China’s Infrastructure Bank Makes Inroads in Asia

Like many countries, China has long reverted to cash as a means to buy influence with other countries. An obvious example is the furtherance of Beijing’s “One China” policy, whereby China lavishes extensive economic aid in exchange for a country’s political allegiance to refuting Taiwan’s claim as an independent country and legitimate representative of China. According to AidData, countries which vote with China at the U.N. usually receive more aid than other countries.

To date, Beijing has successfully chipped away at Taipei’s claim, with just 21 countries recognizing the Republic of China’s government in Taiwan.

Yet beyond the obvious political motivations, Beijing is also keen to obtain the resources needed to fuel its still growing economy. But Beijing has recognized that getting the resources it needs out of resource-rich countries is not always easy, given these countries lack sufficient infrastructure such as roads, highways, ports, pipelines and railways. So China is offering to build that infrastructure, while creating more work for its construction, steel, cement, railway and machinery companies.

To fund the construction of infrastructure, China has established the Asian Infrastructure Investment Bank (AIIB), as part of Chinese President Xi Jinping’s vision in 2013 of restoring China as a global power under the “Belt and Road Initiative” (BRI) or “One Belt, One Road” (OBOR). On May 14-15, President Xi hosted leaders from 29 countries in Beijing for the Belt and Road Forum, intended to push for the reestablishment of the ancient silk road trade routes through infrastructure investment.

The AIIB represents an effort by Beijing to use soft power to achieve geopolitical influence in Asia, as Jin Liqun, the Chinese president of the AIIB recently implied: “China needs to do something that can help it be recognized as a responsible leader.”

Following the launch of AIIB in January 2016, and with 57 countries signing on, a total of 13 projects have been approved. The latest approval came this month for a $160 million loan to help improve the transmission and distribution of electricity in Andhra Pradesh, India.

The AIIB has also approved power sector investments in other South Asian countries, including $165 million in loans to upgrade the electricity distribution and provide electricity to more than 2.5 million rural consumers in Bangladesh and $300 million for the Tarbela Hydroelectric Dam project in Pakistan. In South Asia, the AIIB has also approved loans of $100 million for a motorway in Pakistan and $60 million for a gas field and pipeline development in Bangladesh.

The AIIB’s approval of $400 million in loans for projects in Pakistan will certainly help cement relations with one of Beijing’s staunchest allies. The AIIB’s loans may go along way toward currying favor with Pakistanis – the overwhelming majority (some 80%) of whom hold a favorable view of China (the highest in Asia), according to a recent Pew Center Research survey.

Indonesians too, hold China in high regard, with some 60% having favorable opinions of China while being far less concerned over territorial disputes with China than other ASEAN nations like Vietnam and the Philippines. Certainly adding to China’s popularity with Indonesians will be AIIB’s $217 million participation in a $1.7 billion project to improve slums in Indonesia, providing access to clean water and sanitation.

Yet the goodwill expected by China will only follow if the projects are implemented on time, on budget and in accordance with environmental standards and social safeguards. Beijing ‘s track record in environmental protection throughout China leaves much to be desired, although authorities have recently taken measures to reduce high pollution levels. On this front, AIIB’s participation with lenders such as World Bank and Asian Development Bank (ADB) is advantageous, given the stricter of local or World Bank guidelines are often written into co-financing agreements.

With Beijing holding the majority (28%) of AIIB’s voting rights (India has 8%, Russia 6%), the bank has rightly been noted by some analysts as a deliberate political effort to pull Asian countries closer into China’s orbit. However, co-financings with the World Bank and ADB – who will be reluctant to give the new bank a lead role – will translate into a junior role for AIIB and help mitigate this concern.

Over the long run, as AIIB staff come up the learning curve, the AIIB will seek to increase its political influence on Asian nations by doing projects on its own and participating in fewer co-financings.

There is the danger that in so doing, the stricter environmental and social standards imposed by other developmental institutions may be set aside in the rush to quickly roll out major infrastructure projects and gain favor with host nations. If standards are relaxed, Asian host nations of AIIB projects may come to face the same problems China has experienced with its own infrastructure growth, including forced relocations, quality control problems and investment in wasteful “white elephants.”

Needless to say, other multilateral banks, such as the World Bank and the ADB, have been cited in the past for their association with environmentally harmful projects to corrupt governments. Despite this risk, the AIIB deserves a chance to offer a new alternative and prove itself to be a viable development finance institution. Asia needs the infrastructure necessary to grow – and China’s economy needs new opportunities for growth.