Late last month, negotiators from the 57 prospective founding members of the Asian Infrastructure Investment Bank (AIIB) met in Singapore where they hammered out the bank’s Articles of Agreement or Charter. According to China’s Ministry of Finance, the AIIB Charter will be signed in Beijing at the end of June when many experts believe the founding document will be made public. Taiwan Security Research’s Kristian McGuire speaks with Pieter Bottelier, Senior Adjunct Professor of China Studies at Johns Hopkins University’s School of Advanced International Studies and former Chief of the World Bank’s Resident Mission in Beijing, about China’s motivations for initiating AIIB, the significance of the AIIB Charter, and more in this interview. The following transcript has been edited for clarity.
There’s been a great deal of debate about China’s motivations for establishing the Asian Infrastructure Investment Bank. From your understanding, what were China’s main motivations?
It’s clearly an initiative that was promoted by the new top party leadership, in particular party secretary Xi Jinping. It all came about very quickly. I think he only began to talk about this in 2013. It’s very probable that a large part of the motivation was to create an institutional foundation for his big Silk Road – One Belt, One Road – concept which also was presented for the first time around the same time. I don’t know if the two initiatives were initially linked in his speeches.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
It also has a political dimension. China clearly wants to be, and to be recognized as, a larger player in global economic issues and that’s not just in the context of the G20, but also in what is now emerging as one of China’s major international initiatives: One Belt, One Road. We still don’t really fully understand what it all means. And there doesn’t seem to be, at least at this point, any centralized bureaucratic institution to mastermind this major new initiative. But AIIB – which is now rapidly approaching its foundation, because the Charter was approved in Singapore just a few weeks ago, although it remains to be signed – is obviously an important component of these various ideas which have significant economic, political and perhaps even strategic dimensions.
Why have we seen such a diverse group of countries flock to this new bank? Because on the one hand, you have these major European economies, you also have smaller, less developed Asian economies. Are they all motivated to join for the same reasons or are they expecting different things out of this bank?
It’s interesting that when the Cameron government made its decision public to join as a founding member, the initial reaction in the U.S. was that the U.K. is doing it for financial advantage – they want to become an important renminbi trading center. Not long before that time the U.K. Treasury had placed a renminbi-denominated bond issue – a first – and there had been many discussions between Chinese and British experts on how the City of London could become a major renminbi trading base. I think that the initial assessment by the U.S. of U.K. motivations was a mistake. The Brits are not so narrow that they would do things just for that reason. It’s probable that there were other significant motivations underlying their decision to apply for founding membership in that new institution, including geopolitical considerations.
China is already the largest trading economy and largest economy on a purchasing power parity basis, and it will probably also become the largest economy on a market exchange rate basis. How can anybody afford to ignore important Chinese initiatives such as AIIB, especially when you have been invited to join?
I was here last year when the president-designate for this new institution Jin Liqun came to Washington to personally, on behalf of the Chinese government, invite the Americans to join. He was essentially ignored by official Washington.
So then with the smaller economies – we’ve seen that Taiwan has shown interest in joining – and less developed countries in Asia, do they have the same sense that they don’t want to be left behind, that they need to get in this at the beginning?
My guess is that the motivations vary all over the place. If you look at the Southeast Asian and Central Asian countries, Kazakhstan, Kyrgyzstan, Myanmar, Vietnam, they are probably at least in part motivated by the wish to take advantage of China-aided investments under this new plan. Western European countries would be mainly motivated by geopolitical, not financial, considerations: recognition of China as an important player. And the U.S., I think, was ill-advised to take the decision they did. It was a lot of political energy spent on a negative purpose. It didn’t yield any benefits for the U.S. whatsoever.
Some have argued that because the AIIB is a Chinese initiative and Beijing is going to contribute the bulk of its capital, China’s construction companies are guaranteed to grab the lion’s share of the bank’s funded business. Do you think that this is a likely outcome?
It’s hard to say. I haven’t seen the Charter yet. I’ve been trying to get it, but I’ve been told that it hasn’t been made public because it hasn’t been signed yet. I’m told that after the signing, which is scheduled for the end of this month, the Charter will become public. The Charter will tell us how the bank will organize procurement under AIIB-financed projects. It’s probable, I would say, that they will follow World Bank, ADB procedures of international competitive bidding. In which case, Chinese suppliers, equipment manufacturers would not be guaranteed anything, but would certainly have a good chance, not because they are Chinese, but because no one can really compete with them on price.
Two weeks ago, two of China’s largest state-owned railway equipment manufacturing companies, China North Rail and China South Rail, merged. The newly merged company, CRRC, was listed in Hong Kong on the same day and its shares shot through the ceiling which gives you an idea of what’s going on. There is a huge prospective international market for CRRC – which will be the world’s largest railway equipment manufacturing company by far. They will be well placed to win many contracts under China’s One Belt, One Road initiative.
Although reported on by the Wall Street Journal, the bank’s Charter or Articles of Agreement, as you mentioned, have not been made public yet. As someone who is quite experienced working within a major financial institution, what are you most interested in learning from this document?
I want to know what the Charter has to say on decision-making processes, the roles of the board and management, the currency in which accounts of the institution will be expressed. There’s a possibility they will use this opportunity to put all their accounts in renminbi not in U.S. dollars. So I’m interested in the currency, board power, and in procurement, particularly procurement.
What about procurement would you be interested in?
Whether they would follow World Bank- and ADB-style international competitive bidding procurement or not. My expectation is that they will do that, because China wants to establish a reputation for itself as a responsible multilateral player. They’ve essentially been maltreated by the U.S. on World Bank and IMF quotas. It is ridiculous that the U.S. Congress hasn’t bothered to vote on what the G20 finance ministers agreed to – under the U.S. leadership, mind you. Tim Geithner was the U.S. Treasury Secretary at the time of the G20 meeting in Seoul in 2010 when it was agreed that the IMF quotas of important emerging economies, including China, had to be realigned. The U.S. is the only member of the G20 that hasn’t ratified the Seoul agreement and China is obviously annoyed by that. Their AIIB initiative is probably at least in part related to that. They have not been treated well by the U.S. in existing multilateral institutions. Now, my guess is, they want to show that they can do a better job.
That Wall Street Journal article reported that Beijing offered to forgo outright veto power in AIIB’s day-to-day operations in order to get certain European countries to join. Yet it looks like Beijing will posses enough votes to block any major decisions that require a super majority, or 75 percent of votes. Given the likelihood that one country, that being China, might be able to block future reforms to AIIB, how important is it that the bank’s founding members get the Charter or Articles of Agreement correct the first time?
I don’t know the answer to your question. I’ve been puzzled myself. I saw the same references in that Wall Street Journal article. It distinguished between veto power on critical issues and veto power on day-to-day management issues. It was my understanding, at least initially, China had indicated to prospective founding members that China would be willing to forgo any veto powers and not have any super majority rules, like in the IMF Charter and to a minor extent in the World Bank Charter. Now, I understand from the Wall Street Journal article that there is more to it, that there is apparently a distinction between two kinds of vetoes: vetoes of critical issues and vetoes on day-to-day management issues. I don’t know what to make of it. That’s one of the reasons that I want to read the AIIB Charter when it becomes available.
Once you have these 50-plus prospective members invested in the bank and the bank is up and running, how difficult would it be for one group or single member country to then exit the bank? Would the disincentives to leaving the bank once this institution is up and running be so high as to be prohibitive?
If China is going to use this institution for obvious domestic political purposes, then I think the temptation on the part of some of the European countries to exit would be rather strong. I think they wanted to join, because this looks at least like a genuine multilateral plan worth supporting and since the U.S. has messed up on existing multilateral institutions, I think some of the Europeans developed serious doubts about U.S. leadership on the multilateral scene.
What criteria would you use to judge the overall success or failure of the AIIB?
I would judge it a success if the Chinese turn AIIB into a genuine multilateral institution. Even though the Chinese have the largest block of votes, about 30 percent I understand, they could still structure the decision-making power of management and board such that it becomes a genuine multilateral institution, something the U.S. has never allowed to happen in the IMF. I don’t know if you’ve ever studied the IMF Charter. Article by article it says if you want to change anything you need a super majority, usually 85 percent. It was designed from the start to give the U.S. veto power over most important decisions.
Finally, our readers would be interested in hearing about any projects that you’re working on, events or anything else that you would like to bring to our attention.
I’m a teacher at SAIS and I have just finished some research on shadow banking in China. What is happening, to which extent is it a risk to financial instability in China and therefore perhaps also, indirectly, to the world. The second, longer term, project I’m working on is basically a history project. I’d like to trace the history of thinking about economic development in China since the early ’50s, especially since Deng Xiaoping. I’ve been collecting all sorts of materials on early Chinese thinking on economic development, which, of course, in the ’50s was very different from what it is today. But, it’s becoming increasingly evident to me, that already under Mao Zedong, and even during his Cultural Revolution, there were plenty of Chinese intellectuals and political leaders who felt the best road to sustainable economic development was the market and economic liberalization. Unfortunately, those people usually ended up in the doghouse.
* Pieter Bottelier is Senior Adjunct Professor of China Studies at the Johns Hopkins University School of Advanced International Studies, Senior Adviser on China to the Conference Board and visiting scholar at the Carnegie Endowment for International Peace; held various World Bank positions, including senior adviser to the vice president for East Asia, chief of the Resident Mission in Beijing, director for Latin America, director for North Africa, division chief for Mexico, resident chief economist in Jakarta and desk economist for African countries; former adviser to the Ministry of Finance of Zambia, and chief economist and marketing director of a state-owned Zambian copper company; served as a consultant to the United Nations Conference on Trade and Development; was a Harkness Fellow with The Commonwealth Fund and a research associate at the Brookings Institution; research associate and course work at the Massachusetts Institute of Technology; M.A., economics, University of Amsterdam
**Kristian McGuire is an independent, Washington-based researcher and the Associate Editor of Taiwan Security Research. He earned his M.A. in international affairs degree from George Washington University’s Elliott School of International Affairs and his B.A. in international relations from University of the Pacific’s School of International Studies. His research interests include U.S.-Taiwan relations, cross-Strait relations, East Asian regional security, and two-level games in alliance politics. You can contact Kristian at [email protected]
This interview was first published in Taiwan Security Research. It is republished with kind permission.