The U.S. may have mastered the notion of soft power. But if there is one thing we can say about the world's No. 2 economy it is this: those guys in China sure know how to imitate.
China's proposed Asian Infrastructure Investment Bank (AIIB) is soft power at it best. An idea once cast aside by the U.S., today even the International Monetary Fund is getting in on China's latest big bank.
IMF director Christine Lagarde said there was "massive" room for IMF co-operation with the AIIB on infrastructure financing, the BBC reported this weekend.
The U.S. government won't want to be left out of this. It will probably lend support too the bank by sending experts and advisors to help inform governance structures and standards, say directors from the Center for Strategic & International Studies in Washington. The U.S. can also work with European countries that have joined the bank in order to use their influence to ensure that the AIIB adheres to best practices, CSIS experts said last week.
AIIB is a multilateral development bank proposed by and majority controlled by China. It has a 36% stake in the governing structure of the bank as it is now. AIIB exists to finance the infrastructure needs in the Asia Pacific region and is different from China's latest development banking project, the so-called BRICS Bank. The real name for that one is the New Development Bank (NDB), China created with Brazil, Russia, India and South Africa last summer. The BRICS bank is a dollar-denominated lending institution that will invest primarily in those five markets, but also in other countries of interest to its members.
China's new development bank is an example of the country's growing importance in southeast Asian... [+]
This new bank is different. For those who love a good old fashion power struggle, the New Development Bank everyone thought was designed to replace the World Bank is sort of like a velociraptor. The AIIB is a T-Rex.
"China continues to aggressively position itself for a much more prominent role in the global financial system," says Jan Dehn, an economist with the Ashmore Group in London. Ashmore loves China. It's one of the only foreign investment firms that has access to the local Chinese bond market, so it watches the country like a hawk. Or sticking with the dino-metaphors, a pterodactyl.
See: What to Know About the AIIB -- Infographics by Caixin Online
In the past few days, China has won notable support from Europe for the AIIB initiative, which together with the NDB directly challenges the influence of the Bretton Woods institutions -- the IMF and World Bank.
Over the years, the World Bank has been focused on improving the lives of the poorest nations. It is not as interested in building mega dams in the Amazon that will help power industry.
"The single most important constraint to continued emerging market expansion is not external in nature – rather it is domestic in the shape of inadequate infrastructure," says Dehn. "The private sector in most emerging countries has expanded dramatically in recent decades, but the public sector’s ability to expand infrastructure has not kept pace," he says, adding that "financial repression and regulatory measures" imposed by Western governments have largely made it impossible for institutional investors to channel sufficient funding into infrastructure.
It appears obvious that the greatest possible boost to global demand and therefore global growth would be unleashed by removing the supply constraints that are the cause of inadequate infrastructure in countries like China, a country that has spent hundreds of billions building entire cities and subway systems from scratch.
For AIIB member India, infrastructure is a necessity not only for business, but for basic needs like waste water treatment.
The World Bank's most recent and largest loan to India was a $500 million financing vehicle for small and mid-sized businesses. In 2014, however, the World Bank lent $107 million to build a highway in the state of Mizoram.
China wants more projects like that. The concern with U.S. and World Bank is that a World Bank loan won't just let heavy machinery saw down trees to build a highway. China might fund a project and not care that it goes through threatened bengal tiger habitats. The World Bank wouldn't fund that. There's just too many eyeballs on them. And the Bank has become more transparent over the years.
China has money to burn. It is becoming a source of capital in the region now. With AIIB, China can fund infrastructure in developing countries that will, in the future, be buying more made in China, or making Chinese branded products. China needs infrastructure it can rely on in Vietnam, Malaysia and even India. The new Indian government's 'Make In India' policy is encouraging Chinese companies to set up manufacturing bases in northern India. These might be products that need to travel throughout India to get to customers, or fly to Singapore to be shipped to consumers in Australia.
An underpass and partially asphalted road in Jamshedpur, India. This is actually a fairly typical... [+]
AIIB would be a compliment to the two development banks already prominent in the region: the Asian Development Bank (ADB) and of course the World Bank. The ADB invests the majority of its funds in infrastructure projects.
The AIIB was first proposed by Chinese President Xi Jinping in October 2013 during an APEC meeting in Indonesia. The bank was then established by a memorandum of understanding a year later, and was signed by 21 countries. The MOU specifies that it will have authorized capital of $100 billion, with initial subscribed capital of $50 billion. That makes it about the same size as the BRICS bank.
Unlike the BRICS bank, AIIB has 32 members, including 6 non-regional members. Last week, the United Kingdom announced that it would join the AIIB. This announcement triggered similar statements by Germany, Luxembourg, France, and Italy. Australia, which first refused to join, hopped on board on Monday.
The U.S. is on the back burner on this.
The National Security Council (NSC) says, "We believe any new multilateral institution should incorporate the high standards of the World Bank and the regional development banks. Based on many discussions, we have concerns about whether the AIIB will meet these high standards, particularly related to governance, and environmental and social safeguards.”
The decision whether to join the AIIB is now partially being seen as a referendum on U.S. influence in Asia. Australia, the biggest Anglo-American outpost in the region, has voted in favor of China.
"Throughout history, great powers have acted in their own interests. The new great power is doing the same. Certainly neither the Americans, nor the British before them, acted otherwise," writes University of New South Wales international law professor Ross Buckley in an op-ed posted on the Sydney Morning Herald's webpage today. "Given (that) these developments are inevitable, our participation in them becomes all the more important as it gives us an opportunity to influence and shape their future direction," Buckley states.
Meanwhile, the perception of CSIS analysts is that the U.S. will fight expansion of Chinese influence and prestige. But, they worn, they will be seen doing so at the cost of regional and global development.
