What is the next step in China’s economic leadership?

At this moment in history, the global geopolitical dynamics are changing before our very eyes. China is rising on the global stage, as are Chinese companies. Following the phenomenal economic successes over the past quarter century, China has gradually learnt how to more efficiently and harmoniously integrate into global markets and initiate a transition from a follower to an emerging leader.

Forced to Lead?

It is smart to utilize a country’s relative strength to build up its soft power and exert greater global influence. Taking a perspective from outside of China, this is happening right now in the global financial landscape with the establishment of a new multilateral institution, the Asian Infrastructure Investment Bank (AIIB) proposed and led by China, and supported by over 50 countries around the world. Despite concerns the AIIB will rival existing multilateral financial institutions like the World Bank and Asian Development Bank, in fact the AIIB has been established to compliment the current framework and further facilitate large scale infrastucture investments across the Asian region. According to the Chinese government’s public statement, the goal is to fill in the gap to feed increasing capital needs in support of Asia’s infrastructure development.

Importantly, establishing the AIIB comes at a time when China is facing pressing domestic economic challenges with historic low GDP growth rates at around 7% for the first time since 2009. Slowing GDP growth in China has global economic ramifications particularly for China’s largest export markets in Europe already burdened by weaker economic circumstances. Furthermore, China’s insatiable demand for raw materials has fueled the economic progress of nations like Australia, Indonesia, Brazil and Canada, so these economies are intrinsicly linked with China. Therefore, China is exploring ways to diversify its economy and explore new avenues to accelerate growth and adjust its economic model to increase prosperity in a more sustainable fashion. Indeed, this is a huge challenge China is facing and actively trying to overcome.

Therefore, China is taking a leading role in earning the trust of its neighbour’s by painting a picture for a sustainable long term vision of enhanced regional economic cooperation and prosperity. The AIIB is part of the long term strategic vision that incorporates aggregating global investment capital into the burgeoning infrastructure needs of the Asia region. Building new and efficient infrastructure in India for example, will make imports more affordable and exports more valuable, whilst having a positive social impact on the lives of millions of Indians. It also provides more opportunities for China to export goods and services across the region. But, new infrastructure not only benefits Chinese exports, but greatly benefits the vital raw material exporters in the region like Australia, Indonesia and New Zealand.

Increasing regional and economic cooperation through vital geopolitical collaboration comes at a time when economic nationalism is increasing in other regions. The AIIB offers the broader Asian region a unique opportunity to include natural partners and stakeholders to benefit from the rising economic tide and shared prosperity. This is a win-win situation and in fact, as the AIIB becomes more inclusive it provides greater capacity for the benefits to flow externally. But importantly for China, having increased regional and economic partnerships provides the opportunity for vital skills, expertise, governance and best practices to flow internally that in turn benefit China as it continues to rise.

Historic opportunity

Beyond the political considerations of various countries, the debate over AIIB has largely focused on the bank’s potential governance, transparency, environmental and social standards for infrastructure project financing. By implication, the concerns raised question the existing standards of doing business. That being said, the creation of the AIIB offers a generational opportunity to establish a common code of best practices for infrastructure investment financing that grasps the opportunity to incorporate a robust environmental, social and governance framework among members.

Today, sustainability issues are even more important as global populations become more aware. From a Chinese perspective, the AIIB provides a great opportunity to build up its soft power credentials and be seen as a responsible leader in this sphere. After all, China has a proven record of leading the world’s largest and most successful poverty alleviation campaign in human history. Over the last thirty years China has lifted approximately six hundred million people out of extreme poverty, primarily due to a combination of successful policy and ambitious economic reform.

These great achievements have helped accelerate the realization of the Millennium Development Goals (MDGs) and the current affirmation of the Sustainable Development Goals (SDGs). China’s successful story is not only recognized by the world, but also has inspired many developing countries to follow the tireless efforts to fight against poverty. AIIB could be the most immediate opportunity for China to work closely with its fellow member states to invent a whole new way of doing business. On the one hand by thinking outside the box, and on the other by innovation and establishing leading standards and practices strengthening the bank’s sustainability and social responsibility. At the end of the day, it will be the people across the region who ultimately benefit from the improvement in basic infrastructure and the associated positive social impact. China is poised to step up to the plate and lead a multilateral financial institution perhaps on the cusp of another great economic success story.

This is a challenging job. However, it is worthwhile to note a number of international organisations have actively developed the basic framework for the concept of social responsibility and sustainability. These include the ten universal principles by the United Nations Global Compact, the Principles for Responsible Investment by the UN Global Compact and UN Environment Program, and the Equator Principles in the area of project financing by the International Finance Corporation. Those universally supported principles and experiences can be good reference points for the AIIB, without denying the fact that AIIB should aim to set its own rules and standards, to break the status quo and invent a new level of global excellence.

Notably, AIIB is taking shape against the broader backdrop of a new post-2015 agenda. The United Nations and its member states are developing Sustainable Development Goals (SDGs) to replace the MDGs. Not surprisingly, this new set of goals will more thoroughly incorporate environmental and social dimensions to the updated global agenda. China has the opportunity to build an updated portfolio in front of the whole world as a leader on sustainability and highly align such globalization efforts like AIIB with the forthcoming SDGs. This is the right time.

Leader or Follower?

While the Chinese government becomes more active on the global stage by launching the AIIB, Chinese companies should also step up and be more proactive in terms of participating in the global policy making process. The private sector should realize in the long run, such engagement could be very beneficial, enabling companies to shape a “soft” environment to operate within. Globally, there is an increased acceptance that corporate social responsibility is a key part of any business model and goes beyond merely focusing on business and investment opportunities.

Many global institutions such as the World Economic Forum and United Nations Global Compact have provided companies with access to the global discussion on pressing challenges, and in many cases, offer invaluable opportunities for companies to participate in shaping the global agenda. On each platform, various working groups have been established to bring together like-minded companies with other stakeholders in solving problems faced in the areas of supply chains, climate and water, anti-corruption, the empowerment of women etc.

Three major Chinese companies, China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (SINOPEC), and China National Offshore Oil Corporation (CNOOC), participated in a project led by the United Nations, called Business for Peace. The initiative aimed to work out a guideline for investors and companies that have a business interest and operations in conflict affected regions to advance peace through responsible investment and business practices.

It is recognized by companies that participation in such an exercise can help them raise awareness of the pressing issues they face, and share knowledge from the project that could guide more companies to make positive contributions to peace and development in these high risk regions where they operate. There is an historic opportunity to scale up and align business efforts to make positive contributions to similar goals of all human kind.

The fundamental improvements will only happen if more private sector companies engage and join forces. The AIIB is a unique multilateral framework to collaborate regionally, geographically and cooperatively with all stakeholders to positively influence the allocation of capital, and achieve immense positive social impact through the provision of large scale investment grade infrastructure projects ensuring mutual interest and shared prosperity, sustainably.

Authors: Meng Liu, China Representative, United Nations Global Compact. Jeremy Balkin, Founder, Give While You Live, Young Global Leader

Image: Newly-built residential buildings are seen next to the partially-frozen Songhua River and a bridge in Jilin, Jilin province February 3, 2015. REUTERS/Stringer