 |
| The AIIB will provide too vital to China’s prestige, and to the authority of the Xi Jinping’s administration, to be allowed to wither or to be kicked into the tall grass, as the AIF was. |
On the surface at least, China’s efforts to create a $50 billion, Asia-focused development bank to compete with the likes of the World Bank and the Asian Development Bank are going swimmingly. Beijing has spent much of the year courting around 20 nations in the hopes of launching its much-hyped Asian Infrastructure Investment Bank sometime, it hopes, in 2015 or early 2016.
In May, at the ADB’s annual conference in the Kazakh capital, finance minister Lou Jiwei entertained delegates from 16 countries. Waiters at the Great Wall restaurant in Astana bustled and scurried, serving up a dinner of Peking duck and tofu, washed down with a hearty red from Shandong province. A respected figure at the apex of Chinese politics, Lou was there to do more than wine and dine. He was vested with a delicate task: to convince as many senior government officials as possible at one sitting that Beijing’s ambitious new venture was workable, realistic and, perhaps most crucially, in Asia’s best interests.
 |
| It’s very difficult for the west’s established sovereigns to give up control Li-gang Liu, ANZ |
The new development bank would have China’s stamp of approval on it. Moreover, Lou argued, Asia needed it. The World Bank might have the history and the global standing; the ADB, with $174 billion in total capital and a triple-A rating from Standard & Poor’s, might have the money and the regional prestige, but the first is run by the United States government, while the other has, since its inception in 1966, been tightly controlled by Japan.
Now was the time, Lou whispered, to create a development bank run by and for Asia’s 4.3 billion people. One, moreover, that was focused on building the sort of infrastructure – rail lines, highways, hydroelectric dams, airports, power plants and lines, entire new cities – that impoverished nations in the likes of south Asia and Indochina most desperately needed.
Few at the dinner that evening could dispute that both the logic and the momentum lay with Beijing. For months, Chinese officials had been frantically laying the groundwork for another new multinational lender, the $100 billion Brics New Development Bank (NBD), co-financed by the world’s leading emerging economies. The NBD, which hopes to lend up to $34 billion annually to projects in Latin America, Africa and Asia, was formally launched, amid much fanfare, in Brazil in July.
A new Asian infrastructure bank also made good, hardheaded commercial sense. The region’s poorer reaches remain desperately short of capital, particularly the structural sort needed to build and grow their economies. An April 2014 report by the World Bank estimated the infrastructure gap in south Asia alone at $2.5 trillion.
In stark contrast, China’s foreign exchange reserves hit $4 trillion in July 2014, much of it locked into low-yielding US Treasury bonds. A new multinational development bank would give Beijing freer reign to generate higher returns from infrastructure loans. “If you’re seeking a safe, reliable asset class offering higher yields, what better way than to provide long-term financing for other countries,” notes Chen Long, China economist at consultants Gavekal Dragonomics.
The same rings true for a host of other capital- or resource-rich nations. China has searched far and wide for the international partners it desperately needs, less to plump up the AIIB’s finances than to make it appear genuinely multinational. It hosted a meeting of 20 countries in Shanghai on June 10 for a third round of meetings on the new lender; then a fourth meeting in the final week of July. China’s president Xi Jinping, in office since March 2013, is expected in November to make a more formal announcement on the new lender at the annual Apec economic leaders meeting in Beijing.
The new development bank will be split between creditors and borrowers. On one side, Beijing hopes, will sit an array of sovereign creditors including Singapore, South Korea and China itself, as well as oil-rich Gulf states such as Kuwait and Qatar – nations equally keen, notes Frederic Neumann, co-head of Asian economic research at HSBC, to secure new “investment opportunities for their dollar reserves. In that sense, the AIIB could prove quite useful to them.”
On the other side of the fence are Asia’s poorer states, desperate to borrow in order to build. This list is far longer, and includes much of South Asia and Indochina: Laos, Cambodia and Nepal have already come forward as willing recipients, as well as the likes of Malaysia and Indonesia.
One of the more attractive qualities of the AIIB, those behind the new bank say, will be its ability to operate quickly and decisively. Global multilaterals are worthy but often ponderous institutions, restrained by boundless rules and regulations. The AIIB, one booster promises, will “respect the environment” and will have its own “book of ethics”, but that will not stop it “moving at great speed” after deciding to lend to the builders of, say, a Cambodian dam or a new Burmese rail line.
So far, so good. Yet behind the scenes, far from the fanfare surrounding the new lender, trouble is brewing. Indeed, creating the AIIB is likely to be anything but simple, and could wind up being a giant headache for the People’s Republic, for several reasons.
The first stumbling block is likely to be who will control the new institution. The Brics Development Bank was relatively easy to create. Initial capital was spread evenly across all five founding members, with Brazil, Russia, India, China and South Africa each stumping up $10 billion. (Though 40% of the $100 billion in additional contingency capital will be provided by Beijing). It was an easy sell for politicians from Moscow to Mumbai, keen to build much-needed infrastructure, temper the power of Washington, and enmesh their fortunes with fellow emerging-market powerbrokers.
By contrast, and whatever Beijing says publicly, the AIIB will ineluctably be controlled by its founding father. Individuals who have seen the bank’s working framework say that the mainland plans to commit around 50% of total paid-in capital to the new lender and to secure the vast majority of its voting rights. “China would be first among equals at the NBD, while at the AIIB, China will play a very key role in the institution,” notes HSBC’s Neumann. Adds another commentator: “The AIIB will be China’s baby, plain and simple.”
Beijing, it seems, is set to control the new development bank from the outset, just as Washington and Tokyo have always acted as composer and conductor of, respectively, the World Bank and the ADB. That hardly chimes with China’s publicly heralded vision of a new world order in which power is divvied up more equitably between nation states, and where development banks are run in the interests of both the developed and emerging worlds. For years, China struggled to break America’s and Europe’s stranglehold over the World Bank and the IMF. It railed endlessly and fruitlessly against the iniquity of the world’s largest exporter and second largest economy controlling just 4% of the IMF’s voting shares, and less than 3% of the World Bank’s.
Many sympathised with China’s predicament but queried if Beijing, were the positions to be reversed, would have been more amenable to change. “It’s very difficult for the west’s established sovereigns to give up control [of either of the Bretton Woods institutions],” notes Li-gang Liu, chief China economist at ANZ in Hong Kong. “That’s understandable, as no one wants to give up power.”
So China shifted gears, moving from sabre rattling to action. Yet many in Asia are discomfited by the notion of Beijing extending its power and reach just as it cements its position as the only viable global economic rival to the United States. For many, the initial decision to exclude Japan and India (Tokyo was later, and only privately, invited to join the group), the other two Asian economies most likely to mould events in the 21st Century, from discussions over the AIIB, seemed petty at best and plain bad politics at worst.
Another red flag was raised in June, when China harried its Brics peers into locating the NBD’s headquarters in Shanghai. India’s financial capital Mumbai, a dynamic, heaving microcosm of the best and worst of the emerging world, was widely viewed as the logical, even the spiritual home of the new lender. But the far larger Chinese delegation wanted, and got, its way. “It bullied us into submission,” says an Indian delegate who took part in the discussions. “They are providing most of the cash, and are the driving force [behind the project]. Ultimately it wasn’t worth arguing the toss.”
Many saw this is emblematic of the Middle Kingdom’s divine sense of supremacy and superiority and a sign of things to come. “Japan located the ADB in [the Filipino capital] Manila, and it controls it perfectly well from there,” notes a prominent mainland economist. “It would have cost nothing to give the Indians the honour of hosting the [NBD]. In fact, that simple gesture would have won China a lot of goodwill across the region.”
To many, indeed, it seems an inapt moment to be pressing one’s neighbours to fund a bank whose mere existence reinforces the widespread notion that this is Beijing’s century. Across the region, China is testing the willingness of sovereigns to push back against provocation. Its navy scuffles with civilian ships in Filipino and Vietnamese waters, while its air force plays chicken with Japanese military jets over a chain of islands claimed by both states. Even in Singapore, of all places, there is unease at a pervading sense of Chinese overreach. Little wonder, say some, that mainland-led attempts to turn Asia into a unified mega free-trade area, a direct counterweight to the US-led Trans-Pacific Partnership (to which China has not been invited) is proceeding at barely a crawl.
Disquiet has even spread to Beijing, where some officials mutter about the country’s incoherent regional development policy. “We used to seek a win-win approach when we were dealing with challenges and contracts around Asia,” a well-connected Party official tells Euromoney. “Now there is a tendency to barge around telling people what to do. We’ve become the bully in the playground.”
Another official frets that while the AIIB is great in theory – boosting infrastructure spend in impoverished parts of Asia and allowing capital to compete for projects with the ADB and the World Bank – it is being formed for the wrong reasons. “No one is under any illusion that the bank is an entirely political creation,” he says. He adds: “It’s political, political, political: never forget that. It’s the extension of a new policy under president Xi to dominate the South China Sea and to dominate Asia. We are confusing soft- and hard-power policies.”
Then there is the mysterious disappearance (or, rather, non-appearance) of the Asian Infrastructure Fund (AIF), the de-facto precursor of the AIIB, which sank without trace four years ago, despite boasting the support of big-league state backers. Unreported until now, the AIF was dressed up on creation in mid-2010 as a $1 billion private equity fund, co-financed by China Investment Corporation, the country’s sovereign wealth fund, and the Export-Import Bank of China.
Yet it was anything but a private equity fund. The AIF was a “seed”, from which a $10 billion fund was expected to spring, “drawing in capital from countries across Asia”, says one individual involved in the fund’s initial talks. “Then the fund would be converted into a structure [similar to] the AIIB. China expected other Asian countries to pitch in, but no one ever did, so the project was quietly dropped.”
A prominent mainland businessman, who remembers the non-rise of the fund, asks, acerbically and rhetorically: “Did the fund fail because of the difficulty of cobbling together a few billion dollars across Asia, or because of the fear factor about China?”
Either way, the AIF’s failure to launch bodes ill for the prospects of a new, far larger, and more mainland-centric development bank.
Beijing cannot afford another false start, particularly after pouring its heart, soul and reputation into the new project. That would constitute an intolerable loss of face. In all likelihood, the AIIB will prove too vital to China’s prestige, and to the authority of the Xi administration, to be allowed to wither or be kicked into the tall grass, as the AIF was.
The increasingly assertive Xi administration has, notes HSBC’s Neumann, “expressed its desire to assert the rightful role of China, and [the AIIB] is part of that process.” That may be true. But it will hardly be music to the ears of leaders of countries in the wealthier corners of north- and southeast Asia, where China’s increasing economic and military influence is viewed with more than a little concern. Beijing wants the AIIB to succeed. But that doesn’t mean it will be an easy sell, or that it is in any way a done deal.
