China's AIIB Challenge: How Should America Respond?

It may be time for America to adopt the attitude: "If you can't beat 'em, join 'em."

The well-worn advice that “if you can’t beat them, join them” may be the right counsel as Washington ponders what to do next about the new China-backed investment bank intended to finance Asian infrastructure needs while also promoting Chinese influence. And as they think about it, U.S. officials might also relax a bit.

Doing so would be much wiser than the Obama Administration’s first reaction—attempting to block the bank’s creation, or failing that, prevent it from becoming an important financial agency with broad membership and significant influence. That effort failed miserably, due either to bad judgment or inattention, so now, the new bank is off and running at high speed. Fifty-seven nations, including most of America’s closest friends and allies, have joined China as founding members of what is officially the Asian Infrastructure Investment Bank (AIIB), with even Taiwan trying to devise what Beijing would consider “an appropriate name” so it too can be a member. Of the world’s major economies, only the United States and Japan remain outside (and Tokyo is considering a plan to join later with a $1.5 billion capital contribution).

As a former American ambassador to China noted recently, American policy has proven to be “a major strategic blunder.” The initial U.S. response had no possible upside but did promise—and delivered—a great deal of downside.

The new development bank, in fact, is still being developed and just how it will operate remains to be determined. But the broad outlines are clear. First proposed by Chinese President Xi Jinping in late 2013, it is supposed to provide financing for seaports, airports, roads, railroads and other infrastructure needs across Asia and thereby stimulate the region’s economic growth. China has promised to provide up to $50 billion of its initial capital and hopes others will match that total. The headquarters will be in Beijing and its first leader (already chosen) will be Chinese; to some degree, it will be a rival of the American-led World Bank in Washington and the Asian Development Bank (ADB), a Japanese-led institution based in Manila. Though not openly stated, but obviously true, China’s motives include using the bank to increase its political influence in neighboring nations, where Beijing’s sometimes aggressive diplomatic and military actions have caused great worry. In any case, there’s no doubt that the proposed AIIB will become reality, perhaps by the end of the year.

Realizing that it chose a faulty course, the Obama Administration has already begun tacking in the new bank’s direction. After a recent Beijing visit, Treasury Secretary Jack Lew said “the US stands ready to welcome new additions to the international development architecture”—a sharp contrast to late last year when senior White House officials were criticizing the AIIB as unsound and unneeded, and pressuring allies to stay away. But Lew repeated a major American caveat: to be truly worthwhile, the AIIB must “share the international community’s strong commitment to genuine multilateral decision-making and ever-improving lending standards and safeguards.” In other words, member states must not let the bank become an agency for advancing narrow Chinese economic interests in corrupt ways at the expense of local citizens and the environment.

These concerns show that the initial American reaction, however unwise, was not irrational. The Chinese record as a lender to developing nations is spotty at best. Too often it has provided loans to kleptocratic regimes that finance Chinese companies using imported Chinese workers on projects that mainly ship energy and raw materials back to Chinese industry; sometimes bribes grease the way, while the local environment and economy can suffer. Some experts say the Chinese record in Africa, for example, is no better than that of 19th century European colonialists. Other Chinese loans, such as $86 billion to Venezuela, were made primarily for political reasons and may never be repaid.

A few countries, most recently Sri Lanka and Myanmar, have canceled Chinese-funded projects on grounds that corruption paved their way and they serve no basic local purpose. During his successful campaign, Sri Lanka’s new president, Maithripala Sirisena, described local Chinese projects as “robbery taking place before everybody and in broad daylight….if this trend continues for another six years our country would become a colony and we would become slaves.” Since taking office, he has suspended work on a $1.5 billion Beijing-funded port project.