“A diplomatic triumph” is a phrase which is being used by Chinese media when referring to 57 nations joining the Asian Infrastructure Investment Bank (AIIB) as prospective founding members.
The signing up of the nearly sixty members from the organization’s inception was beyond the expectation of many people who participated in the establishment of the AIIB.
The AIIB is an international financial institution whose founding was proposed in 2013 by the government of China. The general purpose of this multilateral development bank is to provide finance to infrastructure projects in the Asian region.
Analysts of international affairs and finance in China, the United States, and Europe say that the unexpected success of the bank represents a major turning point in an undeclared contest for global influence between Washington and Beijing. There are many differing points of view about how the bank should function, what its role will be in the international economic system, and why China created this multilateral institution with a major focus on infrastructure in the first place. Some emphasize a desire by China to win soft power, along with financial clout. Others say that China was badly lacking in outlets for its huge financial surpluses. And others attribute China’s motives to geopolitical strategy.
The AIIB didn’t attract much attention initially. For a period of time, the U.S. appeared to have put pressure on its allies not to join the bank, although President Obama went to great lengths to dismiss this notion in a joint press conference with Prime Minister Abe of Japan last month. Instead, President Obama stressed the U.S. concerns on the transparency in terms of how this multilateral lending institution is going to operate. Two months ago, heated discussions began when Britain, traditionally the closest ally of the United States, made the decision to join the AIIB. Three European nations–Italy, France and Germany–then followed in Britain’s steps, saying that they would join too.
“The new normal is that all the U.S. allies have to coexist with Chinese as well as the Americans,” said Chung Min Lee, Professor of International Relations at Graduate School of International Studies, Yonsei University in Seoul, “for this time around, China is a very different type of adversary to the U.S. because the Americans also benefit from the Chinese economy and any the U.S. allies in the world plays more with China than the U.S.”
In an analysis titled “Will the AIIB one day matter?” posted on his blog, Michael Pettis, a prominent Beijing-based economic theorist and financial strategist, cited competition between London and Frankfurt, Europe’s two major financial hubs, as an important reason why Britain made such a decision. He wrote, “Many people have interpreted Cameron’s actions as implicitly anti-American, but to the extent that they matter, they were designed primarily to damage German ambitions for Frankfurt’s future role as a financial center.”
The Wall Street Journal published an article arguing that China’s decision to forgo veto power in the AIIB was the key factor in winning those European countries’ adhesion to the bank. However, the Ministry of Finance (MOF) of China denied any changes on the voting procedures of the AIIB. Vice Minister of Finance Shi Yaobin said in a press conference, “AIIB divides boarding members only by in or out of Asia. As the increasing number of boarding members, ratio of share holdings of every member would decrease. The statement that China either seeks or gives up veto power is false.”
Chinese media explained how Britain decided to join the bank as a “personal victory” of Chinese diplomacy and put Jin Liqun, the Secretary General of the Multilateral Interim Secretariat of AIIB, in the spotlight as the key figure. Jin is described as a financial expert who is also well cultured in literature and accustomed to translating English poems into Chinese. An article profiling Jin by Asia Pacific Daily, a news platform belonging to the Xinhua News Agency, went viral on social media in China. The article quoted and translated several lines from an article by Financial Times, saying Jin is “an Anglophile who likes to quote Shakespeare to the English, tell the French how enamored he is of their culture and charm the Germans by telling them they are his favorites because of their honesty.”
The article also indicated that Jin took advantage of the competition between Britain and Germany and successfully persuaded those European Countries to join AIIB.
“China does not need to declare veto power at the beginning. Giving up veto power is actually a compromise to win the U.K. and other Western wealthy countries,” said Shen Dingli, professor of international relations at Fudan University, “it indicates that, instead of using voting scheme, China seeks negotiation to solve divergence. To some extent, it is the failure of China hegemony.”
The U.S. has veto power in the World Bank as well as in the International Monetary Fund (IMF) where its voting power is 15.85 percent and 17.69 percent respectively. China’s plans call for setting the AIIB’s initial authorized capital at $100 billion with China providing up to 50 percent of that amount. In other word, although China possesses approximately 50 percent voting power, it cannot use its strength for a veto.
By declaring no intention to pursue veto power, China wants to make a friendly gesture to the world, something to the tune of “hi, we don’t want to be a hegemon” according to Professor Shen. This is also the point China’s Premier Li Keqiang tried to make. In answering the question whether he is pleased that British “have now started a stampede to join the bank” during an interview with Financial Times, Li said, “China wants to work with others to uphold the existing international financial system. And we are ready to continue to play our role in building the current international financial system.”
The U.S. and Japan, the first and the third world’s biggest economies, didn’t join the AIIB in the first round.
“Americans do not actually realize that they owe money to foreigners, ” said Pippa Malmgren, the former adviser on Economic Policy to President George W. Bush, “I think that within the higher inner circle of economic policymaking, which I have been very much a part of, there is a high degree of arrogance. A kind of inherent belief that the US system is so good, strong and capable that it does not really depend on the kindness of strangers.”
The AIIB is viewed as a rival to the IMF, the World Bank and the Asian Development Bank (ADB), since the AIIB is independent from the Bretton Woods system while the others are in the system and dominated by either United States or Japan.
The Chinese government is frustrated that US Congress has obstructed the voting rights reform in the IMF that would give China more say in global economic governance.
“If the US congress had agreed, as Obama has wanted to give China greater voting power in the IMF this (establishment of the AIIB) might never have happened,” said Gerald Curtis, Burgess Professor of Political Science at Columbia University. He thinks the AIIB is a reflection of China’s demand to occupy more important space in the international system under the pressure of US
Vikram Nehru, who is a senior associate in the Carnegie Asia Program, said “there is firm evidence that they (the World Bank and the ADB) are responding positively,” referred to Takehiko Nakao’s, the president of the ADB, new approach to increase the ADB’s lending by 40 percent. “Nakao has done it by restructuring the ADB’s finances in a very innovative way. And I am absolutely certain that innovation in the ADB has come about as a result of pressure from the entry of the AIIB.”
The ADB is a regional development bank established in 1966 to facilitate economic development in Asia. In 2010, the ADB published a report saying that the region requires $8 trillion to be invested from 2010 to 2020 in infrastructure for sustainable economic development. Recently, the Japanese led bank has only loaned about $10,000 million per year according to its annual financial profile, however, for the construction of Asian infrastructure.
Raising the profile of China in the international economic system is not the only purpose of the AIIB. The new bank also serves its own purpose which is to lend money to infrastructure projects of China’s “One Belt, One Road” initiative. This infrastructure initiative has two main components, the land-based Silk Road Economic Belt, which connects China to Europe, and the oceangoing Maritime Silk Road, which links China to Southeast Asia, the Middle East, and Europe.
There is an old saying in Chinese, “if you want to be rich, you’d better build the road first.” Connectivity is extremely important to development. By building infrastructure such as highways, railroads, subways, maglev trains, super-railroads, 3G 4G telecommunication networks and etc., China wants to link neighboring Asian and European countries and foster international trade.
China has over capacity problems in industries that are related to infrastructure, such as cement, iron and steel, therefore an emphasis on infrastructure also caters to China’s own economic needs. Sun Xiao, Chairman of the Board of Maanshan Rural Commercial Bank, considered the main domestic purpose of both AIIB and “One Belt, One Road” initiative is to solve the overcapacity problem by transferring those products along with technologies out of China. “If we can not trade in RMB, the benefits would be much less ” Sun added that AIIB could help promote the trade volume of RMB and probably turn RMB into reserve currency, which could further benefit the international trade.
China made promises of investing more than $45bn in infrastructure in Pakistan. It marks the beginning of the “One Belt, One Road” strategy. Pakistan has been strategic partner to China since the 1950’s.
Peter Dutton, Director of the China Maritime Studies Institute at the U.S. Naval War College, explained that China needs to remain close to Pakistani for the purpose of dealing with “the potential for unrest in Xinjiang and needing Pakistani cooperation to prevent the spillover of Islamic conflict to western China.” China also sees Pakistan as a way of balancing India.
“AIIB would not be just an economic investment but a strategic security development, ” Pippa said.
The AIIB’s charter would be finalized and signed in June. The Ministry of Finance hopes to launch the bank by the end of this year.
Hao Shuhong, a lawyer of Shanghai Guanbo Law Firm, who specializes in investment bank and capital market, thinks that China now needs to figure out how to deal with questions concerning AIIB’s fairness and transparency in its international operations and lack of experience in managing such an economic multilateral bank. “It is a completely new thing to China. China should consider these questions seriously: who is the one holding the decision-making power; how to bid.”
Still, there is a long way to go. Professor Shen offered some suggestions on how to run the organization properly:
“China should stress the AIIB would be up strictly to international standards. China should make the regulation of the AIIB even more ‘standard’ than World Bank, such as never grants loans to undemocratic countries; countries with military government; countries which are under the sanctions of the United Nations. ”
Thomas Gaffney and Hoyun Kim contributed to the reporting of this article.