Making Bank

Why China’s new infrastructure bank represents a challenge to the global order.


Later this week, the Chinese government will convene a multilateral meeting in Beijing that is either an act of enlightened global leadership or a not-so-subtle effort to undermine and supplant the Western-led international order.

The issue at stake is China’s efforts to create the Asian Infrastructure Investment Bank (AIIB), a multilateral lending institution charged with providing much-needed upgrades to the region’s communications, energy, and transportation networks. With China set to provide half of the initial $50 billion, the remaining funds are slated to come from Southeast Asia, South Asia, and the Middle East. Officials from at least 20 founding members are expected to gather in Beijing on Oct. 24 for a signing ceremony to establish the organization, which will be followed by negotiations at a later date to hammer out rules for how the institution will actually function.

The idea that Asia needs more infrastructure is hardly controversial. The Manila-based Asian Development Bank (ADB), a 67-member organization established in 1966 to alleviate poverty in the region, has estimated that East Asia alone needs $8 trillion in infrastructure investment through 2020 to maintain economic growth. Moreover, existing international lending institutions like the World Bank and the ADB won’t come close to closing the gap. The ADB, for instance, lends just $10 billion annually for infrastructure.

But that’s about where the consensus ends. While Chinese officials have been canvassing the globe courting potential donors for the AIIB, the United States has reportedly been voicing its concerns and lobbying others to approach China’s overtures with skepticism.

In part, Washington’s problem is that this is a power play by Beijing. Western and Chinese observers agree that providing an alternative lending institution to the World Bank and the ADB will "strengthen China’s position and influence in Asia" and "diminish U.S. regional leadership." And more than just another multilateral initiative, the AIIB is shaping up to be distinctly China-led. China’s 50 percent share will likely make it far more dominant in the AIIB than Japan and the United States in the ADB — combined those two countries hold just over 25 percent voting power.

By Beijing’s design, this means that China will have outsized control, if not de facto veto power, over decisions at the AIIB. This is worrisome given China’s checkered track record on international assistance and lending. This year, China came in dead last in an aid transparency index ranking of 68 donor nations and institutions; in 2013, it ranked last as well. This lack of openness about operations and intentions has U.S. officials concerned that China will create an AIIB that fails to meet widely accepted international norms on issues including environment, labor, and anti-corruption.

Low or non-existent standards in these areas would be consistent with China’s overall mode of foreign economic support. In fact, Chinese President Xi Jinping has touted that Beijing offers assistance "with no political strings attached," unlike the IMF and World Bank, which regularly require recipient states to make accompanying reforms to how they govern their citizens, treat the environment, and set economic policy. As a result, there are innumerable cases, such as the now-suspended $3.6 billion Myitsone hydro-electric dam in Myanmar, in which an overseas Chinese infrastructure project was doing more harm than good to local populations. A China-controlled AIIB will almost assuredly pay less attention than existing multilateral banks to advancing environmental protection and good governance in Asia.

These anxieties — felt not just in Washington — have created ambivalence about the AIIB. Sure, potential recipient nations have been quick to enlist, including most countries in Southeast Asia and several South Asian nations including India, Pakistan, and Sri Lanka. But the bank needs givers, not just getters. That’s where it gets interesting. China will have to net at least some of the world’s larger developed economies to make the AIIB anything more than a shell for Chinese lending. Singapore is so far the only advanced economy to have signaled its intent to join. The United States and Japan are out for now. And despite aggressive lobbying from Beijing, no European countries are expected to join as founding members.

This leaves Australia and South Korea as the key swing states that will shape the initial success and narrative of the bank. Both Canberra and Seoul have expressed interest, but have yet to commit. Even if they share Washington and Tokyo’s concerns, proponents argue that it’s better to get in on the ground and try to shape the institution from within, rather than forgoing that opportunity by remaining an outside critic. Furthermore — and ethical concerns aside — getting in early makes good business sense for countries with firms that would like to win contracts to build all that new infrastructure.

Regardless, where there’s a will, there’s a way — and despite U.S. objections, Beijing will almost certainly highlight the launch of the AIIB when it hosts 21 world leaders for the annual Asia-Pacific Economic Cooperation forum in mid-November.

Washington should reflect on why it is facing this dilemma. Despite frequent reiterations that the United States "welcomes China’s rise," Washington hasn’t always made room at the table for Beijing. No doubt the United States would like China to do more to combat global problems like climate change and Ebola, but U.S. officials remain circumspect — and often rightly so — about the benefits of greater Chinese involvement on issues where Beijing is likely to stray from Washington and pursue its own course.

As a result, Beijing knows when the United States rolls out its welcome mat only halfway, like during July’s Rim of the Pacific naval exercise. For the first time, the United States invited China to participate — but largely relegated it to the sidelines. (China’s navy even felt compelled to send a spy ship to monitor the exercises.)

With the AIIB, Beijing felt compelled to sidestep existing international lending institutions and create a new organization in part because China wasn’t granted sufficient voting share at the IMF commensurate with its position in the global economy. (Though China is the second largest economy in the world, it holds a meager 3.8 percent voting share at the IMF, comparable to Italy’s and less than a quarter that of the United States.) This ought to be a wakeup call for Congress — which has chosen not to pass legislation that would reform the IMF — that emerging powers can now pursue alternative mechanisms that may not be to Washington’s liking.

But it’s also likely that China would have founded the AIIB regardless of congressional action. This effort comes after several other moves by Beijing to create or reinvigorate institutions that exclude the United States and its allies. These include the BRICS Bank, the Shanghai Cooperation Organization, and the Conference on Interaction and Confidence-Building Measures in Asia — an alphabet soup of regional institutions where Asia’s leaders are engaging on political, economic and security issues without Washington’s heavy hand. Beijing is also pushing two major free trade initiatives — the Regional Comprehensive Economic Partnership and a new Regional Free Trade Area of the Asia-Pacific — in the face of U.S. efforts to conclude negotiations on the massive Trans-Pacific Partnership trade agreement, which does not yet include China.

The United States should hardly expect anything less from a rising power that feels like the prevailing system is stacked against it. The big strategy question is deciding whether bringing China into the tent — even with considerable concerns about the implications of Chinese participation — is preferable to a future in which Washington could find itself on the outside of important decisions and institutions.

This means that the AIIB is not a one-off problem for the United States, but rather Beijing’s boldest move yet in an institutional competition for global governance that has now officially begun. Later this week, Washington will learn it can no longer bank on the perennial predominance of the U.S.-led order.

Ely Ratner is the Maurice R. Greenberg senior fellow in China studies at the Council on Foreign Relations. He was deputy national security advisor to Vice President Joe Biden from 2015 to 2017 and previously served in the Office of Chinese and Mongolian Affairs at the State Department and as a professional staff member on the U.S. Senate Foreign Relations Committee. His current work focuses on U.S.-China relations, regional security in East Asia, and U.S. national security policy in Asia. Twitter: @elyratner