Michael Pettis in GlobalSource Partners’ newsletter highlights the importance of Asian Infrastructure Investment Bank (AIIB) and London’s decision to join it.
London’s decision to join the AIIB creates a spectacular political theater
Special points to highlight in this issue:
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- Investors seem to be increasingly acknowledging that the world suffers from a structural excess of savings over desired private investment, and it is this excess that was responsible for the excess consumption during the bubble years and the weak demand and high unemployment since then.
- The best path for the global economy to follow would be if policymakers in creditworthy countries took advantage of very ample credit availability as extraordinarily low long-term rates to fund a massive rebuilding of productivity-enhancing infrastructure. Policy gridlock and confusion about the distinction between rising debt and a rising debt burden, however, make this unlikely.
- London’s decision to join the Asian Infrastructure Investment Bank (AIIB) was shocking, and it created spectacular political theater, especially embarrassing for Washington and favorable for Beijing, but the importance of the AIIB has been overstated. It is unlikely to represent a significant shift in the way trade and capital flows are managed in the future.
- And it will do very little, if anything, to further the RMB’s progress towards becoming a major reserve currency. The only very plausible ways in which this can happen is either if the PBoC were to take on trillions of dollars of extremely risky exposure to very weak sovereign credits, or if China were willing to run large trade deficits.
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