The Asian Infrastructure Investment Bank: a Test of Leadership for the US and China

By Qingzhen Chen

First published by RUSI.org, April 17 2015

Picture from China Daily

China has established a global financial institution that focuses on building roads, railways and other key infrastructure projects crucial to development in Asia. Though there are concerns raised by the United States, the formulation of the AIIB ties China further into a multilateral system.

China has emphasised tirelessly that the Asian Infrastructure Investment Bank (AIIB), its new financial institution initiative, is an open and inclusive multilateral institution. The United States has presented the main opposition to the AIIB, but recently many of the US’s allies have joined the financial institution as founding members.

The AIIB is a test of leadership both for an existing superpower and a rising power. The sharp difference between the US and many of its close allies’ reaction to the China-led AIIB shows the US’s dominance over leading financial institutions is waning. However, a lot remains to be decided as to how the AIIB will work and how far it will test the US’s dominance in this field.

A Waning US Leadership

Publicly, the US has raised concerns over the governance standards of the AIIB, such as labour rights, transparency, and sustainability. However, the US has failed to convince its allies that these concerns are severe enough to warrant a boycott of the AIIB. The UK, which is one of the United States’ closest allies, was the first G7 member to join as a founding member of the China-led Bank, saying it is in the UK’s interests to do so. Soon after the UK’s decision, other European countries followed suit. Although the US has raised valid concerns about how the bank will be run, its allies believe the potential benefit of AIIB membership, including access to investment contracts, improving relations with China, and increasing their influence in Asia, are too attractive to stay outside. They believe being a founding member would enable them to influence the resolution of those governance issues and mitigate the risks that the US outlines.

Furthermore, the US has undermined its own calls for China to be a responsible actor, by showing a lack of willingness to support China’s leading role in a potentially significant financial institution. China is creating a multilateral institution to meet the infrastructure demands urgently needed in Asia, which requires an additional annual funding of $800 billion, according to the ADB. US scepticism regarding the standards and criticism of other countries’ decision to join has exposed itself to the accusation from China that the US is trying to contain and suppress China. The US is left with the option of working with the AIIB through the IMF and the ADB, but its influence on the AIIB will be limited.

Diplomatic Success for China

The creation of the AIIB is a diplomatic success for China in several ways. Firstly, many Western and Chinese commentators believe that the US’s reluctance to allow China a greater role in international financial institutions is in part the reason for the AIIB’s establishment. In the IMF, the US and Japan has voting rights of 16.75% and 6.23%, respectively, whereas China only has 3.81%, despite China being the second largest economy in the world. The 2010 IMF reform agreement, which aimed to grant China more voting power, still has not been ratified by the US Congress. The ADB reflects a similar story. China has only 6.5% voting power, compared with 15.6% and 15.7% for the US and Japan respectively. China wanted to increase its voting rights by contributing more money to the Bank, but at the annual meeting in 2014 the ADB ignored the idea.

Secondly, the AIIB shows that China has embraced multilateralism by welcoming all countries to join. Beijing has also indirectly proposed giving up its veto right to prove its commitment to voting equality among member states. However, there is another reason behind China’s approach. Multilateralism gives China a legitimate reason to add conditions to its foreign investment, which it would not usually have done bi-laterally. China has long followed the principles of non-intervention, and its foreign aid and loans are therefore usually granted to developing countries without governance conditions.

However, China has slowing recognised that this ‘no-conditions’ lending approach might not yield the best return for its investments abroad. For instance China had to evacuate 36,000 personnel due to the deterioration of security situation in Libya at an estimated loss of $20bn. In 2008 in Sudan, Chinese oil company personnel were killed after being kidnapped by rebels, demonstrating the need for broader security assurances for Chinese investments and workers abroad. By inviting developed countries to join to work multilaterally, which will place some sort of security and governance requirements to the recipient countries, China’s lending will be better safeguarded whilst still maintaining a non-intervention policy.

Thirdly, it also ties into China’s peripheral diplomacy. It will enable China to develop closer relationships with other Asian countries. In committing to contribute up to 50% of the AIIB capital, it will be taking the lead on assisting the development of other Asian countries. Finance Minister Lou Jiwei says the Bank will be led by developing countries and will be more responsive to their needs. Furthermore, Asian member states are expected to receive a total voting power of 70%-75%. Thus China is likely not only to improve its own reputation, but also gain recognition for taking more responsibility in the regions’ development.

Real Leadership Means Ensuring the AIIB Functions Effectively

This is just a start of China’s leadership in global finance, and it will face challenges. It will not only have to cooperate with other countries to make it work, but will also have to rectify domestic debate on what the AIIB’s role should be for.

Other issues China will have to look at include accountability of recipients versus excessive red tape, decision-making processes versus efficiency, and different national interests versus the AIIB’s strategic interest. This is not the first multilateral institution that China has created, but this is the first time that China has proposed a global institution, with both developing and developed countries, bringing together different political systems. How China leads the AIIB will be highly significant for China’s reputation as a global leader.

Qingzhen Chen is an intern in the International Security Studies Department at Royal United Services Institute (RUSI).

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