Washington Should Not Fight with Its Allies over China’s Infrastructure Bank

By Nigel Cory

President Xi Jinping signing a document during a visit to the European Parliament in Brussels during 2014. Source: European Parliament's flickr photostream, used under a creative commons license.

President Xi Jinping signing a document during a visit to the European Parliament in Brussels during 2014. Source: European Parliament’s flickr photostream, used under a creative commons license.

The United States’ effort to discourage allies from joining the China-led Asian Infrastructure Investment Bank (AIIB) is counter-productive and has looked more tenuous after the United Kingdom decided to sign up. France, Germany, and Italy have since announced plans to follow suit, while Australia may soon announce its decision to join. The response by Obama administration officials to the UK’s decision, accusing it of “constant accommodation” of China, is not conducive to long-running U.S. efforts to encourage China to be a responsible and active stakeholder in multilateral forums. It also feeds into the perception held by some in Beijing that the United States seeks to use its alliance system to isolate China.

The latest moves by Australia and European countries leave South Korea and Japan as the only noticeable absences from the AIIB’s current membership roll. But newspaper reports suggest South Korea is reconsidering its position ahead of the March 31 membership deadline, while Japan previously indicated it is unlikely to sign up given its central role in the competing Asian Development Bank (ADB).

U.S. assistant secretary of State for East Asia and Pacific affairs Danny Russel on March 17 said that every government can make its own decision about whether to join the AIIB, but that U.S. concerns about the bank remain the same. While noting that U.S. questions about the governance, lending standards, and procurement practices of the new bank are legitimate, CSIS’ Matthew Goodman says he is “a little unsure as to why the U.S. has chosen to pick a fight with the UK on this bank at this time.”

In reality, U.S. interests would be better served by having as many of its close partners involved in the new institution as possible, especially in the early stages when crucial governance, safeguard, and lending processes are designed. The UK and Australia both have large and active development programs and a strong commitment to best practices. The UK Department for International Development ranked second in terms of transparency on the 2014 Aid Transparency Index, after only the United Nations Development Program.

The decision to form the AIIB was driven at least in part by China’s frustration with the slow pace of global institutional reform. The governance structures of the World Bank, and the International Monetary Fund reflect a post-World War II rather than a 21st-century world order. It is only understandable that China wants a system that better reflects its status as the world’s second largest economy. Japan’s voting shares at the ADB are twice that of China’s despite the fact that China is the largest economy in Asia. Meanwhile, the United States and Japan, the largest voting share and capital holders at the ADB, have not always been willing to make way for China to play a bigger role, which would require them to relinquish some of their own voting powers.

There is a significant and growing gap between the demand for investment in infrastructure and available resources in Asia. With a growing middle class comes a surge in needs for roads, ports, dams, bridges, railways, and other support infrastructure. The ADB estimates that Asia needs $750 billion in annual infrastructure spending between 2010 and 2020. Yet only a portion of the ADB’s capital base of $160 billion and the World Bank’s $223 billion are focused on infrastructure. China plans to contribute $50 billion of the AIIB’s starting capital of $100 billion.

Just as the work done by the World Bank, ADB, and IMF has contributed to the prestige and geopolitical reaches of the United States, Japan, and the European Union decades after their formation, the AIIB will offer China a mechanism to leverage its considerable financial resources into greater political and diplomatic influence.

But in order to build legitimacy for its development bank, China needs to gather a broad membership base. As a result, it has been actively courting Australia and others in an attempt to allay their concerns about governance and lending practices at the AIIB. President Xi Jinping has said that the AIIB “would follow multilateral rules and procedures” and will adhere to “good practices” of existing multilateral institutions. Since Washington was said to be responsible for Australia’s initial refusal to join the AIIB last November, the recent shift was in many ways a diplomatic victory for Beijing. Chinese officials have provided scant details on how the AIIB will be run, but an encouraging sign is that China’s AIIB working group is headed by Jin Liqun, a former ADB vice president who is deeply familiar with best practices used by the ADB.

Countries are wary about a China-centric development institution due to project politicization and its poor record in providing infrastructure finance projects in Asia and Africa. These fears are not unfounded. A fear for many developed countries is that weak governance and lending processes raise the risk of project politicization, corruption, and waste. Indicative of this concern is China’s last place ranking in the 2014 Aid Transparency Index, while the ADB ranked fifth.

On the other hand, concerns that China will use AIIB as a foreign policy arm are equally strong. For Australia, a strong U.S. ally but which has been debating whether to accord greater importance to its relations with China, joining the AIIB could have major geopolitical implications in coming years. But for the time being, having its close allies such as the UK, Australia, and New Zealand affect changes from within the AIIB could still prove useful for the United States.

Mr. Nigel Cory is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS. He previously served as an Australian diplomat in Malaysia and the Philippines.

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1 comment for “Washington Should Not Fight with Its Allies over China’s Infrastructure Bank

  1. Liars N. Fools
    March 17, 2015 at 17:28

    The Washington posture on AIIB has been muddled from the beginning, hampered by the fact that the Americans blocked China and other would be contributors to the World a Bank and the ADB from gaining a greater share of the governance structure of those established institutions.

    That China has chosen to go a bank approach rather than its own direct ODA is pretty shrewd because the AIIB would demonstrate that China is contributing to the “public goods” — which is something that the Americans are supposed to want, or do they? Part of the muddle also seems to be to support their good friend Abe Shinzo, whose did like for the Chinese (and Koreans) is also palpable.

    At the end of the day American allies will be in, including the Aussies and Koreans, Japan will remain aloof and glad the Americans sang to its tune, the Chinese will look good (especially so if they do adjust the governance structure and principles), and the Americans will again prove they only like good ideas if they invent them.

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