US must decide how to include China in financial order

In the celebrated special relationship between Britain and the United States, it is unusual for one side to rebuke the other publicly. Last week, a senior White House official delivered a rare, if unattributable, broadside against Britain over its China policy.

The trigger was a decision by Mr David Cameron’s government to join China’s Asian Infrastructure Investment Bank (AIIB), one of a constellation of institutions that China has set up to promote international development. The US had lobbied allies in the Group of Seven (G7) and Asia not to join the institution and Britain’s defiance is the latest sign of how the bilateral relationship is under pressure. But the spat should also prompt some hard thinking in the US about its approach to China’s rise as a global economic power.

America’s sensitivity to the creation of banks such as AIIB is understandable. Rivalry between Washington and Beijing for global economic influence is intensifying. Since the end of World War II, the US has been the dominant voice, partly thanks to the creation of the Washington-based World Bank and International Monetary Fund (IMF). China is now challenging the Bretton Woods set-up by creating financial bodies to help it gain greater political influence in the Asia-Pacific region and other parts of the world.

The US may want to stop the growth of these bodies. But its lacklustre stewardship of the Washington-based international financial institutions is one of the reasons rivals are proliferating.

The influence of the World Bank as a lending institution has declined, partly because of more restrictive lending focused on poorer countries. At the IMF, the US has proven incapable of helping to give the fund more firepower and a more representative share of votes that reflects the rising power of emerging markets. Having agreed to changes to the funding quotas that determine voting rights on the IMF’s board, the US has been unable to get its contribution past an isolation-minded Congress.

Mr George Osborne, United Kingdom Chancellor, said Britain is joining AIIB to help bind China into a global rules-based system, rather than encouraging Beijing to press ahead without the West. Others see opportunism with Mr Osborne pitching for the City of London in its attempt to capture a portion of the yuan trade and other Beijing goodies. By becoming the first G7 country to join the institution, Britain will have endeared itself to Beijing. But its move will also encourage China to continue pursuing its strategic goals through a policy of divide and rule. It would have been preferable had the G7 adopted a united strategy towards AIIB, rather than seeing one nation break away in its own interest.

The UK’s move serves as another warning to the West of how uncoordinated its policy towards China has become. Within the UK, it should also prompt some hard thinking about what kind of role Britain wants to play in the world. For most of the post-war period, Britain punched above its weight as a staunch ally of the US. Today, that alliance is under strain, even if the common interests ultimately prevail over present tiffs.

The stewardship of the global financial system is up to the US. Washington seems flatly opposed to anything that raises China’s financial profile and threatens the status of the dollar. It does not like being left out of new arrangements. In the last resort, the US must decide how to integrate China into the pre-existing financial order without sullying free market principles. Keeping China at bay at all costs will probably encourage Beijing to build its own parallel system from scratch. THE FINANCIAL TIMES