US GDP of $18.6trillion
and $19trillion shows the Chinese economy growing faster year on year (Statista and
World Bank statistics). However, when adjusted for purchasing power parity (PPP) China’s
economy is over $21trillion in total and 18% compared to over $18trillion and 15% for the
US economy in 2015.

In the year 2016, Chinese exports totaled $2trillion against the US total of roughly
$1.5trillion. In terms of world trade China slightly edges the US, $3.8 trillion to $3.5trillion.
The predictions are supported by unrivalled growth and a current account surplus
frequently over £300billion since 2008, and up to $622 billion in 2017 largely through
global trade. The economic reforms have produced what the World Bank (WB) has
described as “the fastest sustained expansion by a major economy in history” with an
average GDP growth per annum of 9.5%, over thirty years (Morrison, 2018). However,
China’s GDP per capita of $14,275 is still far below the US at $53,417 (Bloomberg, 2016;
World bank Data). Its economic growth has though enabled 800million people to climb out
of poverty, an admirable achievement. These economic facts elucidate the gulf between
the Chinese economy pre-reform and post-reform, and provide quantitative evidence for it
being the main driver of the ‘China’s Rise’.

II.II Literature Review.

China has, in particular the last decade, used its reserves of over $3trillion to sign a
string of trade deals worth billions of dollars with nations across Asia, Africa and Latin

8 In 1989 the demonstrations in Tiananmen Square would bring a shuddering halt to domestic reforms and
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international support. Following the demonstrations in China the unimaginable occurred in 1991, the Soviet
Union collapsed due to domestic instability and US pressure sending shock-waves around the world that
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would reach as far as China. The Chinese government would duly take note. This would set all reform
initiatives back and would lead to a battle for the future of China.
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America. Chinese SOEs have bought stakes, and sometimes whole companies, in
Western companies most notably Lenovo buying the corps server arm of IBM for
$2.3billion. Additionally, around 90 Chinese companies, most of them SOEs, appear on
the current Forbes 500 list. The days of following Deng’s mantra of keeping one’s head
down are seemingly over as there are signs of a more assertive China. This is most
evident in recent Chinese action regarding the South China Sea where it is has reclaimed
and built military facilities on several small islands bringing them into conflict with
neighbours. In particular it disputes Japan’s ownership of the Senkaku (or Diaoyu in
China) Islands which has witnessed clashes between Chinese and Japan vessels and
rising tensions9.

China has significantly increased its military spending; has reorganized the PLC,
made substantial investment in its navy, and into advanced technology-based weaponry,
opening up its first overseas port in Djibouti. The most noteworthy investment in weaponry
is an Anti-Access/Area Denial (A2/AD) system aimed at being able to prevent US access
to the South China Sea (the first island chain). The prediction is that this will eventually
allow China to achieve the reunification of Taiwan to the mainland. Out of the BRICS
group10 has come the National Development Bank (NDB), China has created the Asian
Infrastructure Investment Bank (AIIB) and begun some of the individual projects of the One
Belt One Road (OBOR) megaproject, and increased membership of the Shanghai
Cooperation Organization (SCO).

It has also become more involved with ASEAN, is a ‘Key Dialogue Partner’ and a
member of the Regional Comprehensive Economic Partnership11 helping Chinese FDI
outflows to ASEAN to total $8.2billion. In the realm of soft power China has funded the
opening of hundreds of Confucius Institutes worldwide to encourage the spread of its
culture and language, and invested millions of dollars into enlarging its global media
presence; the Xinhua news agency has been heavily funded to resemble Al Jazeera’s 24-
hour-service with the intention of countering China’s poor international reputation
emanating from Western media outlets. These events have seen China’s rise become one
of the most debated topics in world politics today leading to questions such as: what does
this mean for the future of U.S. influence, the international system it created? Will China
and the US be able to avoid war? And, what does China want?

Despite the above evidence that lends credibility to the China rise discourse, there
is a view shared by some that China faces too many insuperable obstacles that will

9 China claims ownership from a historical standpoint of discovering them in the 15 th century, whilst they
were under Japanese ownership after being surveyed and found to be terra nullius in the 19th century until its
defeat in 1945. They were then returned by the US to Japan in 1972 under the Treaty of Mutual Cooperation
and Security. Interestingly, China had acquiesced until the late 1970s after potential oil deposits were
discovered. Taiwan has also staked a claim to them.
10 Includes the fastest growing economies of Brazil, Russia, India, China and South Africa.
11 Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement (FTA)

between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia,
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Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and the six states with
which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea and New
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Zealand). RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in
Cambodia.
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prevent it from accruing enough power and influence to challenge US power globally
(Shirk, 2007; Fenby, 2014). If their huge population has advantages, it is conversely a
problem in other ways (Murray, 1998, 75). A recent UN report states China’s ageing
population will suffer a demographic deficit of some 400 million people over the next
quarter of a century (Munk Debates, 2011). Additionally, the Chinese government have the
unenviable task of creating 24 million new jobs and accommodating six million more
people into urban areas every year creating potential instability (Munk Debates, 2011).

Other issues are related to the continuation of its economic growth. For instance,
there are forecasts of slowing growth, it recently recorded growth figures of 6.9% GDP, its
lowest since the early 90s. Focusing on the economy as whole there are structural issues
such as a significant imbalance in its growth model between exports, investment and
domestic consumption. 4,000 years of numerous disasters and incompetent governments
have fostered notably thrifty Chinese people. There are also concerns over production and
investment efficiency in the current model as the government seems to be continuing its
dependence for growth rates on returns from investment in infrastructure projects which
has initiated much reference to the ‘middle income trap’. One of the biggest questions is
whether China is able to achieve transition from an industrial economy to a service-based
economy and transition itself higher-up the production chain where greater profits are
realized, comparatively much harder achievements. There is talk of China’s comparative
advantage dwindling, labor cost12, which might lead to a relocation of foreign companies
and a decline in manufacturing output. Added to this is a growing regional debt problem,
state-owned banks saddled with bad loans and a corruption problem that is rife. These are
issues that maintain Chinese leaders’ focus largely on domestic issues.

On the side of this debate is the decline of US power13 which after approximately
thirty years of preponderance has recently been notably weakened financially, credibly and
psychologically. For some it’s temporal and the consensus view among policy makers and
foreign policy scholars is that America’s advantages - economic, military, and
technological - are so pronounced that it will be decades before its dominance can be
challenged (Layne, 2008). Then there are others that see it as a long-term trend that will
facilitate the rise of China leading to multipolar order. For Niall Ferguson the “key to the
21st century really lies in the decline of the West”. He further states:

“A financial crisis caused by excessive borrowing and subsidized gambling; a fiscal

crisis that means the United States will soon be spending more on debt interest than on
defence” (Munk Debates, 2011).

Jacques sees the roots of US decline in its diminishing ability to underwrite the
economic system that it created and stabilized for decades and with it will go the dollars’
prestige as the reserve currency. Other reasons put forth are an uninspiring GDP growth
forecast, a dysfunctional political system, hard decisions over massive budget deficits, a
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12Being the fundamental element that has aided China’s cheap exports
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13Books such as “The Post-American World” by Fareed Zakaria and “Is the American Century Over?” by
Joseph S. Nye.
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massive trade deficit (mostly with China), and declining productivity. It is also gradually
being overtaken by China as the number one importer and/or exporter with numerous
other countries. In contrast, in some surveys US universities are still rated the highest, the
largest number of patents are filed in the US, the largest economy (by GDP and GDP per
capita, but not equivalent to PPP – that is China), it has by far and away the largest
military and approximately 640 installations on foreign soil across the globe, it has an open
and free society that aids creativity and entrepreneurial flair, it is still ranked number one
for research and development (RnD) investment - $473billion and 2.7% of GDP – with
China in second place spending 2.1% GDP equaling $40billion. It also has an extensive
network of allies including most of the other developed nations of the world.

One argument that is commonly debated within this topic is whether China can rise
peacefully, or not. Unsurprisingly, it is a view most notably aired by structural-realist John
Mearsheimer14 who outlines the realist assumptions of the international system15 and thus
China will attempt to maximize its security by attempting regional hegemony16 (2004).
Foreign policy hawk Zbigniew Brzezinski counters Mearsheimer’s argument with several
reasons; that the Chinese government are too “preoccupied by the trajectory of their rise17,
determined to avoid confrontation, and maintain the stability of its rule. Alternatively, a
more liberal lens would note several credible structural reasons for the potential for China-
US co-operation; the current institutional architecture is more sophisticated and durable18,
that both states possess nuclear weapons arsenals and are thus wary of a war and the
existence of global issues that need co-operation to solve.

However, several analysts admit to the “inevitability of frictions” and “heightened

sensitivities to events” as China rises that may spark off a chain of events leading to war
(Brzezinski, 2005; Allison, 2015). A view supported by Robert J. Art’s declaration that
historically the incumbent dominant power does not easily relinquish its hegemonic
position (2010). Empirically, a simmering distrust between China who views the US as
imperialists attempting to contain its rise and the US who suspect China of concealing their
hegemonic intentions could be the eventual catalyst for conflict (Pillsbury, 2015).

For Liberals, the interconnectedness of the financial and economic global structure
and China and America’s economies will provide enough incentives for them to find ways
of co-operating (Nye, 2005; Friedman, 2010). Particularly the fact that China holds
$1trillion worth of US treasury bonds and if their value was to depreciate or the prospects
of US repayment disintegrate, this would be disastrous for China (Nye, 2010). Another
reason for avoiding conflict relates to China’s economic growth having largely depended

14 Article: Why China’s Rise Will Not Be Peaceful (2004).

15 The international system has three defining characteristics. First, the main actors are states that operate in
anarchy, which simply means that there is no higher authority above them. Second, all great powers have
some offensive military capability, which means that they have the wherewithal to hurt each other. Third, no
state can know the intentions of other states with certainty, especially their future intentions.
16 This would involve setting the terms of engagement to other Asian states and pushing the US out of Asia.
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17 Commissioning two distinguished, Western-trained professors to analyze nine major powers since the

15th century to see why they rose and fell.

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18 US led order survived the Cold War without conflict and has witnessed the peaceful rise of Japan and

Germany.
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on exports and foreign direct investment since the reforms (Layne, 2008). The largest
consumers of Chinese exports and origins of the vast proportion of FDI inflows arrive from
America and Europe hence the re-enforcing economic incentives. Notwithstanding the
aforementioned reasons suggesting cooperation is plausible, several factors combine that
leave Chinese leaders in a strategic dilemma.

As noted above, Chinese people and leaders have keen sense of their history and
Chinese leaders have made concerted efforts to connect historical narratives with the
present. As the CCP has gradually moved away from Communist ideology as a way of
uniting the population behind the regime it has turned to alternatives to strengthen its
authority. Narratives such as the ‘China Dream’ and the ‘Great Rejuvenation of China’ all
suggest China returning to greatness and the days of the Middle Kingdom. An integral
element of these narratives is the suggestion only the CCP can provide economic
prosperity to the population, and additionally, restore China’s rightful international status
(Li, 2012, 34). This narrative of restoring China’s past greatness, designed to foster
increasing support for the regime, has consequently created a vigorous nationalism which
feeds on the belief in Chinese exceptionalism (Li, 2012, 34). This growing Chinese
nationalism is proving a driving force behind Chinese assertion in its international
relations19.

This leaves China’s leaders in a complicated situation whereby they need to act
tough in China’s foreign policy interactions and be seen to be restoring China’s status as a
powerful nation, acquiescent to none. Chinese leaders though, know well that U.S. military
power is still technologically superior by some distance20 and their weak position vis a vis
the US Navy in the shipping lanes through which travels their much-needed energy
supplies. Despite foreign reserves of over $3trillion the Chinese government is cautious of
overtly building-up its military because they believe it would engage the US in an arms
race, something that Chinese leaders are determined to avoid for good reasons21.

Providing reasons for Washington to implement measures harmful to Chinese

growth would also have serious domestic consequences. Therefore, by assiduously
utilizing its huge economic wealth through subtle means, China can challenge American
power and influence without incurring an arms race and direct retaliation from Washington
whilst protecting its economic growth. As the following analysis will reflect, Chinese
leaders are adept at achieving multiple aims from initiatives.

19 These nationalist elements are not content with China being seen as a subservient nation and frequently
vent their anger across the internet.
20 The difference in defence budgets is almost incomprehensible. The US spends more on defence than the

next eight countries.

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21 For several years after the fall of the Soviet empire Chinese academics and officials researched and read

all that they could to understand why the collapse had happened. The conclusion was that the exhausting
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effect the arms race had on the Soviet economy was the critical factor (need quote). Hence, Chinese leaders
are careful about how they modernize their armed forces.
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III. The Geo-economics of China’s Trade and Aid with Developing
Countries.

III.I Introduction.

This chapter seeks to assess China’s usage of geo-economic tools to foster a bloc
of developing countries inclined towards political alignment that seeks to take advantage of
gaps in US regional strategies, and provide beneficial at the UN and the WTO. These
activities potentially undermine fundamental elements of the current global order in areas
such as governance, transparency, rule of law, and potentially, security. China’s ultimate
ambition is to increase the international support it receives to thwart attempts by the US to
contain China’s rise (Saunders, 2007) whilst maintaining regime stability.

It is noted that Chinese leaders22 are inclined to focus on long-term geopolitical

flows, relating to the centuries-old Chinese concept of shi23 (Pillsbury, 2015; Casarini,
2012). As mentioned above, they often have short-term or multiple goals24, so according to
Matsanduno (cited in Gong, 2017) not every Chinese geo-economic initiative need be
successful in the immediacy for there to be evidence that China is attempting to use
economic leverage to gain political outcomes. Additionally, evidence should not be static
as circumstances are ever-changing25.

III.II Concepts of Political Influence and Definition of Geo-economics.

Numerous studies on (China’s) economic statecraft have analyzed the tools,

methods, and potential effects (Saunders, 2006; Ross, 2006; Lampton26 2008, Medeiros et
al. 2008; Drezner, 2009; Xinbo & Khanna27, 2016; Brazys & Dukalskis28, 2017). Two
methods of geo-economics to achieve political aims are conceptualized as carrots in

22 Chinese leaders are fully cognizant of their 5,000-year history and well-versed in the teachings of its
ancient philosophers; Confucius, Sun Tzu are only two.
23 Shi combines two elements; firstly, the ability to get others to do your bidding for you, the second is to

assess the environment to know when is the most opportune moment to strike or set in motion one’s plans
(Pillsbury, 2015). It is this second element which requires patience and underpins the Chinese rationale of
prioritising long-term trends as opposed to short-term gains.
24 China’s assertive South China Sea activities are related to several desirable objectives: economic security

and the potential for huge energy deposits and approximately one-tenth of the world’s source of fish in the
area, and from a security perspective the building of strategic military outposts has provided China a stronger
position in an area previously dominated by the US navy that contains highly important transport routes, not
to mention quelling Chinese nationalists. Some of which provide short-term and some long-term objectives.
25 Several changes are possible; firstly, China is likely to become stronger and other smaller or medium-

sized states will become relatively weaker. Secondly, if the US becomes less active or less able to act to
provide a counterweight, smaller states will be less able to reject Chinese overtures. Chinese influence could
plateau or decline which would limit further evidence to support the hypothesis.
26 The five roles are the power of the buyer, the seller, the investor, the development assistance provider,

and the innovator.

15

27 The five key instruments in China’s geo-economics toolkit are; “trade, investment, finance, the

internationalization of the renminbi, and infrastructure alliances.

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28 There use of aforementioned carrots are manifested in development assistance, security assistance,

diplomacy, which contribute to forming both bilateral and multilateral ties.

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providing incentives or sticks for applying coercion29 (Nye, 2004), and are generally
applied through trade, aid and investment (Wong, 2017). For some, China need not apply
geo-economic tools to influence the policy choices of other states, its sheer economic
heft30 and interconnectedness is enough (Kastner, 2016, Reilly, 2013; Kirshner, 2008,
Abdelal, and Kirshner, 2000). However, Saunders (2007) considers Chinese leaders well
versed in the practice of geo-economics.

Albert Hirschman’s (1945) study of political influence derived from asymmetric

interdependence31, formed between powerful and much smaller states is pertinent (Wong,
2017; Gong, 2017; Kastner, 2016; Segal, 2006). Hirschman’s logic observes the
continuing creation of vested economic interests in the dependent country that increases
the pressure to maintain friendly relations. Gong (2017) states that value creation (rather
than value-claiming), and the parallel usage of multilateral and bilateral negotiations thus
differentiates economic statecraft from diplomacy especially regarding influence exercise
and utilization of multifarious tools. The above features are considered significant in
China’s economic statecraft with developing countries (Reilly, 2013; Saunders, 2007;
Segal, 2006). A recent definition of geo-economics described as ‘a government’s
intentional use of economic instruments to promote national interests and produce
beneficial geopolitical results’ (Blackwell & Harris, 2016). This definition is employed to
underpin this chapter.

III.III The Sources and Destinations of China’s Outbound Flows.

There are constraining questions that affect studies of Chinese overseas activities;
firstly, how much control the Chinese state has over all the various political and economic,
state and private actors (Zweig & Jianhai, 2005; Reilly, 2013); and secondly, how to most
accurately identify Chinese outward financial flows (Martinez, 2015; Carter, 2017).
Regarding the former, there are a myriad of overlapping departments32, several state

29 Examples such as offering financial support for insurgencies in Asia and Africa to cultivate influence during
the Cold War, to coercing the French into halting weapons sales to Taiwan in the nineties by threatening
punishment to French companies (and rewards on cessation), to influencing the Clinton administration to
reverse an earlier decision to link China’s trade status to its human rights, onto continuous efforts to deny the
Dalai Lama meetings with world leaders (Kastner, 2010; Reilly, 2013).
30 China is the world’s largest exporter totaling $2.3trillion in 2014, the fastest growing consumer market, is

now the second largest donor of international aid (behind the US).
31 Hirschmanesque effects are realized through the creation of asymmetric dyads linking two states from

economic interaction such as trade which foster vested interests and thus dependence in the weaker state
(Segal, 2006).
32 There are two departments who compete for control over foreign aid; Ministry of Commerce of the

People's Republic of China (MOFCOM) which also companies’ policies on foreign trade, and the Ministry of
Foreign Affairs (MFA) (Carter, 2017). There is the National Development and Reform Commission (NDRC)
16

which determines industrial policy and approves major development projects along with the State-owned
Assets Supervision and Administration Commission (SASAC) tasked with managing China’s large SOEs and
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increasing their value. The financial sector is largely dominated by the Ministry of Finance (MOF) which
controls the national budget, fiscal policy, and shapes macroeconomic policy (Reilly, 2013).
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banks33 and financial institutions34, numerous SOEs and growing private enterprise. Zweig
& Jianhai (2005) optimistically predicted more future plurality and Saunders (2007)
believed development assistance to be “under the direct control of the central government,
whilst overseas business activities driven by market-oriented independent actors. Whereas
Gong (2017) asserts the vast majority of economic activity either falls under the strict
supervision of state departments or is heavily guided or incentivized by government
policies35. China’s financial institutions have accumulated vast reserves36, providing
influential SOEs37 with three-quarters of all loans, which the state dominates almost
entirely (Reilly, 2013).

The tracing of Chinese outflows is hampered by the varied forms of financial carrots
China uses to reward compliant states38. Saunders (2007) stresses the disparity between
the published statistics, and the announcements of multibillion dollar agreements39.
Reportedly, China’s OFDI increased from approximately $2billion in the 1990s to $55billion
by 2008 (Kastner, 2010) and reached $140billion by 2015 (Raess et al. 2017). MOFCOM
states OFDI figures increasing from $12.3billion in 2005 up to $123.12billion in 2014
(Carter, 2017). A 2014 government white paper states China has provided assistance to
121 countries, 30 in Asia, 51 in Africa, 9 in Oceania, 19 in Latin America and the
Caribbean, and 12 in Europe40 (Carter, 2017).

II.IV Chinese Geo-Economic Initiatives and Developing Countries.

China applies differing regional approaches, particularly regarding developing and

developed countries. Chinese leaders make concerted effort in courting developing states
evidenced in numerous leadership visits and magnanimous agreements with developing
countries41. This flattery and benevolence supports the Chinese narrative of equal status,

33 There are state-controlled banks; People’s Bank of China (PBoC), two policy banks; China Development
Bank (CDB) and Export-Import Bank of China (EximBank). The China Banking Regulatory Commission
(CBRC) overseas all banks of which the four largest are the Industrial and Commercial Bank (ICBC): the
world’s largest bank, the Bank of China (BOC), the China Construction Bank (CCB) and the Agriculture Bank
of China (ABC).
34 In addition to the list of state departments and banks, there is China’s main sovereign wealth fund (SWF)

the China Investment Corporation (CIC) and the State Administration of Foreign Exchange (SAFE) which
holds short-term foreign reserves.
35 The Commerce Ministry and the National Development and Reform Commission published a list of

countries and resources in which investment in is eligible for state subsidies (Zweig & Jianhai, 2005).
36 The CDB holds assets worth over $900billion (interestingly more than the WB and the ADB combined).

China’s SWFs including SAFE - the world’s third largest SWF - are endowed with $568billion, and CIC – the
fifth largest – has $482billion in assets.
37 Three Chinese SOEs made Fortune’s top ten list in 2013. The Fortune Global 500, also known as Global

500, is an annual ranking of the top 500 corporations worldwide as measured by revenue.
38 Commodity backed loans, low-interest loans, signing overly-generous agreements, and writing-off large

debts.
39 Saunders cites Hu Jintao’s pledge to invest $100billion, 40% of all FDI, into Latin America in 2004.
40 China investment in Europe is for different reasons; this investment is often overseas accumulated wealth

that cannot be easily returned home, and is invested into Europe for reasons such as purchasing stakes in
17

well-known western brands for prestige, market-share, and the absorption of new technologies and sector
experience to make China’s companies more competitive.
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41 Contrarily, negotiations with developed countries are protracted affairs disagreeing over every small detail

with China using access to its domestic market as leverage (Reilly, 2013).
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China is a developing nation allowing other developing nations to benefit from its growth
which corresponds with the peaceful rise and win-win narratives.

One economic method China employs to increase its connectivity is the usage of
signing FTAs. This began soon after the AFC of 1997 which was combined with increased
China-ASEAN interaction and agreement of the “Good Neighbouring Partnership of Mutual
Trust” (Gao, 2011). Over the next decade China signed eleven FTAs42 and several
bilateral and multilateral FTAs are underway43 connecting China to thirty-one economies
(Reilly, 2013; Sigurðsson, 2014). Surprisingly, China has not signed or begun FTAs with
its three largest trade partners (the US, the EU, Japan) and of its ten biggest trading
partners only three44 have signed FTAs. Therefore, trade volume cannot be so important
for China. Contrarily, China is a major trade partner for its FTA partners.

The Vice Minister of MOFCOM outlined four criteria for choosing countries to sign
FTAs with; good political and diplomatic relationship with China; complementary economic
structures and trade patterns; third, either has substantial domestic market or serves as an
FTA hub in a particular region; fourth, the country shares common intentions on building
FTAs with China (Gao, 2011). On reflection there is some truth in that FTA partners
communicated their interest first, and that many of those countries are regional FTA hubs.
They are also members of regional associations providing China with expanded political
connectivity in all regions (Gao, 2011). Also, several countries are long-term friends of
China: Pakistan. However, several of those countries had officially recognized Taiwan
before beginning FTA negotiations: Costa Rica after sixty years recognition of Taiwan.
Regarding complementary economic structures, China shares replicable economic
elements with several of its neighbours. Leading Gao (2011) to conclude political
motivations trump other factors.

III.IVa Case Study 1: Market-economy Status.

One salient issue to China is the aspect of market-economy status (MES). This
aspect of China’s accession to WTO membership has become economically exacting for
China, and a source of friction between it and developed economies45. Gao, (2011)
highlights the possibility of amending the Accession Protocol and the fact the General
Council is consensus based, hence, the necessity for China to persuade other countries to
support its bid for MES. He also acknowledges China’s advantageous position at bilateral
and regional levels (Gao, 2011). As noted by Kastner (2016), Chinese leaders began
raising the issue in meetings with foreign officials. They also made recognition of MES a

42 ASEAN 2002, Hong Kong and Macau 2003, Chile 2005, Pakistan 2006, Singapore, New Zealand, 2008,
Peru 2009, and Costa Rica 2010, and Switzerland and Iceland 2013.
43 Australia, Norway, South Korea, India, China-Japan-South Korea, and the Gulf Cooperation Council.
44 ASEAN, Singapore and Hong Kong.
18

45 As part of WTO accession negotiations China agreed to be treated as a non-market economy which

allowed other countries to charge China with antidumping and subsidies investigations. Initially considered
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insignificant, China has been increasingly charged with anti-dumping measures, far more than any other
country, costing China’s economy billions of dollars (Kastner, 2010; Gao, 2011).
18 | P a g e
prerequisite of FTA agreements and handsomely rewarded those that complied46. Thus
Sigurðsson (2014), considers FTAs a ‘political strategy’ in relation to MES.

China has lavished the developing regions of the world with billions of dollars in
investment and aid47. Zweig and Jianhai (2005) note that 40% of China’s OFDI went to
Latin American countries in 2004 when Hu Jintao persuaded Argentina - who received
$20billion (Saunders, 2007) - into MES compliance. In later years, reports claim the scale
of Chinese financial support to Africa surpassed all other regions48, over $90billion by
some estimates (Carter, 2017; Dreher, et al. 2017). In addition, China’s huge imports of
energy resources from Africa, Latin America, and the Middle East has created a surge in
commodity prices greatly benefitting those developing countries (Zweig & Jianhai, 2005). A
study of correlation between trade and MES recognition found ample evidence to support
Kastner’s hypothesis, especially in relation to dependence on Chinese imports (2016).

As China sees multilateral forums as force-multipliers, it is not surprising that it has

simultaneously pressed its advantages through multilateral diplomatic channels. This was
apparent in the China-ASEAN Free Trade Agreement (CAFTA), signed in 2002, where
China demonstrated its neighbourly generosity49 which significantly contributed to ASEAN
recognizing China’s MES only two years later (Reilly, 2013). In Africa, China utilizes the
China-Africa Cooperation Forum (CACF) and the SAIS China-Africa Research Initiative to
promote relations and increase its leverage. Thus, China has benefitted from its support to
Africa in the development of an African bloc of fifty-one votes in the WTO (Halper, 2010).
This alone is not enough to amend China’s WTO accession protocol, but momentum is on
China’s side (Sigurðsson, 2014).

The above bilateral and multilateral initiatives have aided China in securing
recognition of MES from seventy-nine countries including several in Eastern Europe.
China has financially supported European countries to coerce the EU into recognition
(Saunders, 2007). This was outlined by Chinese Prime Minister Wen Jiabao when he
pledged to support Greece50 (Reilly, 2013). Understandably, Japan, the US, and the EU all
have a vested interest so unsurprisingly, they, with India, refuse to grant China MES51
(Kastner, 2010). China’s plan is seemingly to reward those countries that afford it MES
whilst building a bloc that encircles nations refusing to acquiesce and pressure them into
complying (Gao, 2017). Eventually, there will be enough support amongst WTO members
to grant China MES with or without the support of the US, EU and Japan.

46 New Zealand is a prime example being the first to support its accession to the WTO and recognize China’s
MES.
47 Africa $5billion, Latin America $35billion, Central and Eastern Europe $10billion (Hilpert & Wacker, 2015).
48 Winton (2014), highlights estimates of Chinese developmental aid growing from $600million in 2001 to

$2.5billion in 2009, lending increased from $800million to $1.4billion between 2005-9, and OFDI over
$2billion by 2010.
49 China signed Closer Economic Partnership Agreements with Hong Kong and Macau in 2003 and included

an Early Harvest Program in CAFTA all designed to demonstrate its benevolence to other regional countries.
19

50 China pledged to purchase Greek bonds and created fund of $5billion to support the Greek shipping

industry (Reilly, 2013).

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51 If China gains MES it will prevent WTO members from holding China to rules that protect important sectors

in other countries, particularly Europe and the US.

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III.IVb Case Study 2: UN Voting Alignment.

China has not yet achieved its aim of MES, it has resisted US hegemony in the UN
though ((Taylor, 1998 (cited in Martinez, 2015). The concept of human-rights has long
been a thorny issue for China, and which divides major world powers52. Several studies
assessed possible correlation between China’s economic relations and UNGA voting
alignment (Strüver, 2012; Flores-Maci’as & Kreps, 2013; Martinez, 2015; Dreher, et al.
2017; Raess, et al. 2017; Brazys & Dukalskis, 2017). These premised ideal points as
represented by great powers’ world visions, so, as a third country gravitates away from
one pole it more normatively aligns with the other ((Li, 2016; Zheng, 2017, (cited in Raess,
et al., 2017)). Analysis of state behavior in this venue has significant utility and validity53,
whilst previous qualitative studies indicated little credibility to correlation between China’s
growing economic ties and political influence (Ross, 2006a; Glosny, 2006).

Analysis of China’s ideal point shows a clear pattern of voting against country-
specific human-rights resolutions (Flores-Maci’as & Kreps, 2013). Despite the results of
Strüver’s study (2012) indicating the possibility of foreign policy convergence, evidence
was insignificant lending the possibility of other causal factors. In analysis of the effects of
China’s commercial ties with African and Latin American countries 1992-2006, Flores-
Maci’as & Kreps (2013) highlight the importance of trade volume and salience in predicting
foreign policy alignment. Additionally, it supports this author’s view that as China grows
economically, and does economic dependence on China, so dependent countries will
replicate China’s norms and policies54. Martinez (2015) examines relativity between
China’s benevolence to African countries and increased political support. As Martinez
(2015) stresses, China’s awareness of Africa’s voting importance55, makes this highly
relative. Martinez (2015) concludes that China has effectively eliminated the WB and IMF
from the Africa picture, for several reasons56, one of them being its developmental support
to Africa. Results show inconsistency in the votes of fifty-one countries with some more in
alignment than others

Two further studies highlight policy convergence reliant on specific factors. Dreher,
et al. (2017) find that African states that have voted in alignment with China have been
rewarded with increased development assistance. Dreher, et al. (2017) reveal the
significance of concessionality: the larger the grant element, the greater return it buys.
Whereas Brazys & Dukalskis, (2017) observe the robust correlation between states with

52 This coincides with China’s oft-stated prioritization of state sovereignty with human rights solely a domestic
issue.
53 Firstly, China has integrated itself into the UN process witnessed by its efforts to coerce others states to

derecognize Taiwan, thus, China sees the UN platform as important. Secondly, China views it as a platform
where it can challenge and oppose the US and western norms without provoking serious retaliation (Brazys
& Dukalskis, 2017).
54 Results from Flores-Maci’as & Kreps’ (2013) study also highlight US influence is declining, and that

increased trade flows and increased trade salience result in an 18% and 12% greater foreign policy
20

convergence respectively.
55 China has long been aware of the value of 51 votes, whilst being some of the most resource-rich
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countries, and has thus strenuously courted African countries diplomatically and economically.
56 Further reasons revolve around China’s values on sovereignty, and political regime autonomy.

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export dependence on China, particularly resource-rich states, and ‘normative alignment’.
This is further supported by assessment of a growing trend of developing countries voting
in decreasing alignment with the US and more with China at the UN as states become
more dependent on Chinese trade and aid (Voeten, 2013; Raess, et al., 2017).

III.V Conclusion.

As highlighted above in China’s White Paper (2014), China engages more with
developing countries and regions in the South. This reinforces Saunders (2007) and
Drezner (2009) belief that China’s economic statecraft be more effective with developing,
‘capital-starved’ countries. The above case studies both reflect an increasingly high degree
of success for China’s efforts in courting and rewarding developing nations for political
concessions such MES recognition and voting alignment on the country-specific human-
rights issues in the UN. However, this should not be surprising. As Finnemore remarks, in
a unipolar order rising states, with disproportionate power, are inclined to similar strategies
to which China has pursued (Brazys & Dukalskis, 2017).

Alternatively, Brazys & Dukalskis, (2017) suggest that voting divergence between
many of the states, now voting with China, and the US eludes to the possibility their
normative commitment was tenuous at most. China’s exponential increase in economic
might has fortuitously materialized at a time when the reputations of the US and the
Bretton Woods institutions are all-time low57. That developing countries were craving an
alternative to Western economic support contingent on conditions that few states
genuinely welcomed is plausible. Thus, China’s growing economic power has provided
Beijing the opportunity to encourage the propensity of declining US influence throughout
the world.

Hence, rather than coercing states to support its normative vision, China is instead
using its economic and diplomatic influence encourage subtle erosion of existing
international norms. Other studies reiterate a similar point, that China has attempted to
influence other countries into participating in modifying the international environment to
better reflect its foreign policy preferences and undermine existing international norms
such as human rights and democracy (Martinez, 2015; Brazys & Dukalskis). The
conclusion is that Chinese leaders have discerned the underlying sentiment of
disenchantment among many nations and generated momentum behind latent forces
inclined to repel the current Western-led order.
21

57 US influence significantly declined as a result of two ostensibly unilaterally-initiated wars, confidence in

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both the IMF and WB from southern-hemisphere countries has disintegrated following the disastrous
structural-adjustment policies that were apparently forced upon them.
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IV. Reserve Currency: China’s Attempts to Internationalize the
Renminbi.

IV.I Introduction.

In comparison with China’s ‘Going Global’ strategy and the increasing rush of
outward FDI, China’s attempts to internationalize its currency – the Renminbi (RMB) – are
a more recent element of China’s broader ambition to lessen the influence of, and other
nations’ dependence on, the US and realizing a multipolar world. For China, there is a
duality to this project which is to raise the international role played by the Renminbi as an
important element of its own international status and standing58, as well reducing the
global usage of the dollar and thus the advantages the US gains59. These gains, they
believe are to the detriment of other nations, particularly developing countries60.
Importantly it will allow Chinese banks and government the ability to lend, borrow and
trade in their own currency61, and thus, the world’s largest trading nation independence
from the US dollar.

IV.II Criteria of an International Currency.

There are three functions of a currency; as a store of value within foreign exchange
reserves or central banks, a medium of exchange thereby for trade settlement, and as a
unit of account for the denomination of financial transactions (Wu, 2009; Coursera, Park,
2018). All of which require the confidence of actors such as investors and traders. The
consensus is that three pillars determine whether a currency is likely to gain international
status; the size of a country’s economy and its trade volume, the breadth, depth and
liquidity of its capital markets, and the stability and convertibility of its currency, (Hartmann,
(1998) cited in (Wu, Rongfang, Di, 2010)). It is not to say that China should meet all of
these requirements at the nascent stage of RMB internationalization though. It is
important, therefore, to bear in mind that China’s efforts to internationalize the RMB start
from a very low base. Hence, Chinese leaders know that this is a long-term aim in their
global development plan.

IV.III Macro-Analysis.

Senior Chinese figures believe for China to achieve its full economic potential an
internationally used RMB is necessary. However, the belief is that prerequisites exist for a

58 The US and the dollar, Japan and the Yen, the EU and the Euro, and Great Britain and the Pound
previously.
59 It allows both the US government and Americans certain advantages; allows the government to run high

trade deficits with less burden and delayed impact. It is fundamental in enforcing US sanctions on countries
and individuals. American people are able to borrow more cheaply, to not be affected by fluctuations in
22

exchange rates when paying for services abroad, when investing or borrowing abroad.
60 Chinese leaders feel developing nations have historically had to remunerate the US by exportation of
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goods and services at cheaper than nominal rates, seigniorage, which impinges on their sovereignty.
61 Avoiding the risks of a sudden depreciation in currency value and the multiplication of debt repayments

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currency to gain international confidence; a liberalized capital account, interest rate,
exchange rate, and free and full currency convertibility (Wu, 2009). For Chinese leaders
there are potential domestic consequences from liberalizing the country’s financial system
that they would prefer to avoid (Nye, 2010). This has led them to, as Zhu points out (2015),
“utilize political power instead of market forces” to begin the internationalization of the
RMB. The earliest sign of China’s usage of political influence to encourage RMB usage
outside China was through currency swap agreements (CSAs) made with several
neighbouring countries via the Chiang Mai Initiative (CMI) after the Asian financial crisis in
1997. Despite them not being activated, the PRC has agreed further swap agreements,
particularly since 2008, with important trade partners as a way of facilitating use of the
RMB (Zhu, 2015). Interestingly, South Korea (a US ally) and Belarus (a Russian ally
courted by the EU) were two of the earliest to sign CSAs with China along with several
more obvious signees; Hong Kong, Singapore, Indonesia and Malaysia.

The 2008 (GFC) has proved pivotal in several ways. Firstly, it boosted self-
confidence in Chinese financial management and provided Chinese leaders the
opportunity to question US management of the global financial system (Bryanski, 2009).
Repeated rounds of quantitative easing have emphasized US abuse of the benefits of the
dollar’s global position in the minds of Chinese leaders (Casarini, 2012). This has
prompted greater impetus to internationalize the RMB (Anderlini, 2009; Bryanski, 2009;
Parker & Dinmore, 2009). Secondly, since 2008 there have been several headline-
grabbing announcements between China and other developing nations signing SAs,
notably with other BRICS members. To support growing trade relations and secure long-
term access to resources, China signed a CSA with Brazil in 2013 which totaled
RMB190billion/$40billion. China and Russia followed by finalizing 10-year-long
negotiations signing thirty-eight agreements which included a deal for currency swap lines
worth RMB150billion. There is little doubt this is to marginalize the dollar by allowing trade
settlement in RMB and ease the pressure of US sanctions62. Two countries frequently
criticized for human rights abuses, Pakistan and Iran, have also signed deals with China,
or pledged, to use the RMB instead of the dollar. Possibly more worryingly for the US, is
several of its allies63 have also signed CSAs with China in 2014. The attractive
opportunities that China’s domestic market and outward investment capital are proving to
be irresistible.

Prior to 2008, RMB flows in and out of China had been heavily regulated (Coursera,
Park, 2018), but following the GFC, the PRC begun allowing usage of the RMB outside of
the mainland for payment of services, interest payment and commercial trade. They began
by allowing issuance of ‘dim sum’ bonds and the creation of an offshore bond market
through banks in Hong Kong in 2009, followed by the issuance of RMB-denominated
bonds in the Taiwanese market (Formosa Bonds) in 2012. In 2009 the Chinese
government launched the cross-border trade settlement scheme authorizing certain
institutions to accept RMB as payment in trade settlements. Two later initiatives were the
23

62US sanctions are largely effective because of the dominant role of the dollar in the financial system.
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63Australia for RMB 200billion in 2012, the UK for RMB 200billion in 2013, the EU for RMB 350billion in
2013, and Canada for RMB 200billion.
23 | P a g e
Shanghai Free Trade Zone (STFZ), allowing for yuan convertibility and unrestricted foreign
currency exchange launched in 2013. China has carefully allowed access to its new
financial market in Shanghai, connected to the Hong Kong stock market 64, by creating two
schemes, QFII (qualified institutional investors) and RQFII (Renminbi qualified institutional
investors)65 - foreign companies that meet strict criteria gain access to China’s A-share
equity market. These initiatives are designed to facilitate greater usage of the RMB in
diversification of financial holdings and slowly remove the dollar (de Jonquières, 2012).
This is evidenced by signs that the RMB is assuming a pivotal role for regional currencies
and in particular the four main Southeast economies that ‘consider the yuan more than the
dollar in management of the exchange rates, ostensibly forming a “renminbi bloc”’ (Cohen,
2014).

In 2018, with huge significance China has reportedly begun measures to pay for oil
in RMB (Chatterjee, 2018), thus circumventing use of the dollar, by launching yuan-backed
oil futures on the Shanghai Exchange. The significance is, at $14trillion dollars, oil is the
most traded commodity and oil consumption growth is highest in Asia and China, buying
about 8.43 million barrels a day, is increasing its leverage (Bloomberg, 2018; Foreign
Policy, 2018). China and Russia have subsequently pledged to discard the dollar in their
bilateral trade. It is known that Angola is keen to alleviate dependence on the dollar in oil
trade, and apparently Saudi Arabia may agree to follow suit (Chatterjee, 2018). In
supporting the EU during the debt crisis Chinese leaders have turned problems into
successes, foreign reserve diversification66, further investment opportunities and acquiring
valuable technology and experience, and the EU’s purchase of RMB-denominated
assets67. In the longer-term it may rebalance the playing-field of US-EU and EU-China
relations which derives from the Chinese concept of Shi and exploiting the propensity of
things (Casarini, 2012). Ongoing efforts to support RMB internationalization have included
statements requesting RMB inclusion to the IMFs special drawing rights basket and
greater use of the SDR to lessen dependence on the dollar and aid greater financial
stability (Nye, 2010). The latter being tacitly supported by countries such as Russia, South
Korea, South Africa (Bryanski, 2009). Both these Chinese efforts have recently realized a
degree of success with the IMF confirming the RMBs inclusion (Zhao, 2017) and support
for an alternative to the dollar from both the UN and the IMF (Bryanski, 2009).

IV.IV Micro-Analysis.

To place China’s multifarious attempts to internationalize the RMB into perspective

an analysis of possible results and effects they have had on the international currency
environment is pertinent. The period from 1998-2004, which is the period prior to RMB
take-off, was largely dominated by three international currencies; the dollar, the Euro, and
the Yen. In relation to invoices and trade settlements (medium of exchange) as an average

64 This follows a similar pattern of utilizing Hong Kong’s financial facilities as a medium to the global financial
system adopted by Chinese leaders.
24

65 The difference being that RQFII approved institutions can use RMB to purchase Chinese financial assets.
66 China now has one quarter of its reserves in euro-denominated assets and thus a big stake in the health
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of the EU and the euro’ (Jonquières, 2012).

67 The European Central Bank (ECB) has invested 500million euros into RMB-denominated assets.

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over this period the euro comprises 54% and 51%, and the dollar 33% and 36% of non-
euro and euro-member European countries respectively. In Asia-Pacific region the dollar
was used for 78%, and the euro only 5% of export invoices. In North America the dollar
settled 90% and 70% of American and Canadian export invoices respectively (Kamps
(2006) cited in (Wu, Rongfang, Di, 2010). The picture was one dominated primarily by the
dollar and secondarily by the euro with other currencies, mostly the yen, used sparingly
across all regions.

Cohen (2014) notes that in just a few years the percentage of Chinese trade settled
in RMB increased from 0-14%. SWIFT, the global payment system, reported a year later
that fifty countries, mainly Asian and European, used the RMB in more than 10% of
payments (Yu, 2014). This is due partly to the sixty countries that China has signed CSAs
worth RMB650billion ($95billion) in 2010 (Wu, Rongfang, Di, 2010), which have seen
cross-border transactions total RMB9.85trillion ($1.49trillion) at end of year 2016 (Zhao,
2017). From a Quartz report, however, a different set of statistics give a different
perspective: the RMB ‘only accounted for 2.5% of all international payments tracked by
SWIFT, as opposed to 43.3% for the dollar or 28.7% for the euro’ (Graceffo, 2017). From
the chart below there is evidence of some, but minimal, progression since 2010. More
recently though, there has even been slight regression in the usage of the RMB to settle
trade contracts.

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 As a unit of account in denominating financial transactions, a function of an
international currency, a 2007 Bank for International Settlements (BIS) report stated that
dollar denominated foreign exchange turnover was 43.2%, the euro 18.5%, and the yen
and pound 8.3% and 7.5% respectively (Wu, Rongfang, Di, 2010). In contrast the RMB
managed a negligible 0.24% in 2007, however, in absolute value it realized a growth rate
of 740% from 2004. Over the next three years financial transactions in the RMB would only
increase to 1.5% whilst the dollar remains the dominant currency in the foreign exchange
market. Facts taken from the table below, BIS report 2016, reflecting, the RMB (yuan) on
4.0%, has seen gradual growth in the foreign exchange market but is by no means
challenging the dollar’s position, or even the euro’s.

Regarding the store of value function figures taken from the IMF for the period
1999-2008 (Wu, Rongfang, Di, 2010), official holdings of the dollar fell from 71-64%, and
the yen also fell from 6-3% due to the gradual increase of the euro from 18-27%. Over the
next six years the dollar still retained 63% share or global reserve holdings compared to
the next best, the euro, which captured 23% (Ezrati, 2014). Based on an IMF data on the
Currency Composition of Foreign Exchange Reserves (COFER) 2017, the dollar has
remained the primary currency, 63.5% share, that central banks prefer in their foreign
reserves, with the euro also a stable share of global foreign reserves, whereas the RMB
26

has hardly made its presence felt (IMF Data 2017: in Business Insider, 2018).
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IV.V Conclusion.

To underscore the importance of the RMB’s challenge to the hegemonic dollar in

China’s desire to increase its global influence and realize a multipolar order, Chengxin Pan
(2013) reveals that some Chinese scholars think however ‘big Asian economies may
become, the Asian century will not materialize if the dollar’s influence is not reduced’.
Since the PRC begun efforts to internationalize the RMB around 2007, they have
experimented with various initiatives to incentivize or coerce other international actors,
state and non-state, into using the RMB. The above qualitative evidence suggests some
success, particularly with other governments. This is not limited to developing countries, as
some western countries have signed SAs for large amounts of RMB – in particular the UK
and the EU. The idea of an alternative currency to reduce dependence on the dollar
seems attractive with some governments, especially those that are not considered friendly
with the US. Efforts to shift the balance in the global oil market is an area that might
27

produce long-term dividends for China as most of the oil-producing countries resent US
omnipotence and welcome a non-hegemonic alternative.
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 Although Chinese leaders have, as Zhao highlights (2017), strived to “tilt the
balance of monetary power…. in its favour”, regarding non-state (or private) usage of the
RMB, the PRC’s efforts have gained little traction so far in areas such as foreign exchange
or financial assets. This most likely reflects the lack of progress in liberalizing its financial
system and particularly full and free currency convertibility. Whereas political leaders may
take a wider view of circumstances, private actors prioritize confidence, stability and
transparency. However, these reforms are unlikely in the immediate future as political
leaders view control of the financial sector as imperative to regime stability (Nye, 2010;
Jonquières, 2012). As outlined above, China’s leaders see RMB internationalization as a
long-term aim (Casarini, 2012), but they have achieved a breakthrough with the RMB’s
inclusion into the IMF’s SDR basket which some in China see as furthering RMB
internationalization (Bryanski, 2009). It is debatable whether the RMB has sufficiently
increased in usage relative to time and effort. Nonetheless, the PRC’s agenda of RMB
internationalization is undeniably aimed at ‘enhancing China’s structural power at the
expense of the US and the dollar’ (Zhao, 2017).

Despite slight improvement in usage amongst private financial actors, there is

coalescence among state actors towards supporting the usage of the Renminbi. There is
growing list of countries that have agreed currency SAs and others have signaled interest
in signing an SA as seen above. In addition, an increasing number of countries are
satisfied with the value of the RMB to hold a significant amount in their foreign reserves.
The UK has certainly been keen to court influence with Beijing in order to attract China’s
European financial hub to London rather than Frankfurt.

Thus significantly, China has firmly placed this as a topic up for a discussion,
attracted notable interest from a number of emerging-market countries to support it twin
objective of encouraging use of the RMB at the expense of the dollar. Chinese leaders will
seek to maintain pressure on the US and the dollar in terms of financial management,
encourage other developing countries that the dollars position as the reserve country is the
basis for ‘American financial hegemony’, (Sun, 2015) and that they pay the price and the
less they depend on the dollar the more economic independence they will have in the
long-term. The further usage of the RMB will be enhanced by the recently inaugurated
long-term grand project ‘One Belt One Road’ and its founding of the Asian Infrastructure
Investment Bank which are the focus of the next chapter.
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V. China, the AIIB, and Soft Power Influence.

V.I Introduction.

This final chapter focuses on the most recent elements of China’s strategy to
redirect flows of influence away from Washington and, as Parag Khanna (2016) aptly
considers, lead them ‘via highways and railways’ towards Beijing. This chapter will assess
the founding of the AIIB and the commencement of the grand infrastructure project the
One Belt, One Road (OBOR). Of particular focus will be China’s reasons for creating the
AIIB pertaining to its involvement in multilateral development banks (MDBs), the WB and
the ADB, similarities between the AIIB and the ADB, and possible pernicious motives or
causal erosion of US influence and the existing liberal international order. A secondary
focus of this chapter will be the somewhat parallel and ambitious venture, the OBOR and
its possible ramifications for international influence. The AIIB and OBOR interlink with
several ‘financial integration initiatives which encompass regional bond markets, bilateral
currency swaps and internationalizing the Renminbi (Callaghan & Hubbard, 2016).

China’s latest initiatives provide it the opportunity to connect the markets of Asia to
China thus gaining more economic influence. China also strives to be seen as providing
public goods to the developing countries of the region as part of its win-win narrative. The
duality of these efforts are the aims to placate worried neighbours whilst gaining greater
legitimacy in the minds of developing countries in Asia and across the world as a
responsible world leader.

V.II Domestic Reasons and Regional Issues, the AIIB and the OBOR.

China has since the GFC 2008, due to the repercussions it had on China’s
economy68, realized the need to focus more on developing markets, especially those in
Asia (Sun, 2015). Chinese leaders have envisioned a two-pronged strategy for improving
the economic outlook of Asian countries and concomitantly its own economy; the OBOR
project and the AIIB. Proposed in 201369 the concept behind OBOR is to complete a series
of infrastructure projects which greatly improve the interconnectivity of Asia and with
Europe70. Announced in October 201371, the AIIB is designed to reduce the $8trillion
shortfall in infrastructure funding across Asia between 2010 and 202072. Chinese leaders
believe improving infrastructure connectivity will boost Asian economies73 and thus provide

68 The 2008 GFC and subsequent contraction in developed countries spending has affected Chinese exports
which is a major aspect of its economic growth model.
69 The two elements of OBOR, the Silk Road economic belt and the maritime Silk Road, were proposed in

September 2013 and October 2013 respectively.

70 From Southeast Asia, through South and Central Asia, across the Middle East, and finishing in Eastern

Europe.
71 Xi Jinping announced plans for a new multilateral bank whilst on a state visit to Indonesia in 2013.
72 The $8trillion shortfall in infrastructure funding across Asia between 2010 and 2020 was outlined in a 2009
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ADB report.
73 Reports claim that obstacles to increased economic flows through Asia are not tariff-related and are due to
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connectivity issues such as transport and communications issues and that removing these obstacles would
realize economic growth of over $2trillion across Asian and boost China’s economy.
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increased markets for Chinese exports and finance solving several key issues74
(Callaghan & Hubbard, 2016). These visions have purportedly become “integral aspects of
Xi Jinping’s new diplomacy” (Zhu, 2015). Subsequently, there has been much debate over
how closely the two projects relate to each other75.

Amongst the US and its allies, the OBOR is generally seen as a response to the US
trade agreement, the Trans-Pacific Partnership (TPP), which Chinese leaders claim is
designed to contain Chinese economic development and influence in the region (Chow,
2016). Therefore, particularly the US and Japan perceive the OBOR project as a strategy
aimed at increasing China’s interconnectivity both spatially and economically, and thus
increase its political influence at the expense of Japan and the US (Kawai, 2015). Hence,
they view China’s new Asian multilateral development bank as inextricably linked to
providing funding for OBOR projects. Despite this, more recently Chinese leaders have
frequently stressed the separation of the two projects often citing the existence of the Silk
Road Fund76 (SRF) as proof. However, the fund’s current capital is insufficient to meet the
$1trillion cost of OBOR projects77. Additionally, reports suggest that originally Xi Jinping
explicitly stated the AIIB’s primary task was to provide funding for OBOR projects (Xinhua,
2015, (cited in Callaghan & Hubbard, 2016)).

V.III Similarities and Differences, Fears and Reassurances.

Following the 2013 announcement, there was much debate and scepticism over its
practices and role. Several aspects of the AIIB reflect the nature of traditional MDBs in a
basic assessment, but under closer inspection reveal aspects of variance suggesting room
for political influence. Firstly, the AIIB will provide a variety of loans from members’
contributions, initially $50billion rising to $100billion comparable to other MDBs, and
finance sourced from global financial markets. Chinese leaders have stated that the bank
will not provide soft loans. These loans are less costly but come with onerous additional
services which prolong the project with some recipient countries in agreement with the
bank’s plan (Bessler, 2016). Additionally, with China’s poor record regarding international
funding practices, the huge amount of capital, combined AIIB and NDB equal $200billion78,
obviously causes consternation amongst Western governments.

74 Diminishing returns from infrastructure investment is one reason for flagging growth rates, in relation
unemployment is rising, and a huge surplus production in industries related to infrastructure building - iron
and steel. China has been frequently punished via WTO anti-dumping measures and President Trump has
recently announced tariffs on Chinese iron and steel. These are all substantial problems, and relate to
China’s economic growth and thus regime stability. Bilateral loans and aid across the region have caused a
backlash in several developing countries. Recent criticism of the government for investing in low-yield US
treasury bonds instead of pursuing more productive opportunities.
75 Since developed countries became members of the AIIB, Chinese leaders have repeatedly attempted to

distinguish the AIIB from being a lending bank for OBOR projects (Weiss, 2017).
76 China has also created a Silk Road Fund backed initially with $40billion and added a capital injection of

$31billion into policy banks to support OBOR.

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77 China’s domestic development banks could provide greater funding but lending through multilateral

channels has advantages.

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78 Despite initial capital contributions being relative to those of other MDBs, the combined capital of the AIIB

and the NDB ($200billion) is only surpassed by the EIB, WB, and the ADB.
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 Further, the management structure will comprise of a Board of Governors79, below
that a Board of Directors80 a similar structure to traditional MDBs. Worryingly in contrast to
traditional MDBs though, ‘the board of directors will be an unpaid and non-resident body
that will approve major decisions and chart the direction of the AIIB’ (Villafranca, 2016).
Indeed, the bank will be located in Beijing and largely staffed with Chinese employees,
thus potentially the CCP could manage the bank in the background reflecting its proclivity
(Chow, 2016). A highly salient issue regarding bank direction and to China is voting
rights81. China had frequently complained about the glacial pace of reform in BWIs to
better reflect the changing economic environment82. As above, some aspects are similar to
traditional MDBs83, however, Asian members will hold greater voting control84. Although
China initially sought a 50% share of votes, this was reduced to 26%85 upon the decision
by developed countries to join as membership increased from twenty-one86 to fifty-three87,
to eighty. Indeed, 26% is still higher than in other MDBs, and affords China veto powers.
These two aspects of voting rights suggest China and Asian countries will maintain strong
control of the bank. Previously employed approaches by China suggest a tendency for
tying membership to inducements thus creating dependency. Interestingly, most Asian
countries were quick to join and AOAs were surprisingly, swiftly concluded. However,
concerns over lending practices and the potential for China through the AIIB to undermine
the role of the BWIs and international norms persist.

The members states of the West share the concern that China will use the AIIB as a
foreign policy tool to fund the OBOR in order to solve domestic issues, mentioned above,
and further integrate itself into the economic and political fabric of the region making it
indispensable to its neighbours. Their concern is that China will not comply with common
standards of multilateral lending and governance such as environmental and social
protection as it pursues the above aims (EPSC Strategic Notes, 2015). These fears relate
to statements of the bank being lean, mean and green (Bessler, 2016) which suggests
efficiency and lowering of the ‘rigorous standards’ for funding projects need to meet with
traditional MDBs (Hanlon, 2017).

79 The Board of Governors will be official representatives of the member states.

80 The Board of Directors will comprise of 12 directors; 9 from regional members and 3 from non-regional
members, along with a President and Deputy President.
81 A major reason behind the founding of the AIIB is related to China’s dissatisfaction with its influence within

the current financial institutions: the WB, the IMF, and the ADB.
82 This especially effects China whereby its voting share in traditional MDBs as of 2015 was not

commensurate to the size of its economy. In the IMF China’s voting share was 3.81%, in the WB 4.45%, and
the ADB 5.45% (Strand et al. 2016) whilst its share of global GDP, PPP related, is 18.59%. In contrast, the
US and Japan held 16.75% and 6.23%, 12.71% and 12.8%, 16.6% and 7.49% in the IMF, ADB, and WB
respectively (Strand et al. 2016). In addition, the IMF and WB presidents are always European and American
respectively.
83 Each founding member will receive 600 votes, as well as a share based on their capital contribution, and

every member will share 12% of the votes to compensate for differences in size (Bessler, 2016).
84 a 75% of share of votes is a higher proportion compared to other MDBs.
85 A 26% share of votes is enough to veto any resolutions requiring a super-majority (75%).
86 Originally, twenty-one Asian countries signed a memorandum of understanding (MOU) reflecting initial
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scepticism in some regions (Kawai, 2015).

87 Within nine months the number of states which had signed the Articles of Agreement (AOA) had risen to
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fifty-three. This sharp increase due to continuous Chinese diplomacy conducted behind the scenes and
despite repeated criticism from the US and calls on allies not to join.
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However, there are signs that suggest initial fears will not be realised beyond the
numerous statements that AIIB will work in cooperation with the WB and the ADB. One
shared view is that the addition of OECD members will prove a counterweight against
possible Chinese unilateral ambitions. There is good reason to think so, however, several
OECD were quick to join following Chinese diplomatic efforts, especially the UK, keen to
attract Chinese finance to London post-Brexit. This has led some in the US to complain
that European countries are frequently accommodating China rather than holding it to
account. However, for some the Chinese leadership prioritise the prestige and legitimacy
that come from providing public goods.

V.IV The AIIB, Chinese Influence and the International Order.

Traditional MDBs rely on a set of rules and practices for funding ethical and
sustainable development projects88 which have become norms. However, some
developing countries view them as ‘rigid and inflexible, lacking efficiency, and ideologically
driven’89 (Humphrey et al. 2015) therefore ignoring development opportunities in
circumstances that do not meet these uncompromising criteria. Increasingly, there is
feeling amongst developing countries of stagnation in Western-led MDBs impacting on
their opportunities for development (Ruggie, 2014 (cited in Hanlon, 2017)). Hence,
developing countries are disinclined to seek assistance from BWIs (Hong, 2016) which has
fostered the belief that development assistance endogenously sourced (South-South) with
less oversight and greater efficiency, that the AIIB suggests, is desired (Chow, 2016). This
is supported by the fact that all ASEAN countries were founding members of AIIB (Banks
& Nash, 2016) and that several countries90 that are not members of the WB nor ADB are
members of the AIIB (Hanlon, 2017). As well as, by the existence of development banks91
in other poorer economic regions, and that countries with the option of accessing
concessional or softer loans are opting for loans that are ‘more expensive but less
conditional’ (Humphreys et al. 2015). Simply put, developing countries gradually turning
away from traditional MDBs for sources of development funding in the provision of public
goods.

An underlying difference between the West and China is the perception of models
of development whereby the West views stability and security as prerequisites for
development whereas particularly China, with its development history, believes
development brings stability and security. For many, China’s alternative approach to
development is gaining supporters searching for an alternative. In addition, Chinese
narratives of win-win, its high-level diplomacy and continued financial support for
developing countries have persuaded many that China is more understanding of their

88 These are based on transparency of decision-making, accountability, open procurement, and

consideration for potential environmental and social consequences
89 One example of many, is the need for S.Korea to seek assistance from the IMF following the 1997 AFC.

However, the overriding belief is that IMF assistance was more interference and severely detrimental (Hong,
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2016).
90 Iran and Oman.
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91 This relates to the creation of ‘purpose-built bilateral, regional-bilateral, and multilateral institutions such as

the Development of Latin America and the Central American Bank’ (Humphreys et al. 2015).
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needs. In relation, many of these countries have been largely ignored by the US.
Therefore, when China provides developing countries the public goods they desperately
need China is seen as responsible and generous, and thus gains status and legitimacy.
Thus, if China manages to provide efficient funding for sustainable development Western
MDBs will ‘lose mindshare and market share’

Rather than the AIIB being a competition for geopolitical influence, it is significantly
more, it is an ideological competition over development models (Trolio, 2014). Therefore,
China is not only supplying the public goods, in terms of funding, China is increasing its
ideational value and thus is elevating its role as a leader within Asia and beyond for
disenchanted developing countries. This is evidenced in the China Dream narrative which
stresses the need for development that is mutually beneficial and internally sourced of
which the AIIB and the OBOR are important aspects (Hanlon, 2017). Thus, the most
significant challenge the AIIB represents to US influence and the Bretton Woods institution
resides in the provision of public goods, and ideational legitimacy (Humphrey, 2015). As
Finnemore asserts (cited in Brazys & Dukalskis, 2017), ‘in a unipolar system a rising
power will not challenge directly the superpower, but will use a soft-power approach to that
will delegitimize the existing leader’.

There is a growing sense, within China and outside, that the US is deliberately
attempting to prevent China’s rise. Despite the existing order providing for China’s rise
thus far, it is not acceptable to become more powerful than the US. There is a disparity
between when China is called upon to be a responsible power and provide its share of
public goods, and when China requests more influence but is denied. Therefore, China is
damned if it does not, and damned if it does. Thus Etzioni (2016) pertinently states,
‘despite calls from western allies of China to play by the rules, China must not be allowed
the power to make the rules’. Indeed, when the US undertakes containment policies,
rejects China’s requests for reforms, and admonishes allies for joining the AIIB these
churlish responses are a diplomatic disaster. Ultimately, this produces counterproductive
consequences that portray the US as unwilling to share power thus diminishing its
legitimacy and increasing China’s.

V.V Conclusion.

China has for some time pursued a strategy of enmeshing itself into the
development opportunities of smaller countries. A common theme of China’s subtle foreign
policy strategies is the targeting of developing countries aimed at supporting their
development as part of its own developmental path. This fits neatly into narratives such as
win-win, China as a developing country allowing other developing countries to share in its
success. It has carefully positioned itself amongst developing countries reiterated its
shared history of suffering by Western imperialism. This allows China to juxtaposition the
developed countries on one side and developing countries with China on the other. China
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then utilises this narrative as justifiable reasoning for its initiatives aimed at supporting its
own and others development. China is not directly challenging the US or the international
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order per se, however, it provides attractive opportunities or incentives to other countries
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which undermines US influence. In turn the US finds it difficult to prevent or contain these
activities for it will be portrayed as denying the opportunity for others development and
thus lose legitimacy as leader of the order.

Essentially China has positioned the US in a dilemma, cede power to China and
you are allowing China to grow stronger, possibly realizing its potential to be surpass the
US in the long-term, or refuse to cede power and ultimately lose legitimacy within the
international community.

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VI. Overall Conclusion.

In summation, although it is not clear to date that China seeks to replace the US
and assume the leading role in a new unipolar order, there are sections within China that
ambitiously aspire to a rejuvenation of China’s past role as the middle kingdom. However,
it is clear that China is making advancements to tilt the currents in its favour as it foresees
a future confrontation with the US. In past decades China has courted developed Western
countries and integrated itself into the international order incentivised by the need for FDI,
open markets for it exports, to acquire knowledge, and a hospitable environment for its
nascent development.

More recently, China has pursued a dual-track strategy of continued gains from
membership in Western international institutions and more recently the progression to
initiating or interacting with numerous regional councils, associations and inaugurate new
institutions to diversify its relations and widen and deepen its network. The former allows
China to work within the system to maintain its development whilst seeking more influence
and political gains. This can be seen above in the evidence of China’s efforts to foster a
voting bloc in the UN to undermine human rights resolutions, and its inducement of MES
and subsequent application of pressure to resolve a highly punitive status. Additionally,
China champions the norms of globalization as it suits its need for open markets for
exports and utilises the practice of signing FTAs and providing financial support. However,
the aforementioned contain some distortion of normative practices to acquire political
concessions and influence.

However, Chinese leaders have increasingly become aware of the limitations to

fully realising its potential within current international circumstances. For several decades,
the US had supported and encouraged China’s rise and integration into the world order.
However, the US has grown wary of China’s rise as their ambitions of supplanting the US
become more observable. Thus, more recently the US has ostensibly resorted to
containment tactics or policies (Chow, 2016). This is evidenced in the TPP, its pivot to
Asia, and reluctance to cede a degree of power and thus influence to China ostensibly
from a fear of being unable to contain a potentially more powerful state that will apparently
alter certain normative aspects of the US international order.

Limitations have prevented this paper incorporating any possible counter-policies

from the US which may restrict China’s ambitions of growing power and influence in the
long-term. Indeed, there are caveats to China’s rise such as the domestic issues that
China’s continued rise faces, the constraints of the international system, and the
preponderance of US power. However, Chinese leaders have shown themselves to be
resourceful, inventive, and determined in circumventing these obstacles. Hence, the
second element of its dual-track strategy has seen China work to gain independence or
political space from US and Western influence and diminish the possibility of containment
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by fostering an alternative and more receptive network of alliances to maintain its

development.
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 This element of the strategy involves working outside of the restrictive international
order in areas such as international finance and its institutions. Chinese leaders have
concluded that the pillars of US power and influence reside in the role of the dollar as the
reserve currency with the advantages it gains as outlined above and its significant control
of BWIs. Hence, since 2008 China has concentrated efforts on highlighting the instabilities
of the system, the negligence of US management, and the need for reform. Concomitantly,
it has begun applying policies designed to create a receptive environment for an increased
role for the RMB in international finance with some degree of success amongst state
actors, particularly developing countries. This is integrated with China’s most recent and
ambitious projects to afford China more independence and leadership, the OBOR and the
AIIB. The aim is to further strengthen and institutionalise its connections with other
developing countries and thus increase its status and legitimacy as a powerful country that
provides public goods and is ideational force of this century.

It is not that China is intrinsically a revisionist state, possibly China is simply

outgrowing the role envisioned for it within the international order. The problem and
ultimate challenge resides “on the other side of the power transition ledger with the US” as
some sections within US policymaking circles appear unwilling to accept the realisation of
China’s power potential within the current international order and institutions (Gennari,
2017). As stated above the limitations prevented an assessment of potential US counter-
strategies. Additionally, several Chinese policies are in the nascent stages of
development, internationalization of the RMB, and the OBOR and AIIB initiatives, thus a
future study of said topics would be beneficial in analyzing further developments in China’s
continued efforts to achieve its aims.

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