AIIB: Regional and Global Responses

21 Jan, 2016    ·   4967

Madhura Balasubramaniam provides an overview of the key concerns of the US, EU and countries in Asia vis-à-vis  the AIIB

The Asian Infrastructure Investment Bank (AIIB) was formally inaugurated on 16 January 2016. The AIIB is a multilateral development bank envisaged to "promote interconnectivity and economic integration" in Asia. Headquartered in Beijing, China, the Bank has 57 Prospective Founding Members. In June 2015, the startup capital of $50 billion was increased to $100 billion. The Bank has aroused different reactions from each part of the world. The articles tends to analyse these responses at the regional and global levels.

The foreign policy and economic concerns that underlie the establishment of the AIIB include the need to bridge the infrastructure investment gap of $8 trillion in the East Asian region. The AIIB, with its initial capital of $100 billion to be invested in energy, transportation, rural and urban development and logistics becomes significant in light of the investment gap.  Other major reasons for China to promote the Bank include the under-representation of non-western economies in existing global financial institutions, and the need to channel surplus Chinese capital into overseas investment.

Beijing argues that because 75 per cent of the seats and shares in the AIIB are reserved for Asian countries, the imbalance in representation of non-western economies in the existing international financial system will get addressed. This is an attempt to attend to a broader Chinese foreign policy agenda of playing a more proactive role in global institutions. Finally, infrastructure investment via the AIIB is to serve as a vehicle to drain surplus capital - estimated at $137 billion in the second quarter of 2015 - as well as to address concerns of regarding the capacity of construction material.

Regional Responses
The AIIB has received mixed reactions in major Asian countries. The Philippines has decided to hold off its decision to participate in the AIIB citing the non-binding nature of the Articles of Agreement (AOA). Japan is not participating in the AIIB to avoid a potential negative impact on Tokyo-Washington relations. Vietnam and India, on the other hand, have decided to participate in the AIIB citing their infrastructure demands. The regional response to the AIIB is significant. The Philippines, Vietnam, India and Japan each have territorial disputes with China. It is possible that negotiating opportunities might present themselves as these countries balance their territorial disputes with their growing economic relations with Beijing.

The AIIB is also a new platform for Taiwan to advance its bid for international recognition. Taiwan submitted its bid to join the AIIB and it was rejected on grounds of nomenclature. This is in tune with Beijing’s policy of strictly opposing any representation of Taiwan as an independent state. The rejection of Taiwan on grounds of nomenclature, as opposed to compromises in other international organisations such as the ADB or WTO, is a clear indication that Beijing’s political concerns trump the economic agenda in the establishment of the AIIB. This raises concerns that the AIIB will serve as tool for China to pursue its geopolitical ambitions, particularly in the light of regional territorial disputes. It would, therefore, be significant to observe the AIIB’s response to Taiwan’s bid for ordinary membership in 2016.

Global Responses: EU and the US
The EU's response to the AIIB reflects the willingness of member-states such as UK, Germany and France to engage more closely with Beijing as well as to encourage China to assume a more significant role in multilateral institutions. As members, they do have a potential role to shape the Bank from within. However, the divergence in stances taken by EU members regarding membership bids reflect the need for a coordinated response.

The US had refused to join the AIIB and is also said to have lobbied against the bank, leading to an increasingly isolated position as key US allies joined the Bank. The establishment of the AIIB is viewed as an erosion of US’ influence in the region.

Washington's concerns about the AIIB presenting a challenge to the existing financial institutions, and on whether or not it would meet standards of governance and environmental safeguards, were addressed during Chinese President Xi Jinping's US visit in November 2015. In a joint statement released by the White House, the US acknowledged China's contributions to the financial infrastructure in Asia and beyond, reflecting a nuanced change in Washington's position in an attempt to perhaps mitigate some of the political costs it incurred due to non-participation as well as attempts to dissuade its regional and European allies from joining the Bank.

The establishment of the AIIB highlights China’s attempt to shape the international financial architecture in a manner that is economically beneficial to the region and also serves to portray China as a responsible stakeholder in the international system. Simultaneously, the regional and global responses reflect the complexity involved in each country’s decision-making process on participate in the AIIB; and the decisions are informed by both economic and political considerations vis-à-vis their respective bilateral relations with China.