China Takes the Lead

JACKSON TSE analyzes the impetus behind the creation of the Asia Infrastructure and Investment Bank and its implications for the future. 

EU countries positive on partnering with China for banking project
Chinese President Xi Jinping and representatives of several Asian Infrastructure Investment Bank member countries posing for a picture in October 2014. 

Initiating operations in January 2016, the Asian Infrastructure and Investment Bank (AIIB) is a Chinese-conceived multilateral institution aimed at financing infrastructure projects in the Asia Pacific region. The AIIB was established to “complement and cooperate with the existing MDBs to jointly address the daunting infrastructure needs in Asia,” an annual shortfall which the Asian Development Bank pegs at approximately $800 billion. So far, 57 countries have signed onto the Bank’s Articles of Agreement, providing it with an authorized capital stock of $100 billion.

While this sum may not seem momentous, measuring two-thirds of the Asian Development Bank’s budget and half that of the World Bank’s, the establishment of a Chinese-led multilateral institution in and of itself is significant. As recent as 2013, Georgetown University Professor David Shambaugh wrote that China remains “a partial power,” a power that remains isolated, whose reach remains decidedly “shallow.” Assessed alongside the “One Belt, One Road” initiative, increasing activeness in the South China Sea, and blossoming trade deals through the Shanghai Cooperation Organization, the Bank accentuates China’s increasing desire to seek a leadership role in the Asia Pacific. In light of these developments, how does China see itself?

Following the Cultural Revolution, China viewed itself as a politically weak, economically poor country. In 1978, Deng Xiaoping asserted that “as a socialist country, China shall always belong to the Third World and shall never seek hegemony.” To belabor this point, Deng advanced the taoguang yanghui strategy – that China should “hide [its] capacities and bide [its] time; be good at maintaining a low profile; and never claim leadership.”

Such a policy made geopolitical sense. Before China initiatived market reform in 1978, China’s GDP per capita measured a mere $165. In 1981, close to 85 percent of the populace lived under the poverty line of $1.25/day. Since Reform and Opening, however, China has undergone a dramatic transformation. The country’s annual average growth rate has exceeded 10 percent. GDP per capita has risen to $7,590, and close to 600 million people have been lifted out of poverty.

At present, there have been differing opinions amongst China watchers as to the continued relevance of Deng’s “low profile” dictum. Paul Haenle, Director of the Carnegie-Tsinghua Center for Global Policy, argues that Deng’s policy is “increasingly irrelevant… [given the] active and muscular approach to foreign affairs [adopted by] President Xi Jinping.” Normatively, however, Haenle states that “there is still an active debate as to China’s desired end-state.” Scholars like Yan Xuetong argue that Beijing should assume greater leadership on the world stage by establishing military alliances, pursuing a more aggressive foreign policy, and preparing for greater competition vis-à-vis Washington. Others, like Ambassador Wu Jianmin have asserted the need to continue “maintaining a low profile” and focusing efforts inwardly at domestic development.

The debate around the AIIB captures this division. Most scholars argue that while the Chinese leadership continues to prioritize itself via internal development, it has sought out a more active role in the surrounding region – for good or for bad. According to Andrew Nathan of Columbia University, the AIIB serves as a means by which China can not only park its vast exchange reserves, but also to “enhance influence with neighbors and thus improve security in both the economic and the military senses.” This facilitates the leadership’s attempt to “maintain peace and stability domestically, in the periphery, and globally – but also at the same time, to use China’s gradually increasing clout… to build out toward increased security and global influence.” Similarly, former Rear Admiral Yang Yi highlighted that the AIIB is part of Chinese efforts in “bringing a better life for its own people” and strengthens China’s position in “[creating] a harmonious world [and] making countries wealthy, secure, and friendly.”

The Bank’s modus operandi further reflects this duality. China possesses the largest voting share at roughly 26 percent, and holds a 30.34 percent stake in the Bank. Yun Sun, a fellow of the Brookings Institute, notes that this governance structure gives China power over the voting process on issues that require a supermajority, such as the board, the President, capital increases, and other significant policies, leading some to believe that the AIIB is a tool the Chinese government is using to seek personal benefits. As Haenle stresses, “the worst outcome is that China uses AIIB to soak up its own industrial capacity and give contracts to state-owned enterprises, [demonstrating] that Chinese external initiatives are in reality a vehicle to address its own domestic challenges.”

At the same time, the regional and non-regional distribution of capital shares – 75 percent regional and 25 percent non-regional – means that now, more than ever, Asian countries, especially smaller ones, are better positioned to vocalize their developmental priorities and demands. Indeed, the fact that China has given up veto power over day-to-day operational issues has convinced many countries like the United Kingdom and Germany that Beijing is willing to make the AIIB line up with international norms.

Consequently, Asian countries have assumed a range of positions when dealing with the AIIB and, more broadly, China. While Japan has adopted a “wait and see approach” to membership and has engaged in what many see as soft balancing by announcing a $100 billion package deal for “high quality and innovative” infrastructure development, Vietnam has acquiesced relatively quickly to joining the Bank. The Philippines has taken a middle position, joining the Bank, but only after an extended period of consideration in which it voiced its unease.

All share a recognition of China’s immense economic clout and the need for engagement, as well as a distrust of Beijing’s geopolitical intentions. Time will tell as to whether these apprehensions are justified.

 

Jackson is a Yenching scholar studying Economics and Management at Peking University. He graduated from Columbia University in 2015 with a degree in Political Science and Business Management.You can contact him at jacksonltse@gmail.com. 

Image provided by humanosphere.org

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