Asian Infrastructure Investment Bank: China As Responsible Stakeholder?

Daniel Bob, Tobias Harris, Masahiro Kawai, Yun Sun
August 7, 2015

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Introduction

In 2013, China announced it would establish the Asian Infrastructure Investment Bank (AIIB) to help meet the enormous demand for new infrastructure in Asia. In 2009, the Asian Development Bank (ADB) projected that such demand would reach $8 trillion between 2010 and 2020, vastly more than ADB and other existing multilateral development banks (MDBs) could finance.

Countries in the region responded positively to China’s proposal, with many pledging to join the bank. The United States and Japan, however, took a cautious approach. Despite the existing MDBs’ resource constraints, they viewed AIIB more as a challenge to the existing Bretton Woods institutions, than a complement.

As China moved ahead with its plans for AIIB, both the United States and Japan questioned China’s motivations and intentions as well as Beijing’s ability to create a high-standard, well-functioning international financial institution. The United States went further: it lobbied allies and partners against joining the bank.

To the apparent surprise of both Washington and Beijing, on March 12, 2015, George Osborne, the United Kingdom’s Chancellor of the Exchequer, announced that Britain would join AIIB. The UK decision opened the floodgates, and another two dozen European and other countries with close ties to the United States quickly signed up. By the April 15, 2015, deadline, a total of 57 nations had joined as prospective founding members. Fifty of those nations have since committed to full participation as founding members, while the remaining seven have until the end of 2015 to make a final decision.

China’s push to establish AIIB and the response by the United States and Japan are important, in and of themselves, given Asia’s need for infrastructure. The actions taken by all three also seem to illustrate many of the issues that attend China’s swift economic, military and diplomatic rise. Indeed, China’s reemergence as a major power, the extent to which it works within the bounds of existing international institutions and follows global norms, coupled with other nations’ willingness to accept and accommodate that reemergence, present some of the more difficult issues of 21st century geopolitics.

To get a sense of how those issues are playing out among Bretton Woods institutions, Sasakawa USA commissioned papers on AIIB’s creation and development by experts from China, Japan and the United States.

Dr. Masahiro Kawai, former head of the Asian Development Bank Institute, provides a view from Japan. He compares AIIB to existing MDBs in its governance, financial operations, scale, membership, capital subscriptions, voting shares and focus, concluding that the new bank parallels them in many respects.

Dr. Kawai presents an example of how a new MDB, the Andean Development Corporation, cultivated a complementary relationship with a comparable existing institution, the Inter-American Development Bank, and how that experience might offer lessons regarding AIIB’s interactions with ADB.

He goes on to assess China’s mix of motivations in establishing AIIB, which included the goal of helping meet the large demand for infrastructure in Asia. He points to American, Japanese and European domination of existing international financial institutions. In large part, that domination results from the failure of the U.S. Congress to permit reforms at the International Monetary Fund that would give China and other countries voices in the Fund more commensurate with their increased economic power. China also saw the bank as a vehicle for expanding external demand to absorb domestic excess capacity and a potential support for its foreign policy objectives and ambitious plans to build overland and maritime “Silk Roads” connecting and integrating China with Central Asia, the Middle East, Africa and Europe.

Dr. Kawai then analyzes AIIB’s current weaknesses. Perhaps most important is its lack of a coherent vision, but the bank also has a governance structure and allocation of voting shares that China may overly dominate, lending policies that may neglect environmental and social standards or fail to follow best practices, potential difficulties attracting personnel with the requisite expertise and a possible unwillingness to coordinate with existing MDBs.

He explains the reasons behind Japan’s initial decision not to join AIIB, pointing first to a fundamental lack of trust between Tokyo and Beijing due to disputes over history and territorial issues. More directly, Japan had concerns over the new bank’s governance and lending standards, and suspicions that China would use AIIB primarily as an instrument for realizing its narrow economic and strategic goals. Finally, Dr. Kawai weighs the pros and cons of Japan joining the bank, and concludes that Tokyo should take a wait-and-see approach, though it should also encourage existing MDBs to engage and work with AIIB.

Yun Sun, a Senior Associate at the Stimson Center, examines China’s motivations in establishing AIIB. She argues that it fits into President Xi Jinping’s vision for the “great rejuvenation of the Chinese nation,” which includes establishing a new, “proper” international order reflecting China’s greater economic and political weight. AIIB was designed, in part, she says, to expedite the emergence of that new order.

Like Dr. Kawai, she cites such other motivations as China’s aim to help meet Asian demand for new infrastructure, provide financial and technical support for China’s Silk Road initiatives, further China’s strategic objectives, boost external demand to absorb excess capacity and give it a voice in an international financial institution focusing on Asia that corresponds to China’s economic influence in the region. She also notes that AIIB may help China achieve its aim of internationalizing the yuan.

Ms. Sun then examines how China’s plans for AIIB changed over time as a result of internal negotiations with members over the Articles of Agreement, the bank’s basic organizing document, as well as external pressure from the United States and Japan. China did not initially anticipate or encourage membership by non-Asian countries. However, as interest outside of Asia grew, China dropped its focus on establishing an exclusively regional bank, and it allotted 25% of capital shares to non-regional members. China also moved away from earlier proposals that the bank function as either an aid organization or a commercial bank, and clarified AIIB’s role as one close to that of existing MDBs.

In addition, China lowered its planned capital contribution to the bank – from a level that might have translated into absolute veto powers – and focused on a more circumscribed range of areas over which it could exercise dominance. Given such changes, Ms. Sun concludes that, while ultimate judgment must await the bank’s actual performance, AIIB’s development shows that, as China challenges the existing international system, those seeking to maintain the essential elements of that system may check China’s ambitions and push it closer to playing by the established rules.

Tobias Harris, Fellow for Economics, Trade and Business at Sasakawa USA, assesses the U.S. response to AIIB. He argues that it encapsulates problems in the Obama administration’s “pivot” to Asia, a set of policies designed to preserve and extend the U.S. diplomatic, economic and political position in the Asia Pacific. To counter widespread views within China and elsewhere that the pivot is a thinly veiled attempt to contain China, the administration has repeatedly denied it has any such intention, essentially reinvigorating the previous administration’s call for China to act as a “responsible stakeholder.”

However, rather than engaging AIIB constructively as a new multilateral opportunity to address the regional shortfall in infrastructure financing, the United States advocated against allies and partners participating in the new bank. Washington portrayed the bank as a threat to existing institutions by focusing on AIIB’s potentially lower standards.

Harris characterizes the rush of allies and partners in Europe and elsewhere to join the bank as an embarrassing failure of U.S. diplomacy. The U.S. arguments against AIIB focused on narrow, institutional standards within the bank, neglecting the larger strategic picture. Harris agrees with Yun Sun, however, that U.S. resistance to AIIB may have played a useful role in pushing China to improve the bank’s operating structure.

Harris goes on to explore the reasons for the imprudent U.S. response. Congressional opposition to the United States joining any new international financial institution, let alone meeting commitments to existing ones, fundamentally limits options for the United States. However, the U.S. response was also driven by an initial lack of information on AIIB, the administration’s preoccupation with Ukraine and the Islamic State, a predisposition within the Treasury Department to preserve the current Bretton Woods institutions’ position and a desire to maintain U.S.-Japan relations when Japan opposed the bank.

Harris concludes with his views on lessons learned for the United States in dealing with China and the development of new institutions in Asia. He maintains that the United States should offer its own solutions to regional problems rather than reflexively oppose new institutions offering fresh approaches. Moreover, Washington should recognize that agenda-setting and institution-building in Asia by China and others are not necessarily zero-sum games. Indeed, new initiatives may even potentially benefit the United States. He contends that Washington needs to address Beijing’s valid complaints over the governance of existing international financial institutions, which do not align voting powers for China and other members with their recently increased economic weight, or more fundamentally, allow China room to become a responsible stakeholder in the existing international system.

As of the summer of 2015, Japan has indicated that it may ultimately seek membership in the bank, while the United States is holding back but taking the position that it welcomes AIIB. Prime Minster Abe said at an April 28, 2015, joint press conference with President Obama that, “For Japan to participate in the AIIB is a decision that we have not taken yet.” At the same press conference, President Obama said in reference to AIIB, “To the extent that China wants to put capital into development projects around the region, that’s a positive. That’s a good thing.”

AIIB is scheduled to begin operations at the end of 2015, so both the United States and Japan will have to find ways to accommodate it. In the meantime, as these papers show, China is acutely aware of the international interest in the bank and appears likely to take the steps necessary to make the institution function appropriately. However, many operational details have yet to be worked out and many hurdles remain.

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