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New Chinese Bank Becomes Major Headache For U.S.

  • Mark Baker

Chinese President Xi Jinping (center-front) poses for photos with the guests of the Asian Infrastructure Investment Bank (AIIB) in the Great Hall of the People in Beijing in October 2014.

Chinese President Xi Jinping (center-front) poses for photos with the guests of the Asian Infrastructure Investment Bank (AIIB) in the Great Hall of the People in Beijing in October 2014.

Another day, it seems, brings another new member to China's latest big international initiative: a new development bank for Asia.

Russia became the latest country to announce it would join the China-led Asian Infrastructure Investment Bank (AIIB), to be based in Beijing.

Russian Deputy Prime Minister Igor Shuvalov made the announcement on March 28 at an international forum in China, saying President Vladimir Putin himself had made the decision for Russia to participate, according to RIA Novosti.

Russia is the latest in a string of countries, including many of the United States' closest allies in Europe and Asia, to announce plans to join the bank ahead of a March 31 deadline to become a charter member.

In recent days, Great Britain, Germany, France, Italy, and South Korea have all said they intend to join the $50 billion bank, which would be used to fund infrastructure improvements, like new roads and rail lines, in Asia.

Diplomatic Tug Of War

On its face, a country's decision to join a global development bank wouldn't normally make headlines, but this time around membership is seen as a clear rebuke to the wishes of Washington. The United States has reportedly spent weeks quietly trying to convince friends around the world to decline or at least delay joining the bank.

Publicly, the United States has offered lukewarm support for the AIIB, provided that the bank meets international norms for transparency and supports global standards when it comes to the environment and labor conditions.

U.S. State Department spokeswoman Marie Harf said the United States had been "very clear" that if the AIIB takes steps to maintain these higher international standards, the bank "could add global value."

Challenge To Bretton Woods?

But privately, analysts say Washington's concern may be grounded in a deeper worry over the rise of China and the future of global economic leadership.

Rajiv Biswas, the chief Asia economist at international business consultancy IHS, says the United States could see the AIIB as a threat to the existing economic order formed at the end of World War II, which gave the United States a leading role in the global economy. The Bretton Woods system, based on organizations like the International Monetary Fund (IMF) and World Bank, has guided the world economy for the past 70 years.

The U.S. concern, Biswas says, "is that the new development institution could potentially compete with existing institutions, such as the World Bank." While China participates in those organizations, its limited influence there is no longer commensurate with its growing economic strength, and efforts to reform the IMF to give China a greater role have languished in the U.S. Congress.

News agencies, especially in China, have had a field day with the U.S. position, as countries seemingly fall over themselves to join the new bank. The official Chinese news agency Xinhua says the United States looks "petulant" and "cynical" and has called Washington's apparent lack of support "sour grapes."

While Russia and China are strategic partners, they also compete in key Asian countries for influence and access to natural resources.

While Russia and China are strategic partners, they also compete in key Asian countries for influence and access to natural resources.

Chinese officials, for their part, have been more diplomatic, appearing to take the U.S.'s stated concerns more seriously. Finance Minister Lou Jiwei has made clear the AIIB would complement -- not compete with -- existing institutions like the World Bank and IMF.

With momentum running strongly in favor of the China-led bank, the IMF has added its support. The fund's managing director, Christine Lagarde, said on March 22 that her institution "would welcome" the [AIIB] initiative. She pointed out the IMF is not in the business of financing infrastructure projects, meaning, she said, "there cannot be any competition between the AIIB and us."

Benefits To Central Asia

While the United States may not be so enthusiastic, the new bank could spur badly needed investment in Central Asia. Kazakhstan, Tajikistan, and Uzbekistan have all signaled they will join the new institution when it starts operating by the end of this year.

Biswas says the purpose of the bank would be to channel investment funds from richer countries like China or Singapore, or some of the European countries that have offered to join, into developing countries with lower to middle incomes in Southeast and Central Asia.

Some estimates put the amount of infrastructure development needed in Asia to 2020 as high as $8 trillion. The AIIB could be a remedy for at least part of this shortfall.

Russia's Role

Russia's announcement on March 28 that it would join the AIIB comes late in the game, but appears to have been inevitable. While Russia and China are strategic partners, they also compete in key Central Asian countries for influence and access to natural resources.

Oleg Kuzmin, the chief economist for Russia and the CIS at Renaissance Capital Investment in Moscow, says it's not clear yet what Russian membership in the bank would bring. "We have [little] clarity on the details of this particular institution," he says. "[It] is quite unclear now what could be the potential benefits for Russia, or what could be the potential costs if Russia takes part in this project."

Russian leaders, no doubt, reckoned it would be better to be on the inside rather than the outside of an institution that could conceivably favor Chinese interests over their own in Central Asia.

It's unclear, though, whether China would or could use the AIIB to strengthen its own geopolitical influence in Asia. Biswas says that's certainly an issue, particularly for those countries, like the United States, that have not joined the bank.

But he points out that China is only one of 30 or more countries that will eventually decide on projects to be funded. Other charter members include the major European countries, as well as countries like Singapore, New Zealand, and India. Biswas says all of these have good track records of ensuring high standards as global lenders.

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