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The UK’s decision to join a new China-led international financial institution has opened a sharp public dispute with the US about how to deal with a rising China.

The Obama administration saw the British move to become a founding member of the Asia Infrastructure Investment Bank as part of an approach of “constant accommodation” of China, a senior US official said on Thursday. The dispute over the new development bank, which could eventually become a rival to the World Bank, has become part of a broader argument about how western governments should deal with a more ambitious and powerful China.

The Obama administration says if the G7 group of leading economies and others rush to join institutions such as the AIIB, it could end up becoming an instrument of Chinese foreign policy.

Instead, US officials argue, western countries can help shape the rules and standards that the bank will adopt by staying on the outside.

The argument comes after the British government was publicly restrained in criticising China over its handling of pro-democracy protests in Hong Kong.

The UK Treasury said George Osborne, chancellor of the exchequer, had discussed his intention to become a founding member of the AIIB with Jack Lew, his US counterpart. Mr Osborne knew that his decision would not be popular with Washington.

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

“Joining the AIIB at the founding stage will create an unrivalled opportunity for the UK and Asia to invest and grow together,” the chancellor 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 — allies of the US in the region — did not become founding members. There has been a strong debate within the Australian cabinet about whether to join following US pressure to stay on the sidelines.

A decision by the big economies to join now would give up any leverage they might have over the AIIB as it was being set up, the US official said, arguing: “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.”

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

When Mr Osborne visited Beijing in 2013 the UK chancellor said he wanted to “change Britain’s attitude to China”. Mr Osborne hailed the British government’s sovereign renminbi bond issue in October, the first by a western government. The UK 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.

The House of Commons foreign affairs committee said last week that 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 MPs were prevented from visiting Hong Kong in November during the protests.

While the relationship between Washington and London remains strong, the dispute over the China-led development bank is the latest warning sign for Britain about its relevance in the US.

US officials have been alarmed by the British debate over its place in Europe and worry that a British withdrawal from the EU will significantly weaken the international influence of an important ally. The Obama administration has also made no secret of the fact that during the crises of Ukraine and the future of the euro, Germany, not Britain, has been the dominant interlocutor for Washington.

Copyright The Financial Times Limited 2017. All rights reserved.

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