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US accuses UK over China stance

Geoff Dyer and George Parker
Alex Wong | Getty Images

The White House accused the U.K. on Thursday of a "constant accommodation" of China after the British government decided to join a new China-led financial institution that could become a rival to the World Bank.

The rare rebuke of one of the U.S.'s closest allies comes as Britain prepares to announce it will become a founding member of the $50 billion Asian Infrastructure Investment Bank, making it the first G-7 country to join an institution launched by China last October.

The reprimand is a rare breach in the "special relationship" that has been a backbone of western policy for decades. It also underlines U.S. concerns over China's efforts to establish a new generation of international development banks that could challenge Washington-based global institutions. The U.S. has been lobbying other allies not to join the AIIB.

Relations between Washington and David Cameron's government have been strained over recent weeks, with senior U.S. officials criticizing Britain over falling defense spending, which could soon fall below the Nato target of 2 percent of gross domestic product.

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A senior administration official told the Financial Times that the British decision was taken after "virtually no consultation with the U.S." and at a time when the G-7 had been discussing how to approach the new bank.

"We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power," the U.S. official said.

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British officials were publicly restrained in criticizing China over its handling of Hong Kong's pro-democracy protests while Mr Cameron has made it clear he has no further plans to meet the Dalai Lama, Tibet's spiritual leader — following a 2012 meeting that prompted a furious response from Beijing.

While Beijing has long been suspicious about U.S. influence over the World Bank and IMF, China also believes that the U.S. and Japan have too much control over the Manila-based Asian Development Bank. In addition to the AIIB, China is the driving force behind the creation last year of the Brics development bank and is promoting a $40 billion Silk Road Fund to finance economic integration with Central Asia.

The Obama administration has said it is not opposed to the AIIB, but U.S. officials fear it could become an instrument of Chinese foreign policy if Beijing ends up having veto power over the bank's decisions.

The U.K. Treasury denied that Britain had acted out of the blue, saying there had been "at least a month of extensive consultation" at a G-7 level, including with Jack Lew, U.S. Treasury secretary.

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George Osborne, chancellor of the exchequer, was unrepentant, arguing that Britain should be in at the start of the new bank, ensuring that it operates in a transparent way. He believes it fills an important gap in providing finance for infrastructure for Asia.

"Joining the AIIB at the founding stage will create an unrivaled opportunity for the U.K. and Asia to invest and grow together," Mr Osborne said. He expects other western countries, which have been making positive noises privately about the new bank, to become involved.

Beijing launched the AIIB in October with the backing of 20 other countries, but Japan, South Korea and Australia — America's main allies in the region — did not become founding members. There has been a strong debate with the Australian cabinet about whether to join, after U.S. pressure to stay on the sidelines.

A decision by the major economies to join now would give up leverage they might have over the AIIB as it was being set up, the U.S. official said: "Large economies can have more influence by staying on the outside and trying to shape the standards it adopts than by getting on the inside at a time when they can have no confidence that China will not retain veto powers."

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Mr Osborne's decision reflects London's desire to pursue commercial relations with China aggressively, even at the expense of antagonizing Washington.

When Mr Osborne visited Beijing in 2013 he said he wanted to "change Britain's attitude to China"; last October the chancellor hailed the British government's sovereign renminbi bond issue, the first by a western government. It has been keen to establish the City of London as a platform for overseas business in the Chinese currency as it starts to play a bigger role in the global economy.

Last week, the House of Commons foreign affairs committee said the British government should press China harder to introduce political reforms in Hong Kong. The committee also said it was "profoundly disappointed" at the "mild" response of the government when its members were prevented from visiting Hong Kong in November during the protests.

Q&A: The Asia Infrastructure Investment Bank

The AIIB — what is it?

The Asia Infrastructure Investment Bank is one of four institutions created or proposed by Beijing in what some see as an attempt to create a Sino-centric financial system to rival western dominated institutions set up after the second world war. The other institutions are the New Development Bank (better known as the Brics bank) and a contingent reserve arrangement, seen as alternatives to the World Bank and the International Monetary Fund; and a proposed Development Bank of the Shanghai Co-operation Organisation, a six-country Eurasian political, economic and military grouping dominated by China and Russia.

What is it for?

The AIIB offers an alternative to the Asian Development Bank, which focuses on poverty relief and lacks the firepower to undertake the large-scale infrastructure projects that are the remit of the AIIB.

What's wrong with that?

In principle, nothing. But the ADB and the AIIB are seen as rival rather than complementary organisations. The ADB was established in 1966 and now has 67 members including 48 from Asia and the Pacific. But it is seen by many in the region as overly dominated by Japan and the U.S., which are by far its biggest shareholders with 15.7 percent and 15.6 percent respectively (compared with China's 5.5 percent). The AIIB was founded last year with 21 members. Notably absent were the U.S., Japan, Australia and South Korea. The U.S., it is said, lobbied countries not to join, while China worked hard to get them in.

Does that matter?

Both sides clearly think it does. Proponents of the AIIB criticise the ADB for being overly bureaucratic. The AIIB's critics say the new lender will play fast and loose with conditionality and other restrictions on the behavior of borrowers, allowing corruption to flourish. More significant, however, are strategic considerations. The U.S. and China are increasingly engaged in a struggle for regional influence, played out through institutions such as these.