AIIB: Is the Chinese-led Development Bank a Role Model?

The following is a guest post from Tamar Gutner, associate professor of international relations at American University’s School of International Service, who is writing a book about the birth and design of the Asian Infrastructure Investment Bank.

With the Trump administration openly disdainful of multilateralism and many of the international organizations the United States helped create, China is attempting to step into the leadership void by promoting global cooperation and supporting international organizations. The best showcase of China’s leadership aspirations is its regional development bank, the Asian Infrastructure Investment Bank (AIIB), which is holding its third annual meeting on June 25 and 26.

When Chinese President Xi Jinping first proposed creating a new Chinese-led development bank to focus on infrastructure development in the fall of 2013, many were suspicious about China’s intentions. After all, the World Bank, Asian Development Bank (ADB), and other regional development banks already operated in Asia, with most lending plenty of money to China. The Obama administration actively lobbied other countries not to join the bank amid concerns it could undermine the others, while unfairly benefitting Chinese companies. The argument was that China’s authoritarian government would be hard pressed to head a user-friendly development bank that followed standards and norms on issues like environment, transparency, and accountability. Now that the AIIB is up and running, we see that it is broadly cut from the same cloth as other development banks, but competition is still likely to be an issue in the future, and suspicions will not quickly disappear. 

The AIIB Today

Despite U.S. efforts to convince other major donor countries to shy away from the AIIB, none did, except for Japan. Today, the AIIB has the second largest global membership behind the World Bank, with approved membership now standing at eight-six. That compares with 189 at the World Bank’s International Bank for Reconstruction and Development (IBRD), and sixty-seven at the ADB. With $100 billion in capital, the AIIB is a medium-sized regional development bank with total lending to date at around $4 billion.

The U.S. concern that the AIIB would deliberately undermine other multilateral development banks (MDB) was overblown. AIIB President Jin Liqun, who was tasked with creating the bank, wanted an institution that would “rest upon multilateralism and international cooperation.” He even brought in recently-retired American World Bank experts to design key parts of the new bank, including Natalie Lichtenstein, the Chief Counsel for establishing the bank, who drafted its charter, and Stephen F. Lintner, the expert who led the design of the new bank’s environmental and social framework. Jin himself also had extensive MDB experience, as a former vice minister at China’s Ministry of Finance who was in charge of the World Bank office, vice president of the ADB, and an alternative executive director at the World Bank. The fact that the AIIB received AAA ratings from top credit rating agencies underscored that it is clearly recognizable as a member of the MDB community, despite its relative youth.

The bank’s governance structure is also similar to the other MDBs. It has a board of governors with one representative from each member, a smaller board of directors, and a president. China has the single largest voting share at 26.6 percent, which gives it veto power over major decisions. Jin has said China would not use that power, although there is nothing in the bank’s charter that precludes it from doing so. An important difference between the AIIB and most other major development banks is that the AIIB’s board is nonresident. The AIIB will soon announce another notable difference, an Accountability Framework Regulation, which includes a provision to shift project approval from the board (as it is done at other MDBs) to the president, beginning January 1, 2019, and phased in over several years. The new provision will no doubt increase concerns about how much oversight the AIIB’s board has over the bank’s work. AIIB officials counter that the board will have a stronger oversight function, and that any board member can call for board involvement if there are concerns about a project.  

The AIIB has been highly cooperative with other development banks—to date, two-thirds of the bank’s projects are cofinanced. This percentage is likely to decline over time as the young bank gathers momentum, but will likely plateau around 50 percent, according to a senior AIIB official. The bank’s motto is to be “lean, green, and clean,” and the “lean” part reflects its goal to have a small, nimble bureaucracy, while being efficient and cost-effective. The AIIB currently has under a hundred and fifty full-time employees, which is one-tenth the size of the World Bank. While other banks have deeper wells of finance and development expertise to draw from, AIIB is more narrowly focused on infrastructure development in Asia.

What About the Future?

Clearly, the worst fears about the AIIB crowding out financing from its competitors have not been borne out. More competition between the AIIB and other MDBs is to be expected in the medium term, especially if the AIIB develops a set of specialized expertise. However, it is not uncommon for development banks to vie with one another for projects.

The AIIB is not limited to lending in Asia, and its new Strategy on Financing Operations in Non-Regional Members specifies such financing must benefit Asia by supporting cross-country connectivity or renewable energy generation, and in members that are “geographically proximate to and closely economically integrated” with Asia. The bank is currently looking to work in Latin America. Right now, there is a cap of 15 percent on nonregional lending, but that can be revisited by the AIIB’s board in the future. Where it won’t likely be expanding lending for now is China, which has decided to seek few projects from the AIIB.

Ultimately, the proof of AIIB’s legitimacy will be reflected in its performance and how it fits with China’s other initiatives and actions. Will the bank follow its state-of-the-art policies? Its projects are still in early stages of implementation. Some international and regional nongovernmental organizations (NGO) are already concerned about how policies are being implemented in specific projects. NGOs are also asking the bank for more clarity in its draft information policy on how it will achieve a culture of transparency.

It will also take time to see how AIIB fits in with China’s much larger, amorphous, and less transparent Belt and Road Initiative, originally aimed at building infrastructure from Asia to Europe, but with an ever-expanding geographical scope. AIIB has said numerous times that it is separate from BRI, but the two can intersect in the future, especially if BRI projects meet international standards. India, which does not participate in BRI, is the AIIB’s second largest shareholder and largest borrower to date, and is hosting this year’s annual meeting.

One thing is evident: the AIIB gives China increased stature as a leader of an international organization with global membership. China has powerful incentives to keep a close eye on the bank’s performance. But a clear or growing contradiction between China’s actions outside the AIIB and the bank’s policies and goals could still risk turning the AIIB into the Potemkin village of international organizations—a showcase of good intentions in a larger sea of hypocrisy. Other major Western donors decided it is better to be inside rather than outside the AIIB, to ensure their influence. Perhaps it’s time for the U.S. to reconsider its membership, as unlikely as that seems in today’s climate. As Jin has said in the past: “We have a standing invitation [to the United States.] Anytime you think you are ready, pick up the phone, give me a ring.”