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China's AIIB Challenge: How Should America Respond?

April 18, 2015 Topic: EconomicsPolitics Region: AsiaUnited States Tags: Banking

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.

But from the first, the AIIB was promised as something quite different, a bank that would follow international norms and be devoted to economically sound projects of value to the borrowers. Jin Liqun, the Chinese official expected to become its first secretary general, has vowed that operations will be “lean, clean and green,” with at least half its staff recruited from overseas. Jin, a former Chinese deputy finance minister and ADB vice president, also has said its operations will be both corruption-free and transparent, two traits seldom found in Chinese governance. Governing board members elected from other member states, such as Great Britain and Canada, are expected to ensure those guidelines are followed.

Washington’s next move is unclear. To join would require a capital commitment, something a Republican Congress is unlikely to provide even if President Obama asks. After all, the AIIB was born partly because Congress consistently has refused to authorize a larger voice for Beijing in international agencies that the United States dominates, which would give China a role reflecting its new economic strength. For example, for five years it has ignored legislation authorizing a cost-free (to U.S. taxpayers) revision of International Monetary Fund quotas despite administration urging. Even so, the administration should swallow its pride and explore the possibility of getting inside the tent, perhaps with Japan, rather than remain a lonely outsider. On the positive side, Jim Yong Kim, the American who leads the World Bank, already plans talks about future cooperation with the AIIB.

 

To date, the political payoff for Washington has been entirely negative. According to Singapore academic and former diplomat Kishore Mahbubani, a persistent America-basher, the AIIB’s creation marks “the end of the American century and the arrival of the Asian century.” The claim is nonsense—the bank is not that important, and the United States remains the world’s leading economy, most powerful military force, and a central figure in the region; most Asian states want to keep close relations with America. But Washington’s efforts to stiff the new bank, and persuade friends to do the same, made it seem churlish, while Beijing appeared outgoing and generous. It also fed the political divide between Japan and China, a major U.S. worry. Most countries ignored Washington’s advice and signed up for their own reasons; Britain perhaps to ensure that London (rather than Frankfurt) remains a center for trading the Chinese yuan, while others saw investment opportunities or a source of needed finance. All this produced soft diplomacy gains for China at America’s expense, undermining the official U.S. policy of tilting Asia’s way.

Whatever American officials do about the bank eventually, they could well relax a bit. If it does operate on promised terms, the AIIB should be a useful contributor to Asia’s economic development. But it cannot possibly dominate the Asian financial arena, nor replace other institutions. According to the ADB, Asia needs $800 billion annually for a decade to meet its infrastructure needs, a vast sum far beyond the combined capabilities of all international agencies. (The ADB, for example, has provided only $13 billion annually in recent times though it hopes to do more.) Huge amounts of national and private capital are also needed, and no single government or institution can provide it alone. If the United States works to remain engaged in Asia, it will; even a successful AIIB will not let China displace it.

 

So Washington’s best course could be to join up if possible. If a Republican Congress blocks the effort, the administration should work with the AIIB directly, as well as through friendly members and agencies like the World Bank and ADB, to keep it on the promised “lean, clean and green” course. If the new bank succeeds, Asia will benefit significantly. And if it degenerates into another corrupt organization designed to extract resources for Chinese industry, Beijing will suffer the political consequences.

Robert Keatley is a former editor of the Asian Wall Street Journal and the South China Morning Post of Hong Kong.

Image: Flickr/DavidDenisPhotos.com