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As a stand-alone institution, the proposed Asian Infrastructure Investment Bank (AIIB) cannot change the world. But it exists in a broader strategic framework of Chinese policies and institutions that give the AIIB some global significance. This framework has sub-regional, Eurasian, and global levels with economic and security dimensions. The AIIB plays a role in strategy at each level to advance China’s leadership. Though the idea has been evolving toward greater inclusivity of others’ interests in response to new external pressures and changing circumstances, its connection to Chinese strategy is unlikely to be severed. Therefore, it is important to evaluate this larger agenda and the AIIB role in it before one can ask the right questions about the AIIB and, at this early stage of its development, derive an indication of where Chinese ambitions are headed.

The AIIB and Peripheral Diplomacy

President Xi Jinping unveiled the AIIB idea in speeches to the Indonesian parliament and an APEC summit hosted by Indonesia when he visited that country in October 2013. In the context of Xi’s diplomatic agenda that fall, the AIIB was not a stand-alone proposal; it was part of a sequenced regional diplomatic initiative that targeted China’s Central Asian and Southeast Asian periphery. Xi’s periphery diplomacy (zhoubian waijiao 周边外交) was launched in September 2013 when he toured Central Asia and signed trade and investment deals with China’s neighbors worth over USD 50 billion. It was on this tour that Xi unveiled the Silk Road Economic Belt initiative, which envisioned Chinese-financed and Chinese-built road, rail, and pipeline corridors radiating out from China’s western border provinces to link up with all of Central Asia.

Xi did not ignore the need to build new institutions to organize and finance this Central Asian initiative. He proposed a new development bank with the SCO members to help finance the Silk Road Economic Belt. This idea has been stalled, perhaps due to Russian resistance. Not to be deterred, China created the USD 40 billion Silk Road Development Fund under its sole management a year later. This fund was tapped in 2015 to finance parts of the Silk Road Economic Belt corridor to be built between Kashgar in Xinjiang province and the Arabian Sea port of Gwadar in Pakistan.

Xi’s attention then quickly turned in October 2013 to Southeast Asia when both he and Premier Li Keqiang paid visits to ASEAN countries. Xi made a state visit to Indonesia and offered the “21st Century Maritime Silk Road” (21CMSR) concept, promising closer trade and investment ties with Southeast Asia through the development of new shipping routes and maritime trade infrastructure. As he did when he proposed the Silk Road Economic Belt in Central Asia, Xi proposed a new multilateral development bank to finance infrastructure construction called the AIIB when he visited Southeast Asia.

To give his vision of a China-led Asian community a name, he introduced the idea of a “Community of Common Destiny” during his Indonesia trip.¹ For the first time in the modern era, a Chinese leader proposed to reshape regional institutions and economic relations to promote Asian development and co-prosperity under Chinese leadership.²

Within days of Xi’s visit, Li Keqiang went to Southeast Asia where he mentioned the AIIB idea, while focusing on a “2+7 Initiative” when he spoke at the annual China-ASEAN leaders’ meeting.³ Li proposed seven functional cooperation agendas (with associated forums and funding pledges) as a way to advance two fundamental purposes: regional peace and security and shared Southeast Asian prosperity. The 2+7 Initiative develops functional cooperation across a broad front and proposes that the intractable South China Sea dispute, which directly affects only some ASEAN members, be removed from the China-ASEAN agenda in order to benefit all ASEAN members through 2+7 cooperation.

After he returned to China, Xi convened the Central Committee work forum on diplomacy towards surrounding countries in late October to authoritatively explain his Central Asian and Southeast Asian “periphery diplomacy,” establish guidance for constructing and managing the China-led Community of Common Destiny, and kick-start work on the “One Belt, One Road” (OBOR) initiative.⁴ China would use OBOR to build transportation and trade infrastructure, diverse investment relations, and economic development policy dialog to intimately connect China to its neighbors. New regional institutions led by China such as the AIIB would help to organize and finance this effort.

The AIIB and OBOR

Subsequently, it became clear that the 21CMSR was meant to include the entire Eurasian littoral southward from Fuzhou through maritime Southeast Asia, around the Indian Ocean and Arabian Peninsula, to reach the coastline of East Africa and the Mediterranean Sea. Similarly, the landward Silk Road Economic Belt agenda was intended to go beyond China’s nearest neighbors to reach every major interior and coastal sub region in Eurasia. Together, China’s overland and maritime Silk Roads have come to be known as OBOR, yi dai yi lu (一代一路), not so much a preconceived blueprint as Xi’s signature strategic agenda with the details to be worked out during his remaining years in office.

The infrastructure that constitutes OBOR is both hard and soft. Hard infrastructure is railways, highways, ports, energy pipelines, industrial parks, border customs facilities, and special trade zones. They use steel, concrete, electronics, and machinery that China can provide. Soft infrastructure refers to the development of financial institutions like the AIIB, international trade and investment agreements, multilateral cooperation forums, academic research, cultural exchange, tourism, etc., that constitute the institutional foundations for trade and investment flows. China can now supply itself with higher value-added goods and services, including computer, Internet, and cell phone technology, consumer durables, heavy plant and equipment, high-speed railways, and construction and engineering services. But it lacks access to export markets to sell growing surplus production overseas. The OBOR infrastructure will build this access. In 2014, Li Keqiang made five tours around Eurasia to promote OBOR and provided at least USD 94 billion in new government financing to projects and programs when he met with leaders of Silk Road countries.

By the time Xi Jinping proposed the AIIB, Chinese engineering and construction firms using machinery, industrial materials, and labor from China were already busy constructing port and port-related infrastructure projects along the southern rim of Eurasia, along the coast of East Africa, and in the Mediterranean. Such infrastructure not only facilitates exports, but creates new equity and lending investment opportunities for Chinese port management firms, shipping firms, banks, manufacturers, and trade firms.

Once established, such port enclaves can provide bridgeheads to help Chinese trade and investment penetrate new and unfamiliar inland markets, especially after Silk Road Economic Belt land transportation corridors link up to these ports. Examples of such Chinese built port nodes linking OBOR land and sea corridors include Kyaukphyu in Myanmar, Gwadar in Pakistan, and Piraeus in Greece. Chinese port enclaves along the rim lands of Eurasia open up a vast market for Chinese trade and investment.

To what extent will the AIIB promote Chinese commercial and investment interests? Will China use its influence to favor Chinese interests in AIIB project selection, project design, project bidding, project construction, and post-completion operations? Will Chinese engineering firms, construction firms, plant and equipment makers, trading firms, labor contractors, and investors receive favored treatment? Host governments that want infrastructure and apply for AIIB funding, as well as other members of the AIIB, will have different interests and normative agendas, and will want the AIIB to be transparently and fairly managed. A first indication of the answer to this question will be provided by the Articles of Association (AOA) when they are finally made public. Later, when operations actually begin, it will be of interest to see how AIIB projects are actually identified, reviewed, approved, financed, built, and operated.

An Asia in which, both literally and figuratively, “all roads lead to China” would link China’s neighbors to it, and make each one ever more dependent on access to China’s market. The result would be a Community of Common Destiny economically integrated via OBOR, gathered under Chinese leadership in new institutions, with each member increasingly dependent on China. With respect to AIIB, the point to bear in mind is that it was designed to facilitate OBOR and build the Community of Common Destiny.

The AIIB and the Domestic Development Agenda

If China cannot expand its overseas trade and investment activity, it risks energy and resource shortages, slowing industrial growth, falling profits, worsening asset price bubbles, and eternal dependence on the US dollar. Today’s growing torrent outward of direct investment started in a small way at the end of the 1990s when China articulated a new “going out” (zouchuqu 走出去) policy. The idea was to invest growing dollar reserves and domestic savings abroad to secure new sources of energy and raw materials to fuel China’s industrialization. Unsurprisingly, China’s need for imported energy, raw materials, and food has grown, and so has the need for outward investment to secure and develop these resources. What is new is the need to export more than T-shirts, toys, and sneakers to sustain China’s development. China now must export industrial materials, machinery, electronics, and consumer durables to keep these newer domestic industries growing, and prepare the way for the next stage of industrial development.

China now has a vast surplus of financial capital that needs to find profitable and sound overseas investment opportunities. China’s foreign exchange reserves have grown to USD 3.8 trillion, and doubts about the future of the US dollar motivate China to invest its foreign exchange reserves in more than US Treasury Bills. China’s savings, trust, and insurance funds also need new investment opportunities. Domestic debt has grown so quickly since 2008 that accumulated financial risk requires low interest rates, and it is hard to find sound long-term investment opportunities. Looking at aggregate investment and output growth figures in the Chinese economy shows that it now takes RMB 5.0 of investment to produce RMB 1.0 of GDP growth.⁵ This makes overseas investment and export finance attractive alternatives; not only can these yield better returns, but they also can be used to promote export-substitution and develop new overseas markets for Chinese businesses. Investment in overseas public infrastructure is attractive to China. In theory, it permits new real wealth production and raises the productivity of existing production factors without harming public welfare. Ports, railways, pipelines, and industrial zones provide essential services. They can be a sound long-term investment opportunity, and they can open up additional new private business opportunities.

Hence, China sees the AIIB as a means to create new and better uses for China’s surplus investment capital. But it is not easy to develop public infrastructure projects that meet the criteria of investment fund managers, who need low risk and stable positive returns. One must objectively and reliably assess project feasibility and estimate returns on investment. Then project-financing schemes attractive to private investment funds will have to be tailored to each project. That is a tall order for AIIB. China also wants to internationalize use of the RMB so that counter-parties assume exchange rate risks and China can enjoy the benefits of money seigniorage. The AIIB can help to normalize RMB denominated trade invoicing, financing, contract settlement, and investment across Eurasia by denominating its contracts in RMB.

The AIIB and Eurasian strategy

As already indicated in the earlier discussion of OBOR, the AIIB is part of a broader effort to integrate and penetrate markets across Eurasia, but it plays a role in China’s Eurasian security strategy in three additional ways. First, large-scale port development of the sort one sees in Myanmar and Pakistan is designed to ship energy sourced in Africa and the Middle East through port terminals into overland pipelines to China. These routes are shorter alternatives to the long and easily interdicted tanker route through the Malacca Strait. Next, Chinese-financed, -built, -owned, and -operated ports along the 21CMSR can also service China’s naval fleet, which will follow and protect maritime commercial and investment interests as these grow larger. For example, an Indian observer has noted that in 2014 a Chinese submarine docked in a deep-water facility inside an enclave built, owned, and managed by China Merchant Holdings International at the port of Colombo, ignoring the Sri Lankan requirement that foreign naval vessels dock at Sri Lanka owned and operated port berths. Because of China’s economic aid and investment in Sri Lanka, the government turned a blind eye to this and other instances of PLA Navy ships docking in the Chinese owned and operated port enclave.⁶

Finally, the AIIB also plays a role in China’s “New Asian Security Concept.” In May 2014, China hosted the Conference on Interaction and Confidence-Building Measures in Asia (CICA), a security forum founded by Kazakhstan and populated by countries across Eurasia from the Middle East to East Asia. China hopes to develop CICA into Asia’s main security forum. When Xi Jinping gave the keynote address, he introduced the “New Asian Security Concept,” calling for Asian security to be managed exclusively by Asian countries, and he rejected traditional military alliances as inappropriate in Asia. Instead, he proposed enhancement of stability and security through cooperative and mutually beneficial economic development driven by China’s continuing rise, specifically offering the AIIB and OBOR as a better basis for Eurasian peace and security.⁷

The AIIB, Global Public Goods, and the Error of US Thinking

The post-2015 agenda refers to the UN General Assembly mandate to replace the Millennium Development Goals (MDGs) program. A new set of global development norms and goals are to be adopted at the September 2015 UNGA meeting.⁸ Development of the new agenda entered the inter-governmental discussion phase in 2014. This new agenda will go beyond the government aid budget and poverty eradication focus of the MDGs to include the mobilization of private finance and non-governmental stakeholders and the creation of a more sustainable development effort.⁹ The AIIB helps to give China credibility as a leading contributor in this important global agenda. It has been stung by accusations of free riding on the public goods provided by the United States and its western allies, as well as by criticism of its unsustainable economic policies and practices. The creation of the AIIB is offered as a response to China’s critics and as evidence of its good faith efforts to contribute to the common global good.¹⁰

The development agenda replacing the MDGs has various measures of “sustainability.” China might be embarrassed by the environmental (un)sustainability of its development model, but it can offer the AIIB as a contribution to the “sustainable financing” of development. The OECD has never met its target of giving 0.7 percent of member GDP as ODA to poor countries, and the fiscal crises afflicting most OECD members today put the western ODA effort into further doubt. China can use the USD 100 billion capitalization of the AIIB as a fresh contribution to the sustainable financing of development needs.

More broadly, China has become a significant provider of foreign aid that does not follow western ODA norms.¹¹ China calls its aid duiwai yuanzhu 对外援助 or international development cooperation. It has little interest in conforming to western ODA norms, which say that ODA is supposed to be a direct, highly concessional (i.e., grant-like), and commercially untied government-to-government transfer of resources to assist the recipient government’s economic development and poverty reduction efforts.

Nevertheless, if one were to comb through available Chinese data to identify and aggregate all Chinese foreign assistance, (which is mostly implemented by the Ministry of Commerce, the China Development Bank, and the Ex-Im Bank of China), to identify funding that meets western ODA criteria, one would find that China is today the sixth largest ODA donor. This makes it a leading ODA donor even though China does not abide by ODA norms and still considers itself a developing country.¹²

The ODA concept was developed during the era of North-South relations in the 1960s-1970s. In the era of the MDGs (2000-2015), ODA focused almost exclusively on poverty eradication. Today, most development experts say a new approach is needed. First, ODA donor governments cannot finance meaningful global development without engaging private capital in sustainable partnerships. Second, recipient governments too often lack capacity to put aid to good use. For-profit and non-profit actors can be engaged to make aid work better. Third, poverty reduction strategies require more than financial and technical resource transfers to achieve sustainable results. The last factor to be mentioned here is that development means more than poverty reduction. It also means industrial development, equitable development, and environmentally sustainable development.

Here is where the AIIB may be presented as an innovative solution to some of these problems. Depending on its charter and policies, the AIIB can use its resources to sustainably enlist private investment capital in development finance through project co-lending, direct equity participation, the issue of bonds, bond guarantees, and subsidies. This strategy fits the spirit of the so-called “Public Private Partnership” theme in the Post-2015 agenda.¹³ The economic infrastructure focus targets industrial development and macroeconomic growth, which may also generate strong poverty reduction, as has been seen in China. The AIIB thus occupies a sweet spot in the post-2015 agenda and gives China some political credibility.

Beyond this, the AIIB may also become an expression of “South-South cooperation” led by China that has to be accommodated in post-2015 norms of development. This refers to aid given to less developed countries by new emerging aid donors such as China, India, and Brazil. This model of economic assistance is openly tied to the trade and investment interests of emerging donors, and it is sympathetic to the interest of recipient governments in developing industrial capacity. Economic infrastructure financing has gone out of fashion among Western ODA donors, who have been focused on poverty reduction and recipient government institutional and policy reform. Moreover, there are relatively few political conditions and bureaucratic procedures attached to Chinese-style South-South assistance, which helps to speed up project approval and completion. Recipient governments greatly appreciate these aspects of Chinese aid. Under Chinese leadership, AIIB could provide a vehicle to institutionalize this South-South approach to development assistance. With the incorporation of South-South cooperation norms in the post-2015 agenda, Western ODA norms may become restricted to “North-South” aid relations between traditional donors and global south aid recipients.

From a global governance perspective, the AIIB is a much-needed fresh source of development finance with a useful new focus on infrastructure investment and public-private partnership to build sustainable development finance. The AIIB is especially useful in Asia today, where Chinese, Indian, and Southeast Asian growth is expected to remain robust and will drive strong demand for new infrastructure. This growth could lift up lagging areas of Asia if economic linkages to growth centers can be forged.

For these reasons, it was a mistake for the United States to criticize the AIIB,¹⁴ especially when it offered nothing comparable in its place, and refused to approve a reallocation of capital shares in the IMF or the ADB to give China and other emerging donors a larger say in institutional governance. Instead, the United States should have welcomed the AIIB and begun a traditional donor vs. emerging donor dialogue to push forward the global governance effort, joining the AIIB when it was invited and encouraging its allies to join. A US-led traditional donor-emerging donor dialogue inside the AIIB would have shown a better US attitude toward inclusive global governance.

The AIIB’s Changing Face

After Xi Jinping unveiled the AIIB in October 2013, it developed from a rather parochial and self-serving initial conception toward more inclusivity as it became clear to China that it needed buy-in and help from the international community if the AIIB were to succeed in its ambitious and complex undertaking. This story is encouraging, because it shows that China is receptive to different interests and norms, but of course, it is still the early days for the AIIB. We have still not seen its Articles of Association, and it has not been staffed and brought into operation. When it was initially proposed, the intention reportedly was to compete with the ADB, include only friendly Asian neighbors, and reduce Western influence in Asia.¹⁵ The first international meeting of potential AIIB members was held in January 2015, to which neither India nor Japan were invited. When these countries asked for details of Chinese plans for AIIB, few were forthcoming.

This exclusivity raised international concern. China’s record in managing its own lending institutions transparently and strictly according to objective standards, with due attention paid to investment risk, is not notably good. In addition, large economic infrastructure projects such as ports, railways, highways, hydropower dams, and pipelines—and private investment projects in large-scale forestry, mining, petroleum refineries, and estate agriculture with which public infrastructure projects are often linked—tend to generate large social and environmental externalities that financial and economic feasibility studies often overlook. And when the interests of powerful governments drive big infrastructure projects, even questions of sound design and quality of construction can be given insufficient consideration in the interest of achieving quick and politically expedient results. Responsible international development banks would insist on carefully executed engineering, financial, environmental, and social impact studies, as well as open contract bidding for projects. Here again, China has not been a world leader in issues of safeguards and quality control in project planning and execution. Finally, the focus on Asian infrastructure at the same time it sought to finance and build the OBOR initiative, together with China’s early desire to hand-pick Asian members for the AIIB, hinted at an effort to organize an exclusive China-centered Community of Common Destiny.

In June 2014, China responded to such concerns by inviting India to join. In July, China invited South Korea and Japan to join. The United States, however, was not buying China’s vaguely worded assurances. It advised US allies to ignore China’s delayed invitation to join the AIIB. By then it became clear that the AIIB would be led by China and headquartered there, but technocrats from leading development finance institutions would be recruited to ensure that it was run with professional competence. The AIIB would have an authorized capital subscription of up to USD 100 billion and would start with USD 50 billion. China organized a ceremony for 21 Asian countries in the Great Hall of the People to sign a memorandum of understanding (MOU) to join as founding members on October 24, 2014. It announced that more countries were welcome to join and a March 31, 2015 deadline for signing the MOU. After that date, the founding members would discuss the AOA drafted by Chinese officials and approve the bank charter by the end of June 2015. The target date for member ratification of the AOA and funding the AIIB would be the end of 2015, with operations to begin in 2016.

By January 2015, only 26 countries had asked to join, but they included US allies New Zealand and Saudi Arabia. Then, as the March 31 deadline neared, Britain unexpectedly announced on March 13 that it would join the AIIB. Within days, Germany, Italy, and France followed. As the March deadline neared, on March 24, Li Keqiang met with the Japanese president of the ADB and both men agreed to future cooperation between the two banks. On March 28 in a speech to the Boao Forum, Xi pledged AIIB cooperation with the ADB and World Bank, and he also gave assurances that the AIIB and the OBOR were both “open initiatives” that welcomed others’ participation.

The AIIB’s AOA have not been made public as of this writing, but many key issues seem to have been decided at the Fifth Chief Negotiators’ Meeting of the 57 AIIB founding members held May 20-22 in Singapore. According to Shi Yaobin, a Chinese Finance Ministry vice minister and permanent chair of the Chief Negotiators Meeting, the AOA will be made public by the end of June, and the bank will be established by the end of the year after a sufficient number of ratifications are received. With respect to ownership and decision-making, bank capital shares will be fully subscribed at USD 100 billion, with 75 percent reserved for Asian governments and 25 percent for non-Asian governments. The Asian share of AIIB capital will be divided among governments according to the size of their GDP, and Western governments will divide their 25 percent of ownership the same way. A Financial Times report indicates that China will own about 25 percent of the bank and not have a veto.¹⁶

The bank is to have an executive council led by the AIIB president that presents projects and other issues to the board of directors for approval. The president is likely to be Chinese. There will be 12 directors, 9 from Asian countries and 3 from non-Asian countries, who will represent the membership. They will not be residing in Beijing. They will visit periodically, and will hold videoconference meetings throughout the year for routine decision-making. Professional staff recruited internationally will implement policies and projects. With input from European founding members, environmental and social impact safeguards, as well as open procurement guidelines, have been worked out in principle. The currency denomination of loans is undecided, but it may be a basket of currencies rather than the RMB.

Does the AIIB Threaten US hegemonic Order?

Somewhat fortuitously, no doubt due to the initiative of traditional donors to join the AIIB, this institution is not set to become what China may have initially intended to create, or what others may have feared. Fourteen founding members are EU states, and 21 are OECD members. Given the way the AIIB has developed after they joined, they will counterbalance Chinese influence, introduce current best practices in development finance, and promote the integration of the AIIB into the existing system of global development finance. Thus, viewing the AIIB as a stand-alone development bank, it is hard to see any threat to the liberal international order championed by the United States. But viewed together with China’s other regional agendas and global governance initiatives, the AIIB becomes part of Beijing’s emerging effort to assert great power leadership and reshape the international system in ways that satisfy Beijing’s core values and interests.

The AIIB is part of a Chinese initiative directed at Southeast Asia. Here China aims to facilitate a successful takeover of South China Sea ownership using coercive force to discourage resistance, and economic cooperation to buy the acquiescence of ASEAN as a whole, leaving individual rival claimants isolated and impotent. At the Eurasian level, the AIIB contributes to a China-centered program of economic integration, as well as to the extension of its military and diplomatic reach across and around Eurasia to enhance China’s security. At the global level, the AIIB supports China’s leadership credentials among Global South countries and emerging powers. The AIIB works alongside the BRICS Bank to create new sources of finance and to institutionalize different development norms that challenge the US-sponsored system of development banks.

As a newly risen great power, is not China’s strategy an expression of its legitimate interests? Interests are legitimately pursued if the rights of others and community norms are respected. If China behaves in this way, the United States and others have nothing to fear. The concern is that Beijing will use its growing power to run roughshod over the interests of others in an effort to construct a might-makes-right sphere of great power dominance.

The behavior of China with respect to AIIB as a development finance institution is a hopeful sign. It shows that China can learn to accommodate the rights and expectations of others in a legitimate pursuit of its interests, at least so far as we can tell at this early stage. How China handles the actual design and operation of the AIIB will be scrutinized because it will be a harbinger of what China’s rise to power will mean for the rest of the world. One hopes that, in managing the AIIB and its larger international leadership strategies, Beijing will see that cooperation and accommodation is the key to its legitimate pursuit of interests, and that this is preferable to what is accomplished through war. And this is a lesson that applies to everyone, not only China.

With respect to what the AIIB supports at sub regional, Eurasian, and global levels of Chinese strategy, we only see preponderant evidence of an illegitimate pursuit of Chinese interests in the South China Sea. Whether China persists in its coercive efforts to unilaterally determine the disposition of territorial rights in the South China Sea will tell us something about the larger strategy that the AIIB serves.