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The Tussle over AIIB – So Much ado about Influence?

The news about China the last few days is about how it is scoring a diplomatic coup d’état against the U.S. vis-a-vis Europe.  On March 12, Chancellor of the Exchequer George Osborne announced that the U.K. had applied to join the Asian Infrastructure Investment Bank (AIIB) as a founding member. If accepted, Britain would have been the first major Western country to become a member.

A few days later, Germany, France and Italy also announced that they too would join.  South Korea and Australia soon also switched their stance and are now on the verge of joining.

Japan appears to be the odd-power out in Asia now.  Given its history of deference to the U.S. (e.g. Plaza Accord) and its current diplomatic row with China, my money is on Japan not joining at this stage.  But even nationalistic and deferential Japan has not has not ruled out the possibility of joining at the founding stage.

The editorial board of the NYT today penned an editorial titled “U.S. Allies, Lured by China’s Bank.” The notion that China is “luring” U.S. allies seems to me … err … funny – even laughable. 

The AIIB is created to liberate Asia from the tight politicized strings attached to the “loans” and/or “grants” from current institutions such as the IMF, World Bank and Asian Development Bank. Many parts of Asia (and Africa) have already benefited from China’s infrastructural investments, without having to answer to Western concerns couched in Orwellian (double-speak) terms of “debt sustainability,” “environmental concerns,” and “societal responsibility.”

Note that I am not saying that as societies develop, there are no concerns about impact of development on society or environment.  Of course there are. But the truth is that there are often no clear answers to balancing the many competing needs of a developing society.  When such concerns arise, they are best addressed locally, and not unilaterally or even multilaterally addressed by rich, far-away foreigners.

As colonialism and religious inquisitions of the last few centuries have shown, no matter how “well intended” a group of people want to shower another (e.g., “white man’s burden,” to save the unbelievers’ souls, etc.), much of the worst historical wrongs have been perpetrated by one group upon another in the context of “helping” another.

For the AIIB to be effective, China does not necessarily need U.K., or France, or for that matter Japan or Australia to join as founding members.  Hey, why share the glory with former colonialists and current vassal states of the U.S.?

After all, even with the rich powers from Europe joining, the initial capitalization for the bank is estimated to be still at most somewhere between US$50-$100 billion.  Compare that against the fact that the capital needs for infrastructure projects in Asia in the next decade alone is estimated to be US$8 trillion.

The notion that China intends to use the AIIB to challenge the West appears even more groundless when one notes that the AIIB is actually puny compared to existing institutions such as the World Bank and Asian Development Bank. For example, the World bank has a capital of around US$220 billion and the Asian Development Bank at US$175 billion, 1 and the International Monetary Fund of around US$760 billion 2.

If the goal is to subvert, wouldn’t China contribute more (a lot more) than US$50 billion?

The fact that the U.S. feels threatened by a project as modest as the AIIB from China tells us much about how possessive the U.S. sees itself in suppressing world affairs and development.  I myself yearn for a day where if there has to be a dominant power in the world, it would care more about the welfare of the world than the influence it can extract from the world…

[Update on 3/31/2015: Here is a quick chronology backgrounder on the AIIB from Xinhua]

Notes:

  1. http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20141030000023&cid=1701
  2. http://en.wikipedia.org/wiki/International_Monetary_Fund
  1. N.M.Cheung
    March 24th, 2015 at 12:57 | #1

    U.S. should worry about AIIB. It’s not about the total capitalization, which understandably is small at present, but I would think will grow as more members join. It’s also about the convertibility of Yuan and her influence eventually as a reserve currency challenging dollar. China has at present $4 trillion foreign reserve mostly at low interest treasury bills. It behoves for China to utilize this reserve better while helping China building infrastructure needs for other countries such as high speed rails and ports. Unlike World Bank which U.S. has veto power, China gives up any such power play and the rest of the world likes it.

  2. March 25th, 2015 at 09:50 | #2

    @N.M.Cheung
    On the notion that China was seeking or has given up “veto” power to attract European support, China appears to be denying it outright. See, e.g., http://economictimes.indiatimes.com/news/international/business/china-dismisses-reports-of-seeking-veto-power-in-asian-infrastructure-investment-bank/articleshow/46691671.cms.

    BEIJING: China today dismissed reports that it was seeking or willing to forego its veto power in order to lure more European countries to join the AIIB, saying the new multilateral bank would be a “transparent and efficient” organisation.

    Vice Finance Minister Shi Yaobin dismissed the assumption that China sought or was giving up its veto power in the Beijing-backed Asian Infrastructure Investment Bank (AIIB).

    “It is an unfounded proposition that China seeks or foregoes veto power,” Shi said.

    “As the number of AIIB founding members continues to rise, the share awarded to each country will drop accordingly,” he said.

    Britain, France, Germany, Italy, Luxembourg and Switzerland recently applied to join the USD 50-billion AIIB, which has 27 prospective founding members including India.

    China has also invited the US, Australia and Japan to be a part of the new bank, viewed by many as a potential competitor to the US-led World Bank and the Japan-led Asian Development Bank. Beijing has, however, denied any such intentions.

    “Prospective founding members are deliberating on the AIIB agreement, including its decision-making mechanism and share distribution,” Shi was quoted as saying by state-run news agency.

    “As a proposition aimed at mutual benefit and win-win results, the AIIB will be an open, transparent and efficient multilateral organisation,” he said.

    Shi said whether the Beijing-headquartered new bank will set up regional centres is a matter of future consultations in consideration of its business performance.

    “The AIIB will draw on experience from multilateral development banks such as the WB and ADB, to avoid their mistakes and seek even better standards. This way, the AIIB will turn into a financing platform that’s professional and efficient,” he added.

    He said all countries interested in the AIIB are welcomed to join it.

    I don’t quite understand the link between AIIB and a supposed challenge to the Dollar. A challenge to the Dollar can be hypothesized given China’s growing economy, and the setting up of trade pacts that trade in Yuan, but I don’t see how the AIIB is another challenge. Can you or someone else link a good article to enlighten me on that aspect of it?

  3. March 31st, 2015 at 23:37 | #3

    As 3/31/2015 deadline for becoming “founding members” approaches and passes, xinhua has this to say:

    BEIJING, March 31 (Xinhua) — There are but a few hours left for those countries who aspire to be founding members of the Asian Infrastructure Investment Bank (AIIB). Time is up at midnight.

    As of 6 p.m. Tuesday, 46 countries had applied to be founders of the bank, but the United States and Japan have remained on the sidelines. The financial authority of China’s Taiwan said on Tuesday afternoon that the island has submitted a letter of intent on joining the mainland-proposed AIIB. Founders will be finalized on April 15.

    TIMELINE

    The bank was proposed by Chinese President Xi Jinping in October 2013.

    A year later, and 21 Asian nations, including China, India, Malaysia, Pakistan and Singapore had signed an agreement to establish the bank, headquartered in Beijing.

    On March 12, 2015, Britain applied to join the AIIB as a prospective founding member, the first major western country to do so. France, Italy and Germany quickly followed suit.

    Other nations will still be able to join the bank after the deadline, but only as ordinary members.

    Negotiations on the AIIB charter are expected to conclude in the middle of the year and the bank should be formally established by the end of this year.

    BUILDING FOR SUCCESS

    As its name suggests, the AIIB will finance infrastructure–airports, mobile phone towers, railways, roads–in Asia.

    There is a yawning infrastructure funding gap in Asia. The Asian Development Bank (ADB) pegged the hole at about eight trillion U.S. dollars between 2010 and 2020.

    The World Bank and Asian Development Bank are more focused on poverty reduction and their funds alone are insufficient to bridge the gap, according to Hans-Paul Burkner, chair of the Boston Consulting Group.

    While both the ADB and World Bank focus on a broad range of development programs including agriculture, education and gender equality, the AIIB will concentrate on infrastructure alone. The IMF, World Bank and ADB have all welcomed the AIIB initiative and see room for collaboration

    The bank will have an authorized capital 100 billion U.S. dollars and the initial subscribed capital is expected to be around 50 billion dollars. Although hardly enough to meet demand, it will still be a helpful boost.

    GOOD FOR ASIA; GOOD FOR ALL

    As the first China-proposed multilateral financial institution that has included developed nations as members, the AIIB offers an opportunity to test China’s ability to play its role as a responsible country, analysts said.

    The initiative followed years of frustrated attempts to reform the existing international financial institutions, which have failed to reflect the changing landscape of global economy.

    The existing economic system, shaped by the Bretton Woods agreement seven decades ago, is dominated by western countries and increasingly unrepresentative of the world’s economic architecture. Since the global financial crisis, emerging markets are becoming the main development drivers. Asian countries now make up one third of the global economy.

    As global economic power shifts to emerging markets, it is only fair that they should play a bigger role in global institutions. Burkner said, “if it is not happening, then it is important to create additional institutions which, to some extent, cooperate and compete with existing institutions.

    “There will be cooperation and also some healthy competition with the ADB and the World Bank.”

    Good for Asia; good for the world as a whole.

    Jin Liqun, secretary general of the interim secretariat of the AIIB, regards the bank as a complement to, rather than a substitute for, the World Bank and the ADB. It will improve the existing international financial system, not overturn it, Jin said.

    The AIIB is just the start. Jim O’Neil, coiner of the BRICs acronym and former chairman of Goldman Sachs Asset Management, believes there are plenty more areas where China needs to be drawn in.

    With its Belt and Road initiatives, the AIIB and other entities (a joint development bank with BRICs partners Brazil, Russia, India and South Africa, for example) China is trying to make its own development beneficial to the whole continent.

    After over three decades of fast expansion, benefiting from globalization and opening-up, China can now share the fruits of its development and build a “community of common destiny” through international and regional cooperation.

    INTO THE UNKNOWN

    Even after membership is finalized, many questions will remain. How will the AIIB be governed? What will be the decision-making process be? What lending criteria will it adopt? Will its policies be transparent and address issues like the environment?

    The answers to those questions will determine whether the bank stands or falls.

    While details are pending, China has repeatedly stated that the AIIB will uphold high standards and learn from the best practices at existing multilateral financial institutions.

    During an interview with Xinhua, Lou Jiwei said the bank will have a three-tier structure — a council, a board of directors and management, as well as a supervising mechanism to ensure sufficient, open and transparent policy-making.

    The prime challenge for the AIIB is how to channel funds to the most productive projects while maintaining security of repayment.

    Zhang Yuyan, chief of the institute of world economics and politics at the Chinese Academy of Social Sciences, a government think tank, believes that, since infrastructure projects usually have long funding cycles and great potential for waste, sustainable profitability will be the real test of the AIIB.

    Rigorous consultation and skillful management to coordinate and balance various demands and interests among members will be of the essence, Zhang said. This will be challenging at the very least, with so many histories, cultures and development stages on show.

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