The proposed BRICS (Brazil, Russia, India, China and South Africa) New Development Bank (NDB) has attracted much attention after its announcement during the BRICS summit in Fortaleza, Brazil, on July 15, 2014. On paper, the NDB serves two purposes: (1) provide liquidity protection to member countries during balance of payment crises; (2) grant aid to finance development in low and middle income countries. China has been instrumental in pushing through the initiative, and is the largest donor (supplying 41 percent of the funds) to the $100 billion Contingency Reserve Arrangement (CRA).
What does China have to gain from the NDB? The answer is less obvious than we might think. China has the largest foreign exchange reserves in the world (about $4 trillion in the first quarter of 2014); it clearly does not need liquidity protection. Perhaps China is a Good Samaritan interested in promoting regional financial stability and development. However, at least in Asia, there is already the Chiang Mai initiative, which provides its members with funds when they are hit by crisis. Moreover, if China simply wanted to promote development, it could easily increase its bilateral aid or contribution to existing multilateral institutions instead of creating a new international bureaucracy. Indeed, it did recently become a donor to the World Bank’s International Development Aid (IDA).
China supports the NDB initiative because it can serve as a useful tool to further the expanding political and economic interests of China, a rising power. To understand the political logic behind Chinese support for the NDB, note that Chinese aid has a bad international reputation. Chinese aid is often associated with attempts to prop up corrupt and authoritarian regimes and with ruthless promotion of Chinese economic interests. During her 2011 trip to Burma, former Secretary of State Hillary Clinton warned the country to “[b]e wary of donors who are more interested in extracting your resources than in building your capacity.” Without naming names, the comment is clearly directed at China, Burma’s long-time patron state. Moisés Naím, currently a senior associate at the Carnegie Endowment for International Peace, dubbed Chinese aid “rogue aid.”Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Reputation matters. Given the rogue aid status of Chinese money, any investment or assistance deal with China is more likely to fall under intense scrutiny by the international community as well as domestic political opponents from the recipient country. This makes it more difficult for China to reach a favorable development assistance deal with the recipient country in exchange for guaranteed access to raw material or political support in multilateral forums.
To be fair, the strategic use of foreign aid is not a Chinese invention. The U.S. and Japan routinely rely on aid as a tool to further their national interests, but they are better at concealing it. Both countries are experts at distributing benefits to their allies through reputable international organizations such as the IMF, the World Bank, and the Asian Development Bank (ADB).
China is acutely aware of the political manipulations of international organizations by the existing powers; it did not contribute to the NDB because it simply wants to contribute to international financial stability or promote development. Instead, Chinese support for the NDB reflects its desire to create an organization that it can control to launder its aid and reduce international scrutiny of its growing influence in the developing world. On this point, I disagree with Dingding Chen’s contribution to The Diplomat. NDB does not demonstrate China’s global leadership. Instead, it shows that China is an avid learner from U.S. and Japan on the art of economic statecraft.
One can challenge my argument by highlighting that the NDB is governed by equal-share voting. Moreover, it has a president from India, a Board of Governors Chair from Russia, and a Board of Directors Chair from Brazil. Why would China expect the other four founding members from BRICS to acquiesce in its use of NDB to launder its dirty deals? To answer this question, we need to look at the balance of geopolitical interests among the BRICS nations. Russia is largely a Chinese ally, while Brazil and South Africa are not geopolitical competitors with China. India is acutely wary of China’s rise, but it is only likely to oppose Chinese initiatives in the NDB when it involves Pakistan and Nepal. On paper, China is one of the five equal founding members of the NDB.
In reality, China is the “first among equals” since no member has any interest in opposing China and China is the only BRICS nation with an extensive global patronage network stretching from Venezuela, Nigeria to Belarus.
Significant Chinese influence over the NDB has two implications. The first is obvious: Chinese allies will be applying for memberships into the NDB, and aid will go to them. Second, aid from the NDB will be tied to minimum conditionality, which reflects both China’s political and ideological considerations. Conditionality restricts the use of aids as bribes to further Chinese goals, and is incongruent with the Chinese principle of non-intervention in the domestic affairs of other countries.
As a result of minimum conditionality, the NDB cannot replace the World Bank and the IMF for developing countries. This is counter-intuitive. If a Chinese-led NDB can provide deals that are associated with fewer conditions, it should make the World Bank and the IMF obsolete unless they engage in a race to the bottom to outbid the NDB. However, developing countries actually have a demand for aid with conditionality. Conditionality can help countries tie their own hands and signal responsible macroeconomic policy-making to attract private investors. An NDB under Chinese influence is unlikely to provide aid with sufficiently strict conditions to serve the signaling purpose of aid.
In conclusion, we cannot understand why China supports the NDB if we ignore Chinese economic statecraft. In addition, we need to recognize that Chinese control of the NDB will have profound influence on how the NDB functions and its impact on the international financial order.
George Yin is completing a Ph.D. in Government at Harvard University. He specializes in international relations with a focus on Chinese foreign policy and East Asia. He is affiliated with the Fairbank Center of Chinese Studies at Harvard and is a National Security Fellow at the Tobin Project.