Geopolitics of the Asian Infrastructure Investment Bank
By Thomas Gaffney
May 4, 2015
In the past six months, the drive to recruit nations to join or to resist the Asian Infrastructure Investment Bank has become a proxy battle in a power struggle between China and the United States.
China, the originator of the AIIB, has taken on this initiative in an effort to simultaneously expand its international influence and channel part of its vast treasury holdings into productive investments. The United States has opposed the AIIB and has privately encouraged its allies to refrain from joining.
But Washington’s appeals were almost universally unsuccessful. The official list of prospective founding members includes not only Asian and Pacific powers, but also all of the BRICS nations and half of the European Union. The United Kingdom joined against the wishes of its closest ally, leading to a cascade of similarly developed nations such as Germany and France applying for membership.
The AIIB’s success in recruiting 18 Western countries to join what is ostensibly an Asian regional organization has prompted cries that China’s true goal is to actually replace global institutions like the World Bank and the International Monetary Fund. China, however, insists that its goals are much more limited.
Still, the readiness with which many American allies joined a Chinese-led organization points to a shift in the international balance of power, signaling a relative decline in American economic influence. Larry Summers, a former US Treasury Secretary, wrote in an op-ed published in The Washington Post that the AIIB’s arrival represents “the moment the United States lost its role as the underwriter of the global economic system.” The perceived significance of the bank has prompted concerns about whether China will use the AIIB as a vehicle to fund investments that advance its own geopolitical interests.
WHY U.S. ALLIES JOINED
When the AIIB begins operations at the end of 2015, it will be authorized to extend loans worth up to a total of $100 billion. To fund this, the bank will require $50 billion of paid-in capital, which will come from the founding members. Officials have said China would be willing to cover half of this by itself, drawing from its estimated $3.8 trillion in foreign reserve holdings.
According to Chung Min Lee, a professor of international relations at Yonsei University in South Korea, many countries joined the AIIB because the attraction of China’s economic power outweighed their concerns about transparent bank governance.
“If American can’t put up the money, then somebody else will, and that is China. It came down to how much money you have,” Mr. Chung said. “Americans simply do not have money to put in $15 billion to modernize Asia’s economy.”
“The new normal is all U.S. allies have to coexist with Chinese as well as the Americans,” he said. He predicts that countries will continue to side with the United States on security-related issues, but that they will side with China for economic issues.
GEOPOLITICAL IMPLICATIONS
China has stated that it will not seek veto power in the bank, seeking to pre-empt concerns that it will dominate decision-making. Yet their decision this month to exclude Taiwan from the bank has already revealed a willingness to use the AIIB to assert its national interests, despite its assurances to the contrary.
The AIIB rejected Taiwan’s bid due to a disagreement about the name filed on the application. Chinese officials have stated that the territory must call itself “Chinese Taipei” if it wants to join.
Japan’s notable absence from the bank’s roster also underscores the regional power dynamics at play. It did not apply to be a founding member, citing concerns about transparency.
Japan had two major incentives to withhold from participating in the bank. First, Japan already enjoys primacy in the Asian Development Bank, an older organization that the AIIB seems designed to compete with. Secondly, Japan may have decided to demonstrate its loyalty to the United States, seeking to deepen their alliance at a time when China’s increasing naval presence and territorial claims around the Pacific have put the Japanese on edge.
Some observers suspect that under the AIIB, both economic and security issues could overlap.
Pippa Malmgren, a former adviser on economic policy to President George W. Bush, said in an interview from London that competition between nations increasingly takes place in control over shipping lines.
“The US is trying very hard to keep control of shipping lanes, particularly around Asia, from falling into Chinese control,” Ms. Malmgren said. “If that’s the case, and the whole purpose of the AIIB is to build infrastructure for transportation, then are you actually participating in something that’s not just an economic investment, but a strategic security development?”
“I think it will become increasingly difficult to pretend that there are no strategic security issues involved,” Ms. Malmgren said.
She believes that the AIIB may choose to invest in some infrastructure projects based on their strategic benefits to China, an idea that echoes what intelligence circles call the String of Pearls theory.
STRING OF PEARLS, OR A NEW CHARM OFFENSIVE
The realpolitik String of Pearls theory suggests that China is building a presence throughout the Indian Ocean and toward the Persian Gulf in order to strengthen supply lines for oil and other commodities.
The theory was first articulated in a white paper from the Department of Defense titled “Energy Futures in Asia.” The report, which was published in 2004, pointed to China’s investments in a deep-water port in Gwadar, Pakistan; its military buildup in the South China Sea; and its intentions to develop a new sea-lane to bypass the Straits of Malacca.
These same issues remain contentious today.
Earlier this month, President Xi Jinping traveled to Pakistan to announce a $46 billion infrastructure investment that will fund an economic corridor linking Xinjiang to Gwadar and the Indian Ocean. The news prompted speculation that China intends to use the Gwadar port as a re-supply station for their naval vessels. While this is not an AIIB project, it shows that there is a strategic component to which international projects China decided to fund.
Similarly, in February at the 21st Century Maritime Silk Road summit meeting in Fujian, China’s leaders discussed building a new canal that could bypass the Straits of Malacca. Currently, 80% of China’s oil shipments pass through the Straits, and some Chinese analysts fear this area could be a “chokepoint” in a blockade scenario.
To reduce this vulnerability, Chinese leaders have expressed interest in digging a canal through Thailand’s Kra Isthmus to connect the South China Sea to the Indian Ocean, a project that has the potential to become an AIIB investment. Thailand’s government had resisted the idea for years, but in March it re-opened discussions about building the canal, signaling China’s growing influence.
China is using investment packages to expand its regional influence and reputation, but this approach also has security implications.
Recent history has shown that the United States has suffered strategically whenever China has cultivated goodwill among its neighbors. During a period in the 1990s and early 2000s known as the “Charm Offensive,” China sought to improve its relationships with Southeast Asian countries by signing cooperative treaties with ASEAN, including a free trade agreement and a maritime code of conduct.
Daniel Kostecka, a senior analyst for the U.S. Navy, does not believe that China’s actions represent any intentional strategy as the String of Pearls theory suggests.
He wrote in the Naval College War Review that the increasing Chinese presence in areas like Gwadar should be referred to as “places” rather than “bases” - military parlance for the distinction between friendly ports and military installations. China does not station any of its military forces on foreign soil, but it is building up a presence in strategic locations where naval vessels can resupply.
“This type of strategy involves securing with friendly governments diplomatic agreements allowing access to those nations’ facilities in order to obtain essential supplies, such as fuel, food, and freshwater, for deployed forces,” Mr. Kostecka wrote.
Part of the reason China wants to develop “places” around the Indian Ocean has to do with its military’s technological constraints. China’s navy lags behind the U.S. in desalination techniques, meaning that Chinese ships are unable to produce new freshwater while they are out at sea. As a result, they must return to a port for resupply every few weeks.
Building up a friendly port requires infrastructure investment, such as building roads and railways, of the sort that the AIIB intends to deliver.
CHINA’S POSITION OF LEADERSHIP
While it is still too early to know what sorts of infrastructure projects will be selected, it is already clear that China will occupy a unique position of leadership in the bank.
The AIIB is to be headquartered in Beijing, the bank’s secretary general is Chinese, and China is going to hold special privileges when the bank begins operations later this year. A CCTV report televised on March 26 said that “as the initiator of the AIIB, China will be the standing chairman for the delegate meeting after the founding of the bank.” This will be the sort of status that has eluded China in the World Bank and IMF.
China now has, by some measures, the largest economy in the world, but its status in other multilateral organizations has not risen to reflect their new position. Despite China’s efforts to be invited to hold a greater stake in the World Bank, they are only responsible for 5.76% of its total subscribed capital and 4.85% of its voting power. Their voting stake has not increased since 2010. Frustrated officials in Beijing began pushing for the creation of a new institution, led by China.
Political gridlock in Washington is partly to blame. A proposal to expand China’s role in the IMF was negotiated in 2010, but Congress has not approved the legislation. This inaction comes despite several overtures from Treasury department officials in the last five years.
Gerald Curtis, a professor of political science at Columbia University, says that these delays in approving reforms may have impelled China to develop a new institution.
“If the U.S. Congress had agreed, as Obama has wanted, to give China greater voting power in the I.M.F., this might never have happened,” Mr. Curtis said.
“So we talk about in the U.S., China being a responsible stakeholder, but if you don’t give them stake to hold, they’re not going to be responsible.”
COMPETING WITH OTHER BANKS
Some might ask why the AIIB is necessary at all. The Asian Development Bank, which is headquartered in Manila and has been in operation since 1966, shares many of the same goals as the AIIB. However, China has not been given a large stake to hold in the organization.
A second, larger reason is that the ABD is dominated by Japan. All nine of the ADB’s presidents have been Japanese. The complicated relationship between the two countries may have made Beijing more likely to start its own bank.
Despite some dire predictions about the challenge posed by the AIIB, ADB President Takehiko Nakao and World Bank President Jim Yong Kim have both made public statements suggesting that there is room for the banks to work together.
Shen Ding Li, a professor at Fudan University, thinks that the AIIB will not pose a direct threat to these organizations because it will be more narrowly focused. “The World Bank’s development concept is all-round. China only does one thing: infrastructure,” Mr. Shen said.
China already has a comparative advantage in infrastructure construction. It spends more on infrastructure than any other country in the world, averaging about 8.5% of their total GDP each year, and it is home to the world’s largest construction company, China State Construction and Engineering Corporation. The combination of cheap labor and enormous government investment has produced a long list of infrastructure mega-projects, including the $23 billion Three Gorges Dam and the $4.3 billion Beijing-Lhasa railroad.
But some development bank officials believe that it is impossible to only build infrastructure and ignore other issues like governance.
Vikram Nehru worked at the World Bank for 30 years, eventually becoming Chief Economist for East Asia and the Pacific.
“The AIIB is in for a rude shock, because the real constraint for infrastructure is not finance,” Mr. Nehru said in a phone interview from Washington. “The problem is capacity in the developing countries themselves - their ability to develop good projects which are bankable, financeable, with a high rate of return. The ability for the bureaucracies of these projects to access and acquire the land, to put together the organization structure to implement the projects, to have the regulatory capacity to bring in the private sector.”
“The AIIB is going to have to figure out a way to do that.”