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Will China’s New Bank Undermine the World Bank?

China's President Xi Jinping (4th from the right) and guests at the Asian Infrastructure Investment Bank (AIIB) launch ceremony at the Great Hall of the People in Beijing last October.

China’s President Xi Jinping (4th from the right) and guests at the Asian Infrastructure Investment Bank (AIIB) launch ceremony at the Great Hall of the People in Beijing last October. Photo: Reuters

No one doubts the enormous infrastructure needs of Asia — the Asian Development Bank (ADB) estimates the region will need as much as $8 trillion to address critical infrastructure needs by 2020. To date, much of the work in creating the capital to address those needs has been done by multilateral development institutions like the World Bank and the ADB. While these institutions have made some headway in meeting the infrastructure needs of Asian countries, some critics of the World Bank and ADB argue they are slow and bureaucratic, and impose stifling environmental and social constraints which deter investment.

In part to address Asia’s growing infrastructure needs, Beijing has championed a new player in the region, the Asian Infrastructure Investment Bank (AIIB). Beijing has pledged to contribute much of the initial $50 billion in capital to the AIIB, which plans to offer long-term financing for transportation, telecommunications and energy projects in countries throughout the region. China is also expected to be the AIIB’s largest shareholder, with an equity stake of as much as 50 percent. The AIIB is expected to be formally established by the end of 2015.

The deadline for countries to join the China-led AIIB passed on Tuesday, with 47 countries and territories having applied for Prospective Founding Member status.  According to Chinese foreign ministry spokesperson Hua Chunying, 30 countries had been approved, with more being considered before April 15.  Recent weeks have seen a number of countries scramble for membership, following the unexpected announcement from Britain it would join in mid-March and the announcement by Beijing that China would forgo veto power.

Beijing now backs several development institutions, including the New Development Bank (along with Brazil, Russia, India and South Africa) and the Silk Road Fund, which can draw on funds from China’s foreign-exchange reserves, Export-Import Bank of China, China Development Bank and the country’s sovereign wealth fund.

Outside of Beijing, the AIIB is perceived by many as a counterweight to Western-backed international development banks, and as a reaction to the reluctance of those institutions to grant Beijing a bigger role. Despite having an economy equivalent in size to the U.S., China has voting rights equivalent to only 5 percent at the World Bank (the U.S. has 12 percent), and the Japanese maintain their lock on the presidency of the Asian Development Bank.

While the creation of additional sources of capital would be welcomed in any region, Washington has expressed its concern over the potential for the AIIB to undermine the current efforts of the ADB and World Bank in adopting best practices in procurement, social safeguards, and environment. Reports are Washington has been lobbying furiously against the creation of the bank.

Washington has not been successful, however, in lobbying another important nation, the United Kingdom, from announcing its application last month to be a founding member of AIIB.  The U.K. government’s participation is significant given it is the first G7 country participant and can be expected to bring good governance to the AIIB’s operations, as stated on the U.K. government website, GovUk, promising “the UK will play a key role in ensuring that the AIIB embodies the best standards in accountability, transparency and governance.”  Western nations France, Germany and Italy were quick to follow the lead of Britain and announce joining the AIIB.

Ensuring best practices will be a difficult task.  In the past, the U.S. has opposed financing of coal-fired power plants by the ADB over concerns of global warming, and refused to support construction of dams that intend to displace people from their homes. Washington ‘s fear is of a “race to the bottom” in environmental and social safeguards during the AIIB’s rush to build infrastructure, and the continued degradation of the environment in Asia — home to some of the highest levels of air, water and land pollution in the world. No one disputes Beijing ‘s track record in environmental protection throughout China leaves much to be desired, not even Beijing.

But the degradation of environmental and social safeguards need not take place should the AIIB adopt a co financing approach — participating and contributing capital in cooperation with the World Bank and ADB. Infrastructure projects often involve large amounts of investment, and limits on loan size and country exposure often require joint participation of several lenders and equity investors. Under a co-financing approach, the stricter of local or World Bank guidelines are often written into co financing agreements.

Unfortunately, to the extent the AIIB participates in co-financings, it will also be hindered by the slow and bureaucratic process of the existing development institutions, thereby undermining its determination to fund projects quickly. The AIIB has also been rightly noted by some as a deliberate political effort to pull Southeast Asian countries closer into China’s orbit, and co-financings will weaken its claim for greater political influence in the region, unless it takes a lead role in the arrangement of capital – something the World Bank and ADB will be reluctant to give up.

More likely, the AIIB will not seek to reduce its political influence on Asian nations by participating in co-financings. Rather the AIIB will strive toward maximum influence and expediency by having Beijing control the purse strings and avoiding the stricter environmental and social standards imposed by other developmental institutions. In the rush to quickly roll out major infrastructure projects, Asian nations may face the same problems China has experienced with its own infrastructure, including forced evacuations, quality problems and investment in uneconomic “white elephants.”  A report released last year by the Natural Resources Defense Council, a U.S.-based environmental advocacy group, revealed Chinese ships leaving China using a cheap, high-polluting “bunker” oil and then switching to a higher grade fuel prior to entering a foreign port, in order to meet their stricter foreign environmental standards. A single container ship, according to the report, emits as much fuel pollution as 500,000 new Chinese trucks in a single day.

With ample support for the AIIB flooding in from many Western nations, the Obama administration has been forced to rethink its stance and is now proposing a partnership between the AIIB and the Washington-backed development banks such as the World Bank. Washington should use its influence, in conjunction with Asian and European countries, to foster a more collaborative approach designed to ensure the new institution adheres to stricter environmental and social safeguards in the bank’s prospective Articles of Association, lest Asian countries experience the very serious pollution and social problems Beijing is now trying to confront.



Gary Sands

Gary Sands is a Senior Analyst at Wikistrat, a crowdsourced consultancy, and a Director at Highway West Capital Advisors, a venture capital, project finance and political risk advisory. He has contributed a number of op-eds for Forbes, U.S. News and World Report, Newsweek, Washington Times, The Diplomat, The National Interest, International Policy Digest, Asia Times, EurasiaNet, Eurasia Review, Indo-Pacific Review, the South China Morning Post, and the Global Times. He was previously employed in lending and advisory roles at Shell Capital, ABB Structured Finance, and the U.S. Overseas Private Investment Corporation. He earned his Masters of Business Administration in International Business from the George Washington University in Washington, D.C. and a Bachelor of Science in Finance at the University of Connecticut in Storrs, Connecticut. He spent six years in Shanghai from 2006-2012, four years in Rio de Janeiro, and is currently based in Ho Chi Minh City, Vietnam. Twitter@ForeignDevil666