Column: Shadow-boxing with China

Published on May 5, 2015.

EVEN IN Baku, Azerbaijan, China’s shadow looms large. At the ongoing annual meeting of the Board of Governors of the Asian Development Bank, held this year in this storied city of the Southern Caucasus, China’s ambitions are very much a topic of discussion.

Beijing’s new initiative, the Asian Infrastructure Investment Bank, serves as a focus for much of the talk. At the first news conference held by ADB president Takehiko Nakao, for instance, the main item in the agenda was the announcement of a new, creative arrangement that would significantly increase the multilateral development bank’s lending capacity.

But many, if not most of the questions raised at the conference, dealt with the AIIB and its relationship with the ADB. The day before the news conference, Nakao had met with Liqun Jin, a former ADB vice president now serving as secretary general of the AIIB’s “Multilateral Interim Secretariat.” At that meeting, the two agreed to collaborate. “ADB will cooperate and cofinance with AIIB on infrastructure financing across Asia by using our long experience and expertise in the region,” Nakao said after the meeting.

At the press briefing, he was asked for more specifics. He made a distinction between his initial, cautious remarks after news of Beijing’s plan to launch and fund a new development bank for Asia began to circulate, in 2013, and his—and ADB’s—position today. “Our message is more clear-cut. We will cooperate and we will cofinance” infrastructure projects in Asia.

He noted that an ADB study had concluded that between 2010 and 2020, Asia needed to invest at least $8 trillion in infrastructure. A new institution with an initial capital base of $50 billion and pledged to fund nothing but infrastructure projects should be welcome.

There’s the rub. While about five dozen countries, including all 10 Asean countries, have already signed up as “Prospective Founding Members” of AIIB (the new bank’s preferred term), two of the world’s three largest economies have opted out. Japan, the most influential stakeholder in ADB, and the United States, the dominant power in the World Bank, apparently see the new Chinese initiative as a threat.

Washington, in particular, has been conducting a behind-the-scenes campaign to discourage membership. The eminent economist Joseph Stiglitz wrote last month: “Wealthy European countries’ decision to join provoked the ire of American officials. Indeed, one unnamed American source accused the UK of ‘constant accommodation’ of China. Covertly, the United States put pressure on countries around the world to stay away.”

Another leading economist, Kenneth Rogoff, was even more direct. He wrote: “The US worries that China may use the AIIB to advance China’s economic and political interests. But anyone who is even vaguely familiar with the US approach to multilateral lending knows that no other country has been as adept at exploiting its power and leverage for strategic gain.”

American and, perhaps to a lesser extent, Japanese resistance to the Chinese plan may be geopolitical in nature, but it is expressed in the language of competence, of governance.

At a Governors’ Seminar here in Baku, the Japanese finance minister Taro Aso announced that his country would increase its development aid for new infrastructure projects in Asia. “We want to encourage infrastructure investment that will contribute to high-quality economic growth in Asia.” He kept repeating the phrase “high-quality,” a mannerism which some in the audience understood as code for “not doing things China’s way.”

A much more nuanced Nakao, fielding yet another question about the birth of the AIIB and its implications for ADB at the news conference, defined the difference in terms advantageous to the Chinese initiative. “I’m not trying to interpret his mind [Jin’s], but there is a perception, a complaint, that ADB processes are too many, too slow.” In other words, the AIIB way will be faster, driven by more urgency.

But this can also be understood as yet another code for “not doing things China’s way.” As The Economist noted last November: “In public, the concern cited by America and some of the hold-outs has been a lack of clarity about AIIB’s governance. Critics warn that the China-led bank may fail to live up to the environmental, labor and procurement standards that are essential to the mission of development lenders.” The White House earlier raised a concern about whether the new bank would define itself according to “high quality, time-tested standards.”

But why would China set up a development bank with worldwide multilateral support (note the curiously named secretariat), only to ram through dubious projects for its Asian allies? The fallout would be considerable.

The true source of American and Japanese resistance, then, must be strategic. According to a former US treasury secretary, however, it is plainly the wrong strategy. “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system,” Lawrence Summers wrote in the Financial Times. “I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it. This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the US approach to global economics.”

Precisely because China is a bully in the South China Sea, the United States and Japan must engage it in other forums, wherever they can.

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