China's economic diplomacy innovative

Arguably, China's boldest attempt to play a leadership role in global investment and trade came in two proposals. One was the proposal to establish the AIIB. The other is its promotion of trade and investment along the two new Silk Roads, known as the Belt and Road Initiative.

What are China's possible motives behind the AIIB's establishment? Like other countries making such endeavors, perhaps China too has geo-economic and geo-strategic motives. But dissatisfaction with US-led institutions alone is not the correct explanation, and there are reasons for that.

First, China can invest part of its foreign reserves in profitable areas instead of keeping them in US Treasuries where their real value is shrinking. Second, the AIIB will contribute to the internationalization of the Chinese currency. Third, the bank will help secure contracts for Chinese enterprises, which, in turn will boost employment opportunities at home. Fourth, since Beijing has been funding many infrastructure projects across the world through China Development Bank and China Exim Bank despite local resentment, a multilateral institution will give it a better chance of curbing malpractices by its own enterprises and face less local acrimony against its perceived economic intrusion.

China's economic diplomacy initiatives since 2012 reveal certain factors. First, the aim of its current leadership's economic diplomacy is to proactively shape the external environment. It has thus invited Asia-Pacific economies to share the fruits of common economic development and stability, and acknowledge the "new normal" of sustainable economic growth.

Second, the purported geo-strategic competition between China and the US and its allies needs to be seen in the right context. Many consider the competition to be mutually exclusive. But over the past few years, Beijing and Washington have pursued rule-based governance of investments through negotiations over a high-standard BIT. The two sides do differ over the TPP and FTAAP. Yet China's recent FTA agreements with Australia, Canada and the ROK (all US security allies) manifest the limits of their difference. So economies should realize they don't have to choose between China and the US for collaboration. In the end, parties cooperate on issues in which they can share the lowest common denominator of interests.

Third, the Chinese leadership is clearly demonstrating that China, too, can be innovative when it comes to handling multilateral trade and investment initiatives and further liberalizing its trade and investment regimes. Though limited in scope and depth, the country's new free trade zones are the result of its innovative investment and trade policies, as opposed to offering conventional project-based concessions to attract investment and tariff reductions to promote trade.

The true challenge for China now is to prevail in regional competition and be more attractive as a source of foreign direct investment.

The author is a professor of International Political Economy at the School of International Studies, Peking University.

Courtesy: China & US Focus