AIIB nears completion but China's 'global leader' status remains in question

By Lean Alfred Santos 30 June 2015

The Chinese flag. AIIB’s rise underscores two things: China is serious in its attempt to legitimately gain global leadership status, and the international development landscape is steadily evolving. Photo by: Matthew Klein / CC BY-NC-ND

The China-led Asian Infrastructure Investment Bank seems on track to begin full operations early next year.

This week, 50 of the bank’s founding members signed the articles of agreement formally establishing the world’s newest multilateral financial institution. Held in Beijing, where the bank’s headquarters will also be established, the ceremony wrapped up nearly two years of contentious negotiations, brainstorming and justifications over the need for a new multilateral bank to help address the region’s growing infrastructure demands. Asia-Pacific is said to need almost $800 billion in infrastructure investments annually over the next decade — an amount that even the combined resources of the world’s multilateral institutions cannot yet fill.

As expected, the international community welcomed news of the completion of AIIB’s articles of agreement. World Bank President Jim Yong Kim and Asian Development Bank President Takehiko Nakao agree the Beijing-based bank is a welcome addition to the legion of institutions committed to ending poverty and uplifting people’s lives. Yet both bank chiefs have also strongly asserted the need for AIIB to adhere to international standards.

For some development experts, AIIB’s rise underscores two things: China is serious in its attempt to legitimately gain global leadership status, and the international development landscape is steadily evolving.

“This signifies the start of a new chapter in the evolution of international development — a multilateral institution, global in membership, whose agenda is not predominantly determined by the U.S. and its Western allies,” Alexander Cooley, director of Columbia University’s Harriman Institute, told Devex.

He also said that China’s ascent as a global leader “should not be surprising” given the rising profile of emerging donors in the international development scene. Last year, the economic group comprising Brazil, Russia, India, China and South Africa established the New Development Bank.

“[AIIB’s near completion] also signifies China’s willingness to join the global development cause and lead on exploring new development solutions by international standards,” Mengke Liang, a Chinese independent consultant and founder of InterDev China Consulting, told Devex. But she also noted that Beijing has a long way to go as it “still needs to withstand real world challenges,” particularly transparency and corruption issues.

While 50 nations signed the articles, seven prospective founding members — Denmark, Kuwait, Malaysia, the Philippines, Poland, South Africa and Thailand — have asked for more time to assess the agreement. They have until December 2015 to sign on.

China’s de facto veto power

The articles of agreement laid out the purpose of the bank, membership rules, capital share, voting power, governance structure and other general considerations regarding AIIB’s adherence to international standards.

Built to “foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia” while promoting “regional cooperation and partnership in addressing development challenges,” AIIB will have a $100 billion startup capital — $20 billion in paid-in capital and the rest will come in the form of callable shares.

Among the provisions in the 34-page document is a shareholder clause opening up only 25 percent of stocks to nonregional members. Shi Yaobin, China’s deputy finance minister, explained that while the shareholding ration may change later on, the stocks of regional members cannot fall below 70 percent to “preserve the regional character bank.”

This 70:30 ratio eschews traditional shareholding breakdowns at other multilateral institutions. At ADB, for instance, nonregional members can hold as much as 36 percent of capital shares and 34 percent of voting shares — something that China has criticized in the past.

Strikingly, China seems set to dominate capital and voting shares at the Beijing-based institution. Its $29.78 billion paid-in capital gives it as much as 30 percent in shareholdings and over 26 percent in voting shares. India is the second-biggest shareholder with $8.37 billion in paid-in capital, with Russia — which the AIIB Secretariat classified as a regional member — comes in third with $6.5 billion. The largest nonregional member in terms of capital shares is Germany with $4.84 billion.

The institutional design laid out for AIIB “effectively gives China a veto,” according to Cooley. But this is “hardly surprising given that the organization was born of Chinese initiative.” The Columbia University professor also explained that this is not very different in the case of the U.S. — the largest shareholder at the World Bank.

In an attempt to gain the trust of traditional donor countries, China has said that it will forego its veto power at the bank. But its voting share alone already gives it de facto veto power. As stated in the articles of agreement, a 75 percent vote is needed for major operational and financial decisions once the bank is fully running.

Yaobin has been quick to dismiss concerns about China’s automatic veto power, saying the bank’s development is still in its early stages. He also said that as new members are admitted later on, “the proportion of voting shares of China and the other founding members can be gradually diluted.”

Evolution in practice needed

Curtis Chin, former U.S. ambassador to ADB, explained that the country’s past actions at other multilateral organizations “underscore why there is legitimate concern over China’s future behavior at this newest of international financial institutions.”

Chin said he saw firsthand how “China’s domestic and international political agenda forced ADB to change course on a project or even in one case to retreat in its efforts to ensure compliance with bank social safeguards.”

There are general provisions on adhering to international standards in AIIB’s article of agreements, but implementing them will test China’s capability to manage AIIB effectively and efficiently. IDCC’s Liang explained that it is “very important for China to recognize the environment and social impact on outward infrastructure investment projects.” One way to go about it is to hire environmental and community development experts and make sure these perspectives are always “visible, meaning they are heard, considered and adopted.”

Cooley meanwhile explained that there should be a shift in how China — as the leading voice and hand in establishing AIIB — should look at how it administers its development assistance. China is best known for its principle of noninterference when giving aid, but the professor shared that in running AIIB, an evolution in practice should happen.

“This will require robust systems of monitoring and, for the enforcement of these standards, some sort of aid conditionality,” Cooley said. “Officials understand that adopting international standards are important for AIIB’s international legitimacy.”

Lastly, China should give assurance that AIIB will not be used as a vehicle to advance its own political and economic interests. The Columbia University professor said China has to have no room for error.

“The first year will be critical for the bank’s legitimacy and global perceptions about Beijing’s intentions,” Cooley concluded. “Should the bank find itself embroiled in problematic, graft-ridden or politically controversial projects, it will give its critics a platform to continue criticizing China’s commitment to international development standards.”

What are your thoughts on the provisions of AIIB’s articles of agreement? Let us know by leaving a comment below.

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About the author

Lean 2
Lean Alfred Santos@DevexLeanAS

Lean Alfred Santos is a Devex development reporter focusing on the development community in Asia-Pacific, including major players such as the Asian Development Bank and the Asian Infrastructure Investment Bank. Prior to joining Devex, he covered Philippine and international business and economic news, sports and politics. Lean is based in Manila.

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