Challenges on the Asian Infrastructure Investment Bank

Yexin Mao /

Chinese President Xi Jinping and Premier Li Keqiang announced the Asian Infrastructure Investment Bank (AIIB) initiative during their visits to Southeast Asian countries in October 2013. The AIIB will focus on the development of infrastructure and other productive sectors in Asia and is expected to be fully established by the end of 2015. As of April 15, 2015, there are 57 Prospective Founding Members (PFMs), of which 37 are in Asia.

According to the Asian Development Bank (ADB), between 2010 and 2020, Asia needs to invest approximately $8 trillion in overall national infrastructure. In addition, Asia needs to spend approximately $290 billion on specific regional infrastructure projects in transport and energy that are in the pipeline. The ADB has just $160 billion in capital, and the World Bank, which has co-financed with other regional institutions for years, has around $500 billion. The AIIB plans to have a $50 billion fund to start.

In addition to plugging the infrastructure funding gap, there are several reasons for China’s new initiative. First, China’s economic growth slowed to 7 percent in the first quarter of 2015, its slowest quarterly pace since 2009. The AIIB is an approach for China to transfer huge excess capacity in heavy industries, such as iron and steel, abroad. Moreover, by exporting technologies and improving transportation and economic integration between China and the Asian regions, China wants to find new markets and greater access to energy resources and balance the U.S. pivot to Asia. The China Global Investment Tracker created by The Heritage Foundation and the American Enterprise Institute has shown that energy is still the main target for Chinese outward investment but, in addition, transportation construction contracts are prominent while investment in the financial sector has receded. Second, China may use the new bank to expand its regional influence.

Despite a preliminary agreement, the AIIB still faces great challenges, including the distribution of voting shares and how to ensure transparency, efficiency, and accountability mechanisms. The Wall Street Journal points out five keys for the West to keep a multilateral lender clean, efficient, and transparent:

  1. Personnel is power;
  2. Metrics matter—the number and size of loans from the AIIB and how quickly they are disbursed must be evaluated by an independent system to assess the results;
  3. Don’t be fooled by sweet promises—i.e., the shareholders that contribute the most have the most influence, regardless of explicit veto power;
  4. Transparency starts at the top; and
  5. Safeguards matter.

Although the Chinese government said that the AIIB would adopt the best practices of more established institutions, how it would work remains uncertain. Given weak institutions and poor governance in developing countries, the greatest failures of multilateral development institutions have come from funding grandiose projects that benefit the current elite, but do not properly balance environmental, social, and development priorities. At a recent House Financial Services Committee hearing, U.S. Treasury Secretary Jack Lew said the U.S. was not opposed to the creation of the AIIB and recognized the need for greater infrastructure spending in Asia. But he also said that the U.S. was concerned that the new bank would not live up to “the highest global standards” for governance or lending and urged those now joining the bank to consider that. He posed this question: “Will the AIIB protect the rights of workers, the environment, and deal with corruption issues appropriately?” Japanese Chief Cabinet Secretary Yoshihide Suga also said on March 31 that it was “impossible” for Japan to join unless China answered its concerns about how the bank would operate.

To deal with China’s initiative, the U.S. should cautiously evaluate the AIIB, urge China to ensure the fair and transparent governance structure, and not undermine the current international system. Meanwhile, to maintain its international influence in Asia, the U.S. should promote negotiation of high-quality economic agreements, such as the Trans-Pacific Partnership, to ensure fair competition and liberalize market access.

Yexin Mao is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.

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