Will Asia Bank on China?

If all goes as planned, China is set to announce the formal launching of the Asian Infrastructure Investment Bank (AIIB) at the Asia Pacific Economic Cooperation (APEC) meeting, to be held mid-November, 2014.

The symbolism of China launching the AIIB as a centerpiece of its hosting of APEC, amidst reported opposition from the United States and reservations from its major allies in East Asia, invites discussion about yet another manifestation of rivalry between Beijing and Washington. Yet, the real test is less in managing perceptions of that rivalry than in seeing that the new instrument serve its declared purposes well.

China’s campaign to enlist as many founding members as possible has been formally under way for over a year. Joining are all members of the Association of Southeast Asian Countries (ASEAN), including the Philippines, which during the same period has been in confrontation with China over maritime territorial issues. This record indicates that there is a fairly broad acceptance of the necessity for an additional development agency.

The AIIB’s focus on infrastructure, i.e., transportation, telecommunication, and energy projects, is indicative of a match between the capacity of Chinese corporations in those areas and the demand for capital for faster infrastructure development in most ASEAN countries. After years of sustained investment in infrastructure within China itself, there is a growing level of saturation of equipment manufacturing and project construction at home.

Traditionally, Chinese involvement in infrastructure development in other East Asian countries went through the route of bilateral investment, often with concessionary loans as part of the package. One of the limits in that approach is that Chinese corporations in those operations lose an opportunity of serious internationalization, as they did not have to answer demands from a cross-sector of funders.

With the AIIB, which is designed to function like other regional development banks, there comes an opportunity to push Chinese corporations to become more international through being subjected to supervision by an international team of stockholders. Furthermore, when more Chinese involvement in infrastructure projects abroad comes through the AIIB, risk and responsibility-sharing becomes possible, especially in the areas of dealing with social and environmental impacts that come with infrastructure projects such as hydropower plants and road construction.

As such, a truly meaningful deliverable in the AIIB would be the establishment and observation of standards for lending, together with accountable enforcement mechanisms. A ‘no questions asked’ approach would be disastrous for both the funders and recipients of AIIB’s loans. Among other things, the AIIB should adopt the Asian Development Bank (ADB)’s approach in securing co-financing as a precondition. It should also encourage joint-ventures in project implementation, in addition to internationalized procurement of equipment and facilities.

Creation of a regional development mechanism is by nature geopolitical, as is true of virtually all existent such banks. For China, though, the AIIB has to compete with available instruments such as the ADB and the World Bank, especially in the areas of gaining a social license for operations on the ground.

For the United States and its allies hesitant to join the AIIB as founding members, it is advisable to treat the new bank as an invitation to make existent instruments more responsive to development needs in the less developed Asian countries. Infrastructure is needed for overall development. A healthy competition is the interest of all parties.

China can and will launch the infrastructure bank. Whether it should is somewhat irrelevant because Beijing is going to do it anyway.

China clearly has the capital to put up the initial financing for the new bank. And the creation of an AIIB certainly has echoes of the Chiang Mai Initiative that was floated after the Asian Financial Crisis in the late 1990s. At the time, Asian nations wanted to have a regional financing mechanism, and in fact, it was Japan that proposed the Asian Monetary Fund as a mechanism to deal with future regional financial volatility. That idea was jettisoned in the face of opposition, particularly from the United States.

I agree with Professor Zha that the intent behind the AIIB is to provide infrastructure financing in needed areas since the existing international financial institutions (IFIs), at this point, are not doing as much infrastructure financing as they used to. There is more focus on the "software" aspect of development, such as training and best practices, among others. But the Chinese view of development needs, particularly in parts of the world it is concerned about, still involve a lot of "hardware—roads, bridges, rail, etc. China, with the AIIB, hopes to fill that gap. Moreover, I suspect another function of the AIIB is to align with China's ambitious idea of creating the so-called "21st century silk road," potentially connecting the old trade routes through Central Asia to Europe with Chinese-made rail and bullet trains.

From the Chinese vantage point, one of the motivations behind the creation of the AIIB (as well as the BRICs Bank recently) was frustration with the slow pace of reform within IFIs such as the IMF and World Bank. In fact, in the joint statement on the BRICs Bank, their dissatisfaction was made clear:

18. We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness. The IMF reform process is based on high-level commitments, which already strengthened the Fund's resources and must also lead to the modernization of its governance structure so as to better reflect the increasing weight of EMDCs in the world economy. The Fund must remain a quota-based institution. We call on the membership of the IMF to find ways to implement the 14th General Review of Quotas without further delay. We reiterate our call on the IMF to develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of EMDCs, in case the 2010 reforms are not entered into force by the end of the year. We also call on the membership of the IMF to reach a final agreement on a new quota formula together with the 15th General Review of Quotas so as not to further jeopardize the postponed deadline of January 2015.

Of course, any time a major power proposes changes and new mechanisms to the existing regional architecture, it can be disconcerting, especially in an environment rife with suspicion over intentions. But at the same time, it's not clear what the reported U.S. opposition to this fait accompli will accomplish. Instead of protestation, it would be more productive, in my view, to have a policy of trying to shape this new entity, especially if there are legitimate concerns about its lending standards, transparency, environmental impact assessments, and other practices. In fact, these are the areas in which IFIs have the most experience and comparative advantage. If Beijing is open to multiple stakeholders and aims to promote an international scope with the AIIB, then it seems some form of U.S. involvement would help the bank achieve global best practices. In addition, it would be in our interest to have at least a modicum of insight into how this bank will operate and what kind of projects it will lend to. Furthermore, U.S. involvement could also help position the AIIB as complementary to, rather than directly competitive with, existing IFIs.

The bottom line is that China is going to set this thing up. It would be worthwhile to think through a bit more whether the U.S. can and should have a participating role in the nascent Asian institution.

On October 2, 2013, President Xi Jinping met with the president of Indonesia Susilo Yudhoyono. President Xi proposed to establish an Asia Infrastructure Investment Bank (AIIB) in order to fund the infrastructure building in Asia. The proposal has been very well received by the ASEAN countries. Apparently, however, the United States is looking at the proposal with suspicion. For the time being, the United States does not want to join the bank and told its local allies not to join as well. I do not believe this is a constructive attitude.

Now, I am in Washington D.C., where I have met quite a few American colleagues and friends, many of whom believe that the United States should be a part of the effort. They are right. AIIB should be an area of cooperation between China and the United States. It should be a win-win project for the region. The reasons are obvious.

First, if you look around the world. There are so many crises. The Middle East is an epicenter of regional war, confrontation, and conflict. The Ukraine crisis persists without any signs of subsiding. Africa is struggling against Ebola with help from the international community. Additionally, the world economy is not in good shape. Some part of the world may slip again into recession. Against such a backdrop, East Asia remains the most dynamic and vibrant region in the world. Despite the tensions around territorial disputes, it still is the global growth center. ASEAN—an important part of East Asia with a population of six hundred million—has tremendous economic potential. Infrastructure is the bottleneck of its economic development. I went to Indonesia last April. My Indonesian friends told me that China has 104,000 kilometers of highway, while Indonesia has only 700 kilometers. If, one day, Indonesia succeeds in building its highway system up around the country, tremendous economic potential would be unleashed—for the benefit not only of Indonesia but also of the region.

Infrastructure building is very expensive. At this stage, Indonesia lacks sufficient investment. The same applies to many countries in the region. When it is founded, AIIB will be very useful to help many Asian countries in infrastructure building. If the United States and Japan join the AIIB together with China and the ASEAN countries, AIIB will play an important role in promoting growth of the region. The whole world will also benefit. Everybody will be a winner.

Second, AIIB is not designed to replace the Asia Development Bank or any other bank in the world. Many banks do not want to invest in infrastructure: it is a long-term investment from which returns usually come slowly. This is why the demand for infrastructure in the region is huge. AIIB will partly fill up the vacuum. Take ASEAN as an example. As far as China is concerned, prosperity among ASEAN countries is excellent news. In 1978, the trade volume between China and ASEAN amounted to $859 million. Last year, it rocketed to $443.6 billion at the great satisfaction of both sides. Infrastructure building in Southeast Asia will give a strong push to further economic and trade cooperation between China and ASEAN. That would be a piece of good news for everybody.

Third, AIIB can offer a wonderful opportunity for Sino-US cooperation. The United States is the only superpower and the largest developed country. China is the largest developing country. June 2013, in Sunnylands California, President Xi Jinping and President Obama agreed to build a new model of big power relationship, characterized by no conflict, no confrontation, mutual respect and win-win cooperation. The consensus reached by our two presidents shows the world that our two countries are determined to avoid a Thucydides trap. This is a reassurance not only to the region but also to the world. The new model of a big power relationship is a wonderful framework. We need to put flesh on the bones. AIIB is part of the flesh.
Asia is rising. The AIIB will contribute positively to the rise of Asia. China and the United States need to cooperate toward this wonderful undertaking for the benefit of Asia and the rest of the world.