The Real Reason Behind the Asian Infrastructure Investment Bank10 min read

The Real Reason Behind the Asian Infrastructure Investment Bank

This is an extremely important letter, so please be sure to read it in its entirety.

Our greatest historical empires have failed.

Their failure was not the result of poor war strategies, nor the result of a failed leader.

Their failure was ambition: the mentality that one empire could rule all.

The Coming Death of an Empire?

When one empire falls, another takes its place. This is not conjecture, but the facts of history.

Our world has come to a crossroad where the power of our current leading empire is severely being threatened by other rising empires. The path it chooses will determine the fate of our lives.

Over the past few years, I urged you not to take the power shift from the West to East lightly.

I can’t be sure of the consequences, but I am sure that no empire maintains its rule forever.

I am not the only one who feels this way.

What do you think? Is the United States losing its power?

CLICK HERE to Share Your Thoughts

In Defiance of the United States

Last week, the United States received a very bad omen: prominent western nations have decided to join China.

I’ll explain more in a bit.

Less than a year ago, I wrote about how the BRICS development bank was being setup to combat the control that the US-led International Monetary Fund (IMF) had on the world, and how it could lead to de-dollarization:

“…Five of the biggest major emerging national economies, Brazil, Russia, India, China, and South Africa (BRICS) signed a long-anticipated document to create a $100 billion BRICS Development Bank, with headquarters in Shanghai.

The institution will counter the influence of Western lending firms as well as the dollar, and give way for developing economies to grow without being forced into unfair terms from Western lending firms.

The creation of this bank is not only a direct threat to the dollar, but also a direct threat to the United States and its control over emerging economies.

Recall the Bretton Woods summit in 1944 that became the basis for the modern system of central banking and foreign exchange as well as the creation of both the World Bank and the IMF.

Their creation gave Western powers control of the world through loans to nations that simply could not afford to pay them. In the end, many of these nations are forced to privatize state-owned assets in order to fulfill their debt obligations.

In other words, it’s a politically correct way to seize the assets of a country and hand them over to corporations and bankers for profit.

…The development of the BRICS Development Bank gives poor developing nations (may I add resource rich) the option to potentially receive better lending terms. In addition, these nations no longer have to rely on the harsh lending terms from Western banks.

The BRICS are quietly telling the world that it no longer has to rely on the dollar and Western banks to grow.”

The BRICS development bank – now called the New Development Bank (NDB), headquartered in China, is an equal partnership amongst the BRICS nations. The bank makes sense, but it will still be no match for the IMF or the World Bank.

Why?

The Veto Power of the United States

Both the IMF and World Bank, the world’s largest public lenders, are led by the United States – a nation that controls 16.34% and 16.75% of the banks’ voting power, respectively.

That means every loan, and every action, by the two biggest public world lenders, must be approved by the United States. Furthermore, in both organizations, the United States is the only country with veto power – that’s short for the ability to do whatever it wants.

Members of the IMF have fought against the veto power of the United States for many years, but with no success.

In November 2010, the IMF agreed on wide-ranging governance reforms to reflect the increasing importance of emerging market countries, which included a big change in the amount of financial injection. A month later, this reform was approved.

Yet, nearly five years later, nothing has happened.

Why?

Every country in the IMF has a quota. This quota represents the amount of maximum financial commitment to the IMF, its voting power, and has a bearing on its access to IMF financing.

The higher a nation’s quota, the more influence it has on the IMF.

If the 2010 reform is implemented, it will:

  • double quotas from approximately SDR* 238.5 billion to approximately SDR 477 billion (close to US$737 billion at current exchange rates),
  • shift more than 6 percent of quota shares from over-represented to under-represented member countries,
  • shift more than 6 percent of quota shares to dynamic emerging market and developing countries (EMDCs),
  • significantly realign quota shares. China will become the 3rd largest member country in the IMF, and there will be four EMDCs (Brazil, China, India, and Russia) among the 10 largest shareholders in the Fund, and
  • preserve the quota and voting share of the poorest member countries. This group of countries is defined as those eligible for the low-income Poverty Reduction and Growth Trust (PRGT) and whose per capita income fell below US$1,135 in 2008 (the threshold set by the International Development Association) or twice that amount for small countries.

*Special Drawing Rights – The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies (currently the U.S. dollar, Euro, Japanese Yen, and the British pound), and SDRs can be exchanged for freely usable currencies.

Now for the quota increases under the 14th General Review of Quotas to become effective, the entry into force of the proposed amendment to reform the Executive Board is required, as well as the consent to the quota increase by members having not less than 70 percent of total quotas (as of November 5, 2010).

As of March 4, 2015, 163 members having 80.17 percent of total quota had consented.

That means that the majority of nations approve the new quota increase.

Yet, the quota hasn’t changed.Why?

Because, as mentioned above, the quota increase is still dependent on the approval to reform the Executive Board.

In order for the proposed amendment on reform of the Executive Board to enter into force, acceptance by three-fifths of the Fund’s 188 members (or 113 members) having 85 percent of the Fund’s total voting power is required.

As of January 27, 2015, 146 members having 77.07 percent of total voting power had accepted the amendment.

There’s only one country that can change that: the United States of America.

As I mentioned earlier, the US has just over 16% of the voting power at the IMF. If the remaining 7% of the votes accept the amendment, that still leaves us with only 84% – 1% shy of the required 85%.

That’s the power of the US.

Now the question is: why would the US not want to accept this reform?

What do you think will happen if the US accepts the reform?

Power Struggle

As mentioned, the 2010 reform would double the amount of permanent funding available to the IMF, and potentially reduce the US voting share below the 15 percent it needs to block major decisions.

In other words, the US will lose its veto power in the IMF, while China will dramatically gain more power.

It’s been five years since the 2010 proposal was put forth, and the next review is already coming up. The United States has still not ratified the reform.

The majority of the IMF members aren’t happy.

Via Bloomberg:

“IMF Managing Director Christine Lagarde had said she would give Congress until the end of last year (2014) before asking fund staff members to present alternatives.

…IMF country representatives began this month (January, 2015) to formally consider options to get around the U.S. impasse. While discussions are still in the early stages, one possibility would be to revise the formula for calculating each country’s share of the fund’s resources, the people familiar with the talks said.”

And they weren’t bluffing.

But instead of making changes to the IMF, they went one step further: they’ve retaliated in one of the most direct slap-in-the-face ways possible.

No Reform? No Problem

Along with the creation of the New Development Bank, China has also been busy creating its own international public lending institution to compete with the United States-dominated IMF, the World Bank, and the Japanese-led Asian Development Bank: The Asian Infrastructure Investment Bank (AIIB).

Instead of trying to change IMF policies and procedures, which could take years and many headaches, prominent members of the IMF have decided to join China – a nation, under the 2010 reform, that would suppress the veto power of the United States in the IMF.

Last week, four world economic powers said they would be joining China’s AIIB, despite the United States urging countries to think twice about signing up to a new China-led Asian development bank:

Via NY Times:

“Ignoring direct pleas from the Obama administration, Europe’s biggest economies have declared their desire to become founding members of a new Chinese-led Asian investment bank that the United States views as a rival to the World Bank and other institutions set up at the height of American power after World War II.

The announcement on Tuesday by Germany, France and Italy that they would follow Britain and join the Chinese-led venture delivered a stinging rebuke to Washington from some of its closest allies.

… The United States lobbied its allies not to join the new China-based bank. The United States has argued that the bank at best duplicates, and at worst undermines, the role of the Washington-based World Bank and the Asian Development Bank, which has its headquarters in the Philippines, a close American ally at odds with Beijing over the South China Sea. The I.M.F., which manages financial crises, is less directly affected.”

Shortly after, again in direct defiance to the plea of the United States, another world economic power announced it could soon join China.

Via Reuters:

Australia said on Friday there was a lot of merit in the China-led Asian Infrastructure Investment Bank (AIIB) while Japan’s finance minister signaled cautious approval of the institution that the United States has warned against.

… Australian Treasurer Joe Hockey said no final decision had been made on Australia’s involvement but the matter had been under careful consideration.

“More than 30 countries have already signed up. This is going to operate in our region, in our neighbourhood,” he told a radio station in Brisbane.

“There is a lot of merit in it, but we want to make sure there are proper governance procedures. That there’s transparency, that no one country is able to control the entity.”

Whether or not Japan joins remains to be seen, especially given their poor relations with China. However, it is believed that both South Korea and Australia could join and could make their announcement next week.

The United States’ lack of pace in the reform and governance of the IMF, World Bank, and Asian Development Bank, has now paved way for China to strike.

It’s biggest advantage?

As it stands, the Chinese will have nearly half of the voting power in the AIIB – which is more than the United States has in voting power in both the IMF and World Bank combined.

Whether or not these new proposed members of China’s AIIB can come to proper terms with China on the bank’s reforms is not the point of focus here.

The point of focus is that China is one big step closer in making its currency a rival to the dollar.

How?

The New World Currency?

The SDR, the main asset of the IMF, and can be exchanged for freely usable currencies. In other words, the asset is highly convertible and can be deployed for use all around the world.

Participating nations must exchange their own currency to make their contribution to the IMF. That means the bigger the SDR becomes, the more widely spread the dollar, pound, euro, and yen become.

China’s Renminbi (RMB) is not part of the SDR, but many IMF members – including Germany – are now supporting its inclusion. If this happens, China’s RMB could soon become a fully convertible currency, given the size of China’s reserves.

But China isn’t holding its breath – and neither are many members of the IMF.

While the spotlight is on what members will join China’s AIIB, the question every one should be asking is:

“If the IMF has its SDR, what will the AIIB have?”

Whatever it is, I bet it will include China’s RMB.

That means participating nations in the AIIB may have to exchange their currencies for RMB to participate.

That means China’s RMB will soon be even more wide spread.

When you factor in everything I have been telling you about China’s aggressive currency swaps, the mass accumulation of gold by Russia and China, the repatriation of gold by Germany (who has been insistently supportive of China’s currency), the picture becomes extremely clear: China’s currency will soon become convertible.

All of the events leading up to now have been a very carefully planned strategy by China, and its new Eastern and Western allies, to dethrone the US dollar.

If more countries announce agreements to join the AIIB next week, look for the dollar to halt its climb and begin to back peddle. That could also mean gold might bounce higher from here.

When a king’s rule is threatened, you can be sure that he will spare no expense in preventing his loss of power.

This includes sacrificing its pawns, knights, and bishops.

Be prepared to be sacrificed. An empire is being threatened.

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