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The AIIB - The infrastructure of power

Reasons to be enthusiastic about China s answer to the World Bank

Jul 2nd 2016

CHINA s growing global clout can be unsettling for the incumbents who must make

room for it. At the same time, China s recent financial tumult has been

unnerving for the investors exposed to it. This combination of vastness and

vulnerability has left some people afraid of China and others afraid for it.

Both groups have found reason to worry about the Asia Infrastructure Investment

Bank (AIIB), which has just held its initial annual meeting in Beijing and

approved its first $509m-worth of projects.

The AIIB reflects China s new eagerness to institutionalise its official

lending abroad, which has been generous but contentious. Another example is the

sprawling one-belt, one-road initiative, which aims to revivify trade routes

across and around the Eurasian landmass (see article). Harking back

nostalgically to the Silk Road, it envisages a web of bilateral agreements

between China and the beneficiaries of its largesse. The AIIB is more modern

and multilateral in character. It is billed as China s 21st-century answer to

lenders like the World Bank (always led by Americans) and the Asian Development

Bank (dominated by Japan).

To its critics, the AIIB is early evidence of China s determination to work

around existing institutions rather than through them. Where some see

aggression, others see hubris. The AIIB was conceived when China s

foreign-exchange reserves seemed headed inexorably towards $4 trillion. Since

then, China s yuan has fallen and capital has fled. Having lost over $500

billion of hard-currency reserves in 11 months, can China really afford to lend

dollars to Tajikistan?

Neither fear stands up to scrutiny. China s financial commitment to the AIIB is

equivalent to less than one percent of its remaining reserves. Almost 70% of

the institution s $100 billion of capital is drawn from its other 56

participants. It will also raise money by issuing bonds of its own. Far from

being a fair-weather folly, the AIIB appears well-timed. Global capital has

retreated from emerging markets, leaving a gap the AIIB will help fill. By the

same token, the retreating dollars are sheltering in safe assets, such as the

highly rated bonds the AIIB proposes to sell.

Unlike the World Bank, which is pulled hither and thither by its members, the

AIIB will keep a tighter focus on infrastructure. It has no sitting board or

permanent branch offices in borrowing countries. It is also quick, approving

four projects within six months of its launch date. More established

multilateral lenders can take a year or two to do the same. Some fear the AIIB

will deviate from prevailing norms in other, more troubling ways undercutting

environmental standards, say. But of its first four projects, three are joint

ventures with existing institutions, subject to their protocols. Its $217m

project to improve slum-life in 154 Indonesian cities, led by a veteran of the

World Bank, seems alert to the dangers of soil erosion and groundwater

pollution. Likewise, its road-improvement plan in Tajikistan, administered by

the European Bank for Reconstruction and Development, will tactfully relocate a

monument to Avicenna, a Persian polymath who memorised the Koran by the age of

ten.

Any assessment of the AIIB s safeguards must also consider the alternative. If

the new institution did not exist, China would presumably lend the money

bilaterally, escaping any scrutiny by its peers. It has instead invited outside

participation, precisely because it wants the respectability such partnerships

confer.

But if China is happy for its new bank to work with existing lenders, why not

simply work within them? One reason is that they have been painfully slow to

accommodate it. The IMF, for example, agreed in 2010 to give emerging economies

a bigger say. But by the time America s Congress ratified the deal five years

later, China s economy had grown by 80% (and Japan s had shrunk by a quarter)

in dollar terms. If international financial institutions make room for China,

it may bypass them anyway, but if they do not, it definitely will. The AIIB s

first solo venture will bring electricity to 2.5m rural homes in Bangladesh.

That is not the only kind of power distribution that needs modernising.