China’s New Infrastructure Bank Wins Grudging Assent From the US and Japan

Mon, Oct 5, 2015 - 12:30pm

We reported earlier this year on China’s new foray into development banking: the announcement of the foundation of a new multilateral financial institution under Chinese leadership. The Asian Infrastructure Investment Bank (AIIB) would primarily serve developing Asia’s infrastructure needs, concentrated in energy and transportation, seeded with $100 billion in capital from its 57 prospective members. The AIIB will compete with (or cooperate with, depending on one’s point of view) the established Asian Development Bank (ADB), which although multilateral functions within the US sphere of influence (its president has traditionally been Japanese).

The ADB itself acknowledges that developing Asia’s infrastructure needs far outstrip the ability of existing institutions to meet them. Infrastructure investment has been lagging need for more than a decade. The ADB estimates that $8.22 trillion will be needed over the decade from 2010 to 2020, or more than $800 billion a year—but its assistance in 2014 was only $22.9 billion.

[Check out: Worth Wray on China's Failed Plan to Blow Stock Market Bubble and Attract Global Investors]

This reality is one of the reasons that the new AIIB has won so many participants, even as the US and Japan put enormous pressure on their allies not to join. As we noted in May, no nation founds multilateral financial institutions out of a pure desire to help poorer nations develop; there is always, and rightly, a decisive dimension of economic and geopolitical self-interest involved.

The congenial president-to-be of the AIIB, Jin Liqun, is fluent in French and English, has long experience in international financial markets, and cuts a very different picture from the staid and Stoic bearing typically associated with Chinese officials. He’s a welcoming face, and he recently reassured participants at the Singapore Summit that the AIIB would not select projects to fund on a political basis. AIIB projects would not favor Chinese companies, and the institution will not act as “China’s bank,” he says.

Jin Liqun Gives the AIIB a Friendly Face

Source: Wikipedia

However, it’s clear to all that it is in China’s economic interest to help its neighbors develop—and that means bootstrapping the essential infrastructure to help them accelerate growth. China also wants to be the dominant power in its neighborhood, and although it has done its share of saber-rattling in the South China Sea, it is also pursuing “soft power,” and the AIIB is one major manifestation. It also represents a step in China’s strategy to increase its clout in global, not just regional, financial markets—eventually hoping to challenge the dominance of the US Dollar and of western institutions in the world’s financial architecture.

In May we noted the significance of eager participation in the AIIB by US allies, particularly in Europe. The US and Japan remained staunch holdouts—for a while. Now that resistance has cracked. On September 21, ADB president Takehiko Nakai met with Mr. Jin in Beijing to lay the groundwork for a partnership between the two institutions. At first, the cooperation will be technical, with the ADB providing help with the development of operational policies—but co-financing is already under discussion. Mr. Jin will reciprocate the visit by travelling to ADB headquarters in Manila “in the near future.”

The US Declares a Truce

When Chinese President Xi Jinping visited Washington in September, he reaffirmed China’s commitment to deepen its participation in existing global and regional financial institutions, including the World Bank and regional development banks in Asia, Africa, and Latin America. He also pledged that the new AIIB would demonstrate the highest standards of governance and environmental standards—two of the administration’s public criticisms.

The US, for its part, reaffirmed its commitment to bring more inclusive governance to the World Bank (read: give China more power), and its support for the inclusion of the Chinese Yuan in the SDR basket of the International Monetary Fund (IMF). The statement released after the meetings said:

“Both sides acknowledge that for new and future institutions to be significant contributors to the international financial architecture, these institutions, like the existing international financial institutions, are to be properly structured and operated in line with the principles of professionalism, transparency, efficiency, and effectiveness, and with the existing high environmental and governance standards, recognizing that these standards continuously evolve and improve.”

We and other observers read this as a truce—that is, that the US is dropping its opposition to the AIIB and (frankly) admitting the defeat of its efforts to constrain or derail it.

The media are currently full of talk and fear about China’s decline and collapse. We reiterate our view that China continues to grow economically, continues to transition successfully to a consumer-led economy, and continues to expand its power in global geopolitical and financial affairs.

[See also: No, China Is Not Crashing]

Investment implications: The US and Japan are dropping their opposition to the new Asian Infrastructure Investment Bank. The Japanese president of the Asian Development Bank met with the AIIB’s appointed president to discuss cooperation and co-financing, and President Obama and Chinese President Xi Jinping basically signed a truce during Xi’s visit to Washington. US efforts to derail this phase of China’s push for greater regional economic and geopolitical power have failed.

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