NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, August 10, 2015

It has been quite surprising to see how much press attention has been focused on China’s creation of the new Asian Infrastructure Investment Bank (AIIB). Usually, these institutions do their work rather quietly and without fanfare. And, because they play such a small role in the market, they hardly cause a ripple. The Asian Development Bank, for instance, finances less than two per cent of Asia’s funding needs. Moreover, this number has been steadily declining as loan volumes and commitments are being canceled and as prepayments are continuing, even as the Asian financial markets continue to grow. If the ADB or the AIIB were private sector banks, they would get very little press attention.

No doubt all the media focus is a function of the implicit conflict the press perceives between China, the U.S. and Japan in the establishment of this new institution. This attention has certainly grown in the last few weeks as the U.S. chided Britain over its membership, issuing a statement saying: “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.”

There is a clear sense that the Chinese would like to play a bigger role on the Asian and world stage, and that they feel rebuffed from doing so at the IMF and the World Bank by the U.S. Congress. Equally as important, the Japanese and American domination of the ADB can be seen a lingering source of frustration to the senior political leadership in Beijing, as China’s economy and political standing have grown. As always, conflict draws media attention.

It is hard to see this as the true story. The Chinese have a reasonably big role in the ADB, with one of the three dedicated single country seats on the Board of Directors making them the third largest owner. Moreover, they have very rarely objected to proposed policies and/or transactions. Indeed, the Chinese representatives at the ADB have often been teased for not being “revolutionary” enough in pressing for needed reforms. And as for the IMF, they are again the third largest shareholder and currently hold one of the three Deputy Managing Director positions within that institution, along with Japan and Brazil. Within the World Bank, Chinese nationals man the CEO and CFO positions of the IFC, arguably the most successful and, therefore, important unit of the institution.

Others say that the creation of the AIIB will help them in the building of the new “Economic Belt Silk Road”, which will cut across their northern territories. Surely China can do so on their own, in cooperation with their Central Asian neighbors, without external financing. All things considered, it is hard to escape the conclusion that the Chinese are merely putting down a “marker” with the AIIB that they intend to play a major role in Asia’s affairs, and are unwilling to take a back seat to the Japanese as a matter of principle.

But it is most interesting that the Chinese have chosen the vehicle of a development bank as their instrument. While such an institution looks good politically and seems to make sense given Asia’s deep infrastructure needs, it is certainly not clear that they will make much progress on related investments through this vehicle. For the AIIB to be an effective political instrument, it needs to be a successful financial and development institution. That will be very hard to fully pull off.