China blocks ADB India loan plan

Published on April 12, 2009 by brooks | This story has been viewed 428 times

China has allowed a long-standing territorial dispute with India to spill over into the international arena by withholding approval for a multilateral development plan for India.

The unusual friction between Asia’s two largest emerging economies occurred ahead of a board meeting of the Asian Development Bank at the end of last month, when China used its right to postpone approval of the lender’s country partnership strategy for India, outlining ADB lending to India until 2012.

The Chinese did not give a reason for their intervention. But the ADB said Beijing was unhappy that its Indian plan proposed lending to projects in the disputed north-eastern region of Arunachal Pradesh. People familiar with the plan said the projects were for flood management, water supply and sanitation. China and India fought a war in 1962 over disputed territory. China declared victory and then pulled back its troops.

The ADB would not provide the financial details of its India plan ahead of board approval, but India was the biggest recipient of ADB lending last year, with almost $2.9bn (€2.2bn, £1.9bn).

“The ADB has never deferred any loan to India. There is nothing like that [in the past],” said an ADB official in New Delhi.

China’s reluctance to approve the country plan for India comes at a time when Beijing is lobbying hard for a larger role in the International Monetary Fund and other international organisations. Analysts said this incident could herald future conflicts once China gains the influence it is seeking in multilateral organisations if future initiatives infringe on what Beijing sees as its interests

“This effort [to block the ADB’s plan for India] is a clear signal to partner countries that China sees partnership as sometimes less important than power projection,” said Russell Moses, a Beijing-based political analyst. “There are powerful officials who have no problem injecting strategic considerations into multilateral financial decisions.”

Some analysts also worry that greater Chinese involvement in institutions such as the IMF could allow it to wield veto powers over rescue packages for countries that did not comply with its political demands, especially over issues such as Tibet and Taiwan.

“Of course this [incident within the ADB] makes some people nervous but at this point it doesn’t seem so unreasonable given the fact this is contested territory,” said David Zweig, director of the Center on China’s Transnational Relations at the Hong Kong University of Science and Technology.

“I’d be much more concerned if this was China blocking a development plan for a country whose leader had recently met the Dalai Lama.”

The ADB said it hoped to reschedule a meeting to approve the Indian plan, but at a yet unspecified date.

Pratibha Patil, India’s president, emphasised India’s claim to Arunachal Pradesh during a three-day visit last week. She said the state was “never far from the centre of the nation’s consciousness”.

China assumes lead on world economy

The meeting yesterday between Barack Obama and Hu Jintao, his Chinese counterpart, on the sidelines of the G20 summit had been described by some as “the G2″ and marked the first encounter between the two men.

During the meeting, Mr Hu stressed China’s commitment to strengthening macro-economic control and expanding domestic demand, the White House said. The two leaders agreed to work together to renew world economic growth, strengthen the financial system, and establish a “strategic and economic dialogue” group that would first meet in Washington later this year. The White House also announced that Mr Obama would visit China in the second half of the year.

But with China demonstrating that it now wants to play a much more decisive role in international economic affairs, their meeting may have also set the tone for the rest of the London summit.

While talk of an emerging “G2″ ignores the increasingly multilateral basis of financial diplomacy, it does reflect the reality that, on an increasing range of international issues, little can happen without agreement between the US and China first.

For much of the build-up to the G20 summit, China was a quiet participant. However, in recent days China has launched a series of initiatives which demonstrate a desire to move centre-stage. Zhou Xiaochuan, Chinese central bank president, called last week for the eventual replacement of the US dollar as the global reserve currency.

Meanwhile, ahead of the summit China has established Rmb650bn ($95bn, €72bn, £66bn) worth of currency swaps with Indonesia, Belarus, Malaysia, Argentina, Hong Kong and South Korea – all of which indicate a more confident diplomacy and a larger future role in international finance for the Chinese currency.

The more assertive stance also reflects anger building up in China about criticism that its large current account surplus and reserves helped create the crisis and the realisation that its huge holdings of US bonds give it little direct leverage over US policy.

“In my 16 years of covering China I have never seen the country approach an international forum in such a proactive way,” says Dong Tao, economist at Credit Suisse.

“China has traditionally been passive on the international stage, being a listener rather than an opinion leader, but this time it’s different. China wants to make sure [its] voice is being heard.”

On the IMF issue, China has been under pressure from the US and the UK to start making a substantial contribution to boosting the IMF’s coffers, similar to the $100bn already pledged by Japan and the European Union.

China initially pushed back strongly against the idea, arguing that it was still a poor country. Yet over the past two weeks the Chinese line has softened somewhat, prompting speculation that it will inject substantial new funding.

However, Chinese officials have also made clear that their condition is accelerated reform of the IMF to boost China’s voting rights.

Moreover, Hu Xiaolian, deputy governor of the central bank, said last week that a quicker way for the IMF to raise new funds might be for it to issue bonds that China and other countries would be willing to buy.

“Having made these points forcefully, the Chinese now realise they would gain a tremendous moral advantage by appearing flexible and providing more resources to the IMF at a critical time for the institution and the world economy,” says Eswar Prasad, a professor at Cornell University and former head of the IMF’s China division.

Observers had been watching closely the conversation about China’s ideas for a new global reserve currency using an IMF currency basket. But the issue was not raised in yesterday’s meeting.

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