The world is changing. China’s ascent in the global economy, rising as the second largest country in terms of Gross Domestic Product (GDP), was only the prelude. Scholars around the world acknowledged China’s increasing role in the international society. However, there was a wide range of speculations and ideas on when and how China will catch up with the global hegemon, the United States (U.S.). Some argued that it would take some time for China to challenge the hegemonic status of the U.S., while others argued that China’s overtaking of the U.S. would come sooner than expected. This new international order has begun to materialize with China’s initiation of the Asia Infrastructure and Investment Bank (AIIB).
▲ MOU of AIIB held in October, 2014. Provided by www.washingtontimes.com
The Humble Beginning
The idea of AIIB was first introduced in October 2013, when Xi Jin Ping, the leader of China, was on a tour through Asia. The new bank proposed that it would create a new system of funding infrastructure development, building roads, ports, railroads, and much more. Although there has been a great need for funds to develop infrastructure in Asia, the region suffered from a lack of financial and institutional support. 21 different countries, including China, India, Thailand, Malaysia, Singapore, the Philippines, Pakistan, Bangladesh, Brunei, Cambodia, Kazakhstan, Kuwait, Laos, Myanmar, Mongolia, Nepal, Oman, Qatar, Sri Lanka, Uzbekistan, and Vietnam, signed a Memorandum of Understanding (MOU) on October 24, 2014. The bank is planned to launch by the end of 2015. The AIIB is expected to start operating with 50 billion dollars invested by China and increase its budget to 100 billion dollars after receiving investment from other member countries.
The AIIB was greeted coldly when the idea was first proposed in 2013. The countries who signed the MOU were mainly developing countries that would become the beneficiaries rather than the donors. It was criticized as having overlapping roles with the Asia Development Bank (ADB) and the World Bank (WB). The U.S. especially pressured its allies not to take part in the organization, questioning the AIIB’s ability to uphold international standards. Transparency and environmental concerns were also raised about the bank. However, the dynamics turned upside once the United Kingdom (UK) expressed its enthusiasm at becoming the founding member of the AIIB.
The Turning Point
The UK announced on March 12 that it is eager to join he AIIB, a surprise decision that shocked both Beijing and Washington. The UK, one of the most powerful allies of America, firmly stated that joining the AIIB was out of pure national interest, and that other countries do not have the right to pressure others from making independent sovereign decisions. This has created a domino effect and opened the channel for many other countries. Those that were interested in joining but had not dared, due to U.S. pressure, quickly followed. Germany, France, Italy, Switzerland, Luxembourg, and Korea, applied for membership soon after the UK’s announcement. Russia had seemed to be largely uninterested in the whole affair but also applied on the last day. Even Taiwan applied for membership in the AIIB as well as Israel.
The only major developed nations that had not applied for membership are Japan and the U.S. Both countries have major stakes at hand if the AIIB is launched. Japan is heading another development bank called the ADB, with its headquarters in Manila. It has been working to boost growth in Asia by lending loans to developing and underdeveloped countries. It has a much longer history, launched in 1966. However, it was criticized severely, as the head of the organization had always been a Japanese national, and the decisionmaking power was mainly distributed to Japan and the U.S.
The U.S. has even more to lose compared to Japan, as it leads many other development banks such as the WB and the ADB. The AIIB isolates the U.S. from major infrastructural development in the Asian region, making the U.S. more vulnerable as it is only starting to recover from the 2008 financial crisis. “I think the bottom line is maybe we screwed it up. I think we miscalculated in terms of that (sic) other countries also want to be part of the Chinese initiative. All of a sudden everybody was in,” was the way Madeleine Albright, the former U.S. Secretary of State described the situation.
The Impetus for Action
While Japan and the U.S. are in a scramble contemplating on their next move, experts say that this should have been anticipated. Beijing’s efforts to expand its influence over international economic order have been thwarted on many occasions. China does not have a strong influence over the Bretton Woods institutions including the WB and the International Monetary Fund (IMF). China’s endeavor to include Renminbi (RMB), as one of the reserve currencies in the IMF was rejected in 2010 as it was deemed not “freely useable.” “China tried to re-negotiate their share of expenses within the ADB to enlarge their influence, but their voice was not incorporated,” said Professor Kang Moonsung (Division of International Studies). This prompted China to create a new institution and establish a new economic order of their own, changing the paradigm of post-World War II economic order mainly dominated by Western countries.
Professor Kang explained that “China’s domestic economic situation also seems to be the motive for the initiation of the AIIB. For example, quite a number of Chinese corporations are working for the development of infrastructure in China.” He continued, “Of course, there are still many regions that need to be developed, but there are too many corporations in the infrastructure-related industry. China currently has an overcapacity in the construction industry. If these corporations can participate in constructions abroad, this would bring significant economic benefits to China.”
▲ David Cameron and Xi Jin Ping. Provided by The Telegraph.
All Roads Lead to China
The establishment of the bank has been viewed as a method of loading ammunition for China’s ambitious “Land and Maritime Silk Road” scheme. President Xi has been pushing for increased connectivity and cooperation within the regions previously connected by the Silk Road. Also known as the “One Belt, One Road” initiative, connecting the region throughrailroads and ports is expected to boost not only China’s economic power but also foster development in poor landlocked Central Asian countries, Southeast Asian countries, and even in Europe and Africa. The financing of the infrastructural development will not be limited to merely building roads, rails, and ports. Pipelines to transport oil and natural gas, along withfiber-optic networks for the Internet, are also expected to be funded by the AIIB.
According to Hong Kong’s leading newspaper, South China Morning Post, “The Silk Road Economic Belt focuses on linking China, Central Asia, Russia, and the Baltic states, linking China to the Gulf and Mediterranean through Central Asia and West Asia, and connecting China with Southeast Asia, South Asia and the Indian Ocean. The 21st Century Maritime Silk Road will stretch from China to Europe through the South China Sea and the Indian Ocean in one route, and from China to the South Pacific in the other.”
The AIIB and the “One Belt, One Road” initiative also serve China’s military interests according to Nadège Rolland, the Senior Project Director for Political and Security Affairs at the National Bureau of Asian Research (NBR). She said, “For over a decade, Chinese authorities have sought to circumvent the “Malacca One Belt One Road Initiative. Provided by The Wall Street Journal. Professor Kang Moonsung. Photographed by Lee Ji Hoon. May 2015 47 dilemma” by finding ways to lessen reliance on the Southeast Asian strait through which 80 percent of China’s energy supplies from the Middle East and West Africa now pass. The planned infrastructure, including pipelines and roads, as well as railway lines, will improve China’s ability to transport crucial energy resources from suppliers in Central Asia and the Middle East.”
She continued by saying, “The fear of a maritime blockade imposed by the U.S. in the event of a conflict in East Asia (one option proposed by critics of the air-sea battle concept) has led Chinese thinkers to look for ways to bypass sea lanes subject to U.S. naval dominance. In this sense, the new Silk Road vision offers a sort of homecoming for China, which has historically given priority to its landmass at the expense of maritime expansion.”
Implications for Korea
Korea was one of the late applicants to the AIIB due to the pressure from the U.S. The announcement by the UK to join the AIIB weakened Korea’s burden in also taking part. The Korean public generally approved of the decision by the Korean government, hoping for more economic benefit. Some criticized the Korean government for not joining earlier.
The issue now lies in obtaining the most shares from the organization. As Japan, the second largest economy in Asia, has not joined, Korea is the third largest Asian country in terms of GDP. “For Korea, dividing the shares based on GDP is positive. Of course, accounting for regional differences, such as favoring Asian countries, is preferable,” said Professor Kang. “The more Korea pays, the more decision-making power Korea gets. Even though the Korean government needs to provide funds, if Korean construction corporations are able to participate in projects led by the AIIB, this will bring significant economic benefits to Korea,” commented Kang, emphasizing the potential benefits Korea can get from donating more funds to the AIIB. “Negotiating is the key to deciding these matters,” said Professor Kang.
It has been claimed that North Korea was denied membership in the AIIB due to the absence of appropriate economic data. This, however, was not officially confirmed by the Chinese government but reported by Emerging Markets, a British financial news website. In the long run, South Korea may have difficulties in benefiting from the “One Belt, One Road” initiative without the cooperation of North Korea.
▲ Barak Obama. Provided by www.washingtontimes.com.
▲ Malacca Dilemma. Provided by www.chinesedefence.com.
The Future of the AIIB
Despite the positive outlook for the AIIB, some concerns and challenges remain. “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,” said the White House national security council. “The international community has a stake in seeing the AIIB complement the existing architecture, and to work effectively alongside the WB and ADB.”
Professor Kang also stressed that China must demonstrate that the AIIB is different from the existing organizations and will not have the same inefficiency problems. “China needs to show a clear vision on how the AIIB is different from previous organizations and be transparent,” he said.
As a fledging organization that has not yet formally been launched, the AIIB has a long way to go. However, it is certain that the initiatiton of the AIIB will change the paradigm of international order.
▲ Professor Kang Moonsung. Photographed by Lee Ji Hoon.