Money Talks: China and the AIIB

Japan’s ambassador to Beijing announced on March 30th that Japan is likely to join the Asian Infrastructure Investment Bank within a few months. Masatio Kitera told the FT that ‘he agreed with Japanese business leaders’ belief that the country would sign up to the China-led development bank by June’.[i]


Image courtesy of World Bank Photo Collection, ©2012, some rights reserved.

This was part of a larger trend of countries joining the AIIB in spite of US reservations. By the application deadline of March 31st, almost 50 countries had handed in their applications to join as founder members.[ii] Amongst them was the UK, whose application elicited a strong American reaction. In a rare breach of the usually friendly special relationship, the White House ‘signalled its unease at Britain’s application to be a founder member of the AIIB by raising concerns about whether the new body would meet the standards of the World Bank’.[iii] In another interview to the FT, a US official claimed that ‘we are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power’.[iv]

The ‘constant accommodation’ was probably a reference to the UK’s soft-handed approach towards China during the Hong Kong protests. The point being, US allies such as Japan, the UK, the Netherlands, Australia, Taiwan and South Korea have all announced their intentions of being founder members.

This did not go unnoticed in China. Trending articles on the subject on Weibo (Chinese Twitter) contain statements like ‘US stunned, their time is over’ and ‘Obama is caught by surprise as AIIB member list grows’.[v] Official state media took a more conciliatory tone, highlighting US Treasury Secretary Jacob Lew’s position that the US ‘is looking forward to cooperating with the AIIB’[vi]

The AIIB is part of the Xi Jinping’s ‘Belt and Road Initiative’. It proposes an ambitious route ‘running through the continents of Asia, Europe and Africa, connecting the vibrant East Asia economic circle at one end and developed European economic circle at the other.’[vii] More specifically, the ‘Belt’ will consist of a land route linking China, Central Asia, Russia and Europe; the ‘Road’ are two maritime routes, one reaching Europe through the South China Sea and the Indian Ocean, and another reaching the South Pacific through the South China Sea.

There are two reasons for countries joining the AIIB.  First, it is the result of Chinese soft power projection in recent years; second, countries want to make sure that by being founder members they will have a say in the AIIB’s organisational structure and thus ensure transparency.  The UK certainly wants to be seen as being motivated by the latter— in a statement, the government claimed that ‘as part of these discussions the UK will play a key role in ensuring that the AIIB embodies the best standards in accountability, transparency and governance’.[viii]

To be sure, there is a huge need for infrastructure funds in the region.[ix] Some have estimated the Asian infrastructure financing gap to be ‘about $8 trillion between 2010 and 2020’.[x] The $50 billion starting fund, while insignificant compared to the gap, would be a welcome addition.

I claim that joining the AIIB as founder members, while not a guarantee of transparency, will at least give the international community a shot at making sure there is accountability behind the AIIB. Furthermore, China’s rhetoric, at least for now, is marketing the AIIB as a complement to existing institutions, rather than a competitor. The numbers support this argument— the infrastructure gap gives ample space to ensure that the ADB and the AIIB won’t be competing with each other. If anything, ‘even a third development bank could probably find demand’.[xi]

In more concrete terms, China will not be allowed to invest in more than 50% of the capital in the AIIB[xii]— presumably a gesture of China’s commitment to a more democratic governance structure. However, taking into account that non-Asian countries are only allowed 25%, which leaves 25% to other Asian countries, China still has the capacity to dominate the AIIB.

What is certain is that the AIIB represents a success of China’s long-term policy of ‘peaceful development’. The fact that so many countries were willing to risk a small deterioration in their relationship with the US to apply to join the AIIB is telling. Furthermore, the enthusiasm of countries (or regions, depending on your stance on Taiwan) with ongoing territorial disputes with China such as Japan and Taiwan, represent a triumph of the logic of interdependency. Business interests seem to take priority over issues of nationalism, at least for the time being. If this logic holds true, the AIIB will be a stabilising force for the region.

However, much remains to be seen as to whether this will be realised. While China will be unlikely to reject any country’s application to become a founder member, there is no guarantee as to what type of investment the AIIB will make. Will China have enough clout to make such investments ‘no strings attached’—the type that made her foreign direct investments so popular in Africa? The reason why so many African countries prefer Chinese investment to Western investment is that the former make no demands on domestic political reform. However, it seems unlikely that countries such as the UK or the Netherlands will be able to stave off domestic and international criticism if they acquiesce to such a policy.  As such, the AIIB may become another space for geopolitical wrestling.

The AIIB as an idea is laudable— there is every chance that it will bring badly needed investment to the region, and ameliorate regional tensions through a ‘spillover’ effect advocated by interdependency theory. However, the AIIB could also be a source of future tension as its members debate over what kind of investment should be considered ‘legitimate’.