The U.S. meets the AIIB: Overreaction or Foresight?

by Darcy Zhengyang Li

China US hands

@ Kurious, pixabay

The Asian Infrastructure Investment Bank (AIIB), advocated by China, has stunned the world and even China itself, even without the bank being fully established yet. In June 2014, when China cautiously invited India to co-found the AIIB and proposed to double the bank’s registered capital from $50 billion to $100 billion, its initiator could not have imagined that the comparatively unambitious original design of the new financial institution would quickly attract 60 countries and regions in and outside Asia, ranging from Australia to the U.K.

Besides the AIIB, China has initiated two other international funding mechanisms. The $100 billion New Development Bank established by the BRICS members (Brazil, Russia, India, China and South Africa), has another $100 billion reserve currency pool, while China’s exclusive $40 billion Silk Road Fund, echoing its Belt and Road Initiative, is a comprehensive economic cooperative program covering Eurasia, Oceania and part of Africa. This is a significant change, especially having in mind that until ten years ago, the dominant sponsors of the foreign investment projects around the world were the U.S.- led Bretton Woods institutions.

The U.S has attempted to dilute the incredible expansion of the AIIB membership. According to the Economist, “America has lobbied allies not to join the AIIB, while Jin Liqun, the Chinese official who will head the bank, has shuttled between countries to persuade them to sign up.” Washington has allegedly pressured its major partners, such as South Korea, Australia and the U.K., not to join the new China-led institution. This turned out to be something of a failure with only Japan left to side with the U.S., while the AIIB has become a de facto international financial institution covering not only almost all Asian countries but most major developed countries. Indeed, the AIIB might be China’s attempt to challenge the world order, if one was to judge by the media headlines published in the months past.

With China gaining influence and practical experience as a rising financial power in the region, the emergence of the AIIB means that China can go its own way if its demands, together with the demands other emerging economies for more representation in the Bretton Woods institutions, are not met. According to Alfred Gerstl, East Asian Economy and Society expert at the University of Vienna, “the U.S., but also the Western dominated International Monetary Fund (IMF), the World Bank, and the Japanese dominated Asian Development Bank (ADB) will likely loose influence,” due to the new institution.”

Detecting its global economic supremacy under the threat from China, Washington has been insisting its uncompromising stance against the AIIB. Despite the generally unfavorable position of the U.S. towards the AIIB, two former U.S. treasury secretaries, Lawrence Summers and Hank Paulson, however, publicly expressed their positive opinions about the institution.

Summers, a former World Bank Chief Economist, justified the emergence of the AIIB in an article published in the Financial Times stating that, “with U.S. commitments (to the IMF governance reforms pushed forward by Washington itself in 2009) unhonored and US-backed policies (of pervasive restriction on infrastructure projects financed through existing development banks) blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank.” And Paulson told CBS News that, “the U.S. decision not to sign on during the creation of the AIIB was a mistake”.

The central concerns of the U.S. and Japan focus on transparency and governance, whether the AIIB would have environmental and social safeguards, and whether it would damage other creditors Concerning operational and technical issues, “right now it seems that the AIIB is at least equal to existing International Financial Institutions (IFI) with respect to all these issues,” remarked Kurt Bayer, member of the Supervisory Board of Development Bank of Austria and former Border Director of the World Bank as well as of the European Bank for Reconstruction and Development (EBRD). “[I]t will have to be seen whether environmental, anti-corruption and social standards and safeguards in AIIB will be equal, or stronger, than in existing IFIs, but clearly this has been the argument the British used when they broke the US quarantine of AIIB and joined,” he continued.

According to Gerstl, the economic interconnectivity in Asia that might be further promoted by the AIIB as well as other China-led projects “can contribute to more stable political and economic relations in the region, but can also raise fears among China-skeptical nations, such … It is therefore possible that Washington and Tokyo increase their economic collaboration with key partners.” Indeed, Japan has recently unilaterally launched a $100 billion Asia infrastructure aid package, “coincidentally” matching the AIIB capital level.

However, Bayer believes that those recent Chinese initiatives are “a heavy test of U.S. domination in South-east Asia and will, in the medium run, have to lead to some negotiations about power-sharing in the region. Whether global security will be enhanced or diminished, will depend on the intentions and actions of all powers involved.”

To turn to other economic factors, like international monetary and trade systems and the bilateral economic relation between the U.S. and China, it must be highlighted that the finance chiefs from the Group of Seven industrial nations just agreed that including China’s currency—renminbi—in the IMF’s Special Drawing Rights (SDR) currency basket is “desirable, but a technical review must be completed first.” According to Reuters such inclusion requires the U.S. “to accept a dilution of its power in international finance,” implying that “technical review” might be used by the U.S. as an obstacle in China’s way. However, since China and the U.S. have close trade ties, and China is currently the largest foreign director investor in the U.S., such close relation of mutual dependency will prevent a direct economic confrontation. However, the“strategic conflict that needs to be closely monitored [are] the two opposing free trade projects—TTIP and RCEP—in East Asia,” says Gerstl.

The AIIB has recently finalized its Articles of Agreement after its fifth meeting of founding members, with negotiation details still closed for public. Any latecomer to AIIB will have to accept what has been negotiated. Historically speaking, the U.S. rarely joined an international institution where it cannot be an influential rule-maker. Should the AIIB prove a success, one option for the U.S. to (reluctantly) participate would be as a third country instead of a non-policymaking ordinary member.

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