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Responding to the China-Led Asian Infrastructure Investment Bank (AIIB)

The Asian Infrastructure Investment Bank (AIIB), a multilateral development bank that aims to finance infrastructure in Asia and globally, was launched by China in October 2014 with a planned initial capitalization of $50 billion.1 As the March 31 deadline for joining as founding members of the AIIB2 draws near, the U.K. announced its application to join, followed by Germany, France, and Italy, thus “lending the weight of Europe’s largest economies to the project despite U.S. opposition.”3 Among the three major U.S. allies in the Asian region, Australia and Japan are still reviewing their options, while South Korea has issued a statement on March 26 announcing its intention to join.4 As characterized by a former assistant secretary of the U.S. Treasury, this wave of participation in the AIIB “is basically about money, [and t]he Europeans figure they can affect the changes from the inside, and still get some of the contracts.”5

As its allies are flocking one by one to the AIIB, the U.S. has begun to change its tune. When the U.K. became the first G7 nation to join the AIIB in early March, a senior U.S. administration official reportedly told the Financial Times, “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.”6 Last week, the U.S. has switched from a rebuking tone to a cautionary one. Treasury Secretary Jacob Lew still warned that countries “lend[ing] their name to this organization [should] make sure that the government is addressing” the issues of anticorruption, labor, and environmental safeguards.7 But on the same day, Assistant Secretary of State for East Asian and Pacific Affairs Daniel Russel opined that it is up to the individual nations to decide whether to join the AIIB.8 He claimed that the U.S.’s consistent message to China is that it welcomes investment in infrastructure, but the U.S. is “seeking unmistakable evidence that this bank . . . takes as its starting point the high watermark of what other multilateral development banks have done in terms of governance.”9

Participating countries have echoed the importance for the AIIB to meet the standards of a multinational financial institution. According to the South Korean Ministry of Strategy and Finance, the Korean government and its allies “ha[ve] been urging China to improve its plans for the bank so that its governing structure and safeguards will meet international standards,” and “significant progress” has been achieved.10 China itself also reiterated that “[i]n designing its operation and governance structure, [the AIIB] will learn from the good practices of other multilateral development banks and avoid taking detours that these banks have made.”11 Furthermore, China has proactively addressed concerns about the AIIB’s governance and Chinese domination. To convince the European nations to “line up as founding members,” China has offered to forgo veto power at the AIIB.12 This contrasts with U.S.’s veto power at the IMF and other international lenders it supports.13 Although the U.S. holds only 20% of IMF’s voting shares, it can dictate IMF’s decisions with its no-vote, to the chagrin of many.14 China is also recruiting former World Bank staffers, such as attorney Natalie Lichtenstein, to help resolve governance issues and establish the AIIB’s credibility.15

In face of losing all leverage regarding the AIIB, the Obama administration is now proposing that U.S.-backed development banks, such as the World Bank, can co-finance projects with the AIIB.16 The administration hopes that this partnership will undercut the AIIB’s “potential to promote new alliances and sidestep existing institutions” and become China’s foreign policy instrument.17 The U.S. declares that it “would welcome new multilateral institutions that strengthen the international financial architecture,” and “[c]o-financing projects with existing institutions like the World Bank or the Asian Development Bank will help ensure that high quality, time-tested standards are maintained” at the AIIB.18

In the meantime, the AIIB’s founding members will need to decide on the distribution of voting rights. One rumored option is to allocate to the Asian members 75% of the voting shares, which will then be divided among those members according to their GDPs. The remaining 25% will go to non-Asian members.19 Under this distribution, Beijing could easily amass a majority vote.20 Another issue is the structuring of the board of directors.21 The U.S. has allegedly been urging China to adopt the structure at the World Bank and IMF, where “countries are represented by resident directors who are actively involved in the institutions and vote on new projects, programs and policies. Those representatives act as a check on management.”22 But Beijing wants the AIIB’s management, foreseeably predominated by Chinese officials, to exercise more power.23 As the negotiations continue, Beijing expects to finalize the AIIB’s Articles of Agreement by the end of June and commence operations by the end of this year.24 The prospects of the AIIB attaining the “high quality, time-tested” international standards will soon be revealed.

 


  1. Andrea Thomas & Charles Hutzler, Germany, France, Italy to Join China-Backed Development Bank, Wall St. J. (Mar. 17, 2015, 5:33 PM), http://www.wsj.com/articles/germany-france-italy-to-join-china-backed-development-bank-1426597078. 

  2. Id. 

  3. Id. 

  4. Choe Sang-Hun, South Korea Says It’ll Join Regional Development Bank Led by China, N.Y. Times (Mar. 26, 2015), http://www.nytimes.com/2015/03/27/world/asia/south-korea-to-join-asian-infrastructure-investment-bank.html?_r=0. 

  5. Thomas & Hutzler, supra note 1. 

  6. Geoff Dyer & George Parker, US Attacks UK’s “Constant Accommodation” with China, Fin. Times (Mar.12, 2015, 5:25 PM), http://www.ft.com/intl/cms/s/0/31c4880a-c8d2-11e4-bc64-00144feab7de.html#axzz3VWEd2pZP. 

  7. Thomas & Hutzler, supra note 1. 

  8. Asian Infrastructure Investment Bank: France, Germany and Italy Said to Join, Guardian (Mar. 17, 2015, 2:09 AM), http://www.theguardian.com/world/2015/mar/17/asian-infrastructure-investment-bank-france-germany-and-italy-said-to-join. 

  9. Id. 

  10. Choe, supra note 4 

  11. Thomas & Hutzler, supra note 1. 

  12. Lingling Wei & Bob Davis, China Forgoes Veto Power at New Bank to Win Key European Nations’ Support, Wall St. J. (Mar. 23, 2015, 7:23 PM), http://www.wsj.com/articles/china-forgoes-veto-power-at-new-bank-to-win-key-european-nations-support-1427131055. 

  13. Id. 

  14. Id. 

  15. Id. 

  16. Ian Talley, U.S. Looks to Work with China-Led Infrastructure Fund, Wall St. J. (Mar. 22, 2015, 7:18 PM), http://www.wsj.com/articles/u-s-to-seek-collaboration-with-china-led-asian-infrastructure-investment-bank-1427057486. 

  17. Id. 

  18. Id. 

  19. Wei & Davis, supra note 12. 

  20. Id. 

  21. Id. 

  22. Id. 

  23. Id. 

  24. Id. 

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