Freed only last year from the constraints of cautious central banker-speak, the former chairman of the Federal Reserve did not mince his words as he spoke to a lunchtime gathering in Hong Kong.
“This is a matter of national prestige and I understand that, but the economic benefits really are dwarfed by the benefits of the strengthening of the Chinese economy,” he said of the renminbi's growing global profile. “It's symbolic. It doesn't make a great deal of difference to anything.”
With China's AIIB in mind, meanwhile, he blamed the American legislature for the inefficient splitting of government efforts to coordinate infrastructure development around the world.
“If Congress will not allow governance systems to appropriately reflect the changing economic weights I understand why other countries will take their marbles and go home,” Bernanke said, noting that Congress blocked efforts by the International Monetary Fund in 2010 to give more voting rights to emerging countries.
Congress has also dragged its heels on reform of the World Bank. The US, which holds around a 16% interest in the World Bank, can effectively block decisions at the lender as current rules call for a super-majority of 85% to pass measures.
China plans to anchor the AIIB with $50 billion, while forty-six other participants from the Asia-Pacific region and Europe will stump up an aggregate $50 billion. Investment decisions will likely mirror the structure of existing multilateral lenders like the Asian Development Bank, which accords voting rights in proportion to the size of a member state’s contribution.
How China exercises its control position in the AIIB is a contentious issue. Delegates at an AIIB chief negotiators summit in Singapore last month, including Philippines finance minister Cesar Purisima speaking on the sidelines of the event, said non-Asian members and even small shareholders would be given a vote on the bank's board. But there were no official statements to that effect.
What did come out of the summit was the bank's Articles of Agreement, to be finalised in June, and an end-of-year start-up date for the lender.
“Asia's growing very quickly so I'm sure there are many good projects,” Bernanke said of the region's potential for infrastructure development and the possible need for a $100 billion multilateral lender like AIIB.
China believes the time is ripe for a new multilateral infrastructure lender. The ADB pegs demand for Asian infrastructure investment at $730 billion a year for the next decade. Other estimates go even higher, indicating ample room for more players.
However, Bernanke noted the role for institutions such as the AIIB is less important because private capital is stepping up. There are plenty of deals to go around but major infrastructure projects, which in the past were underwritten by multilateral institutions, are instead being cherry-picked by the private sector.
“It is the private sector that is squeezing out the World Bank more than anything else because they’re taking up many of the profitable investments,” the former Fed chairman said.
Renminbi's globalisation
Glimmers of the ultra-cautious policy banker returned momentarily when Bernanke was asked how he might grade Beijing on the way it is handling the internationalisation of the renminbi.
“I think they are doing good job," he said. "It’s got to be gradual process.”
“I know governor Zhou very well," he continued, referring to Zhou Xiaochuan, governor of the People’s Bank of China. "He and I have talked about this very well and he understands also that it has to be an incremental process.”
However, he downplayed the importance of the Chinese currency's globalisation and advised the Chinese government to focus instead on domestic reforms that lay the foundations of more sustainable growth.
“Renminbi as a share of global reserves is very very tiny; as a share of the transactions that are made it is modest still,” he said.
According to Swift, the organisation that banks use to coordinate international transactions, the renminbi is now fifth-most active currency for global payments. Even so, it still only accounts for 2.07% of payments worldwide, Swift said in its May report.
