Japan Should Consider Joining China’s New Development Bank

Politics Economy

Though it decided not to become a founding member of the Chinese-led Asian Infrastructure Investment Bank, Japan, as a responsible major country, should consider joining the new institution to foster its operation as a regional development institution.

The AIIB: Not to Be Lightly Dismissed

At this year’s annual meeting of the Asian Development Bank, held in Baku, Azerbaijan, at the beginning of May, it was decided that the ADB would cooperate with the Asian Infrastructure Investment Bank in financing infrastructure investment. This outcome was basically in line with the stance adopted by the Japanese government, which has been holding back from joining the new AIIB and seeks to strengthen the role of the existing ADB.

Meanwhile, preparations are underway for the conclusion of the AIIB agreement in June. On May 22, at a meeting of the prospective founding members’ chief negotiators in Singapore, it was agreed to set the initial subscribed capital of the new bank at $100 billion, twice the previously planned amount of $50 billion.

Tokyo and Washington are continuing to keep their distance from the AIIB, citing the lack of transparency regarding the new bank’s governance and concerns over the extent to which it will observe international standards with respect to the environment and human rights in its financing. Since the establishment of the AIIB is a Chinese-led initiative, such concerns gain plausibility from China’s track record in the field of development assistance—a record of aid in places like Africa and Latin America that has been highly problematic in terms of transparency of lending conditions, profitability, and consideration for the environment and human rights.

Even so, the backing that Beijing has gained for this initiative cannot be lightly dismissed. Almost 60 countries and regions have applied to become founding members of the AIIB. Even before Britain announced its intention of joining, the bank had won broad support around Asia. Some experts suggest that the British government’s decision was motivated by the approach of the general election held in  May. This may well have been one factor. But once London made its move, numerous other European countries followed suit.

Emerging Countries Seek a Bigger Say

The emergence of the AIIB as a new framework and the broad support it has garnered must also be considered in the context of the medium- to long-term changes in the international order and the regional order in Asia. Below I will touch on some noteworthy points in this connection.

First, while the AIIB initiative is part of China’s regional strategy for Asia, it also represents an extension of the moves by both China and other emerging countries to seek a bigger say in the governance of the global economy, including international finance. This quest became prominent following the global economic crisis of 2008–9, with the emerging countries pushing for more power within the existing architecture of governance centering on the International Monetary Fund, the World Bank, and the Group of Seven. And it resulted in an increase in the influence of the Group of 20 (which, unlike the G7, includes major emerging countries), along with a proposal for reform of the IMF to give the emerging countries larger stakes.

Needless to say, simply giving the emerging countries a bigger say because their economies have grown in scale is not enough to assure smooth conduct of global economic governance. But it is only natural for these countries to seek increased clout in line with their economic expansion. However, moves to reform the existing global financial architecture, in which Western countries dominate, have failed to progress. Indonesia’s President Joko Widodo explicitly voiced dissatisfaction with this state of affairs on the occasion of the Asia-Africa summit that was held in Jakarta early in May this year.

The ADB Cannot Meet Asia’s Demand for Infrastructure Investment

Second, infrastructure building is indispensable for Asia’s further development, and the actual demand for additional infrastructure is huge. A joint study by the ADB and the ADB Institute released in 2009 focused on the importance of creating infrastructure for a “seamless Asia”—infrastructure to enable the free movement of goods, services, capital, information, and people so as to achieve sustainable prosperity for the region as a whole. The study offered concrete numbers for the scale of the infrastructure investment required for this purpose, estimating that total investments on the order of $8 trillion in national infrastructure would be needed over the years from 2010 through 2020, translating into around $750 billion a year.

The ADB’s annual lending capacity as of 2014 was only $13.1 billion. At the bank’s annual meeting this year an increase in lending capacity was proposed, along with the strengthening of cooperation with private-sector lenders. Even so, it is clear that the existing ADB-centered architecture for regional development finance cannot meet the huge demand for infrastructure investment in Asia.

There are also complaints that the ADB’s financing procedures take too much time. It is not appropriate for the bank to provide assistance or make investments without considering environmental concerns, human rights issues, and good governance. But the ADB has not responded adequately to complaints of this sort from developing countries, and this failure is probably one major reason for the widespread support from Asian countries for the AIIB.

Factors Behind China’s Advocacy of a Multilateral Approach

A third point that bears careful consideration is the fact that Beijing has proposed the establishment of the AIIB as a multilateral institution. China already has a framework for bilateral investment and assistance, including institutions like the Export-Import Bank of China. But in the case of the AIIB, the Chinese will have to listen to input from other member countries. This will mean the dilution of China’s own influence in relative terms.

It seems likely that the Chinese authorities felt that it would be more advantageous to take a multilateral approach in this case, showing that their initiative is not aimed at promoting projects that will benefit only Chinese enterprises and aiming for positive assessments from the international community for China’s active engagement in Asia’s regional integration.

It is also possible that the Chinese government feels that it can better assure the profitability of its assistance and investment projects by conducting them through a multilateral bank with defined rules and standards than by openly pursuing China’s own interests through bilateral aid and investment. If that is the case, it is possible to take the view that the Chinese have become more sophisticated in their approach to diplomacy with their neighbors and are not limiting themselves to the hard line seen in their handling of territorial issues. Some observers also suggest that China may be shifting away from its earlier policy of extending unconditional aid to friendly countries in Africa and Latin America.

Some may argue that the AIIB, though ostensibly based on a multilateral approach, will in practice implement arrangements enabling China to maximize its own interests and those of its domestic enterprises. But many of the countries that have signed up as founding members are seeking to assure transparency in the governance of the new bank.

Also, in the negotiations now underway concerning the articles of agreement for the AIIB, strong calls have been made for consideration of the comprehensive environmental, social, and governance norms included in the international standards that have been established for investment. In response to these calls, China’s Jin Liqun, who is slated to become the first president of the new bank, has promised that the bank will be “lean, clean, and green,” aiming to be cost effective and taking environmental concerns into account. Of course, it is not yet clear how this is to be assured; the details will need to be worked out. But I doubt that Beijing will completely ignore these demands from the other member countries.

Increased Opportunities for Japanese Businesses

It was originally thought that China would provide about 50% of the capital for the new bank, meaning that it would hold about 50% of the voting rights. But that was before the rush by European and other countries to sign up. With these additional members, China’s share of the voting rights is bound to decrease—and all the more so if Japan and the United States decide to join.

Based on the discussions at the chief negotiators’ meeting that I mentioned above, China’s share of the AIIB’s capital is now expected to be slightly under 30%, and its voting rights, assigned in line with capital shares, will be above 25%. It is widely thought that Beijing will hold effective veto power within the new organization. But several weeks ago, Kawai Masahiro, , who formerly headed the ADB Institute and is currently a project professor at the University of Tokyo, came out with a set of estimates suggesting that China’s share of the bank’s capital would be around one-third but would decline to 28% if Japan joined. Japan’s share, meanwhile, would be an estimated 12%, and Japan and the European members would together hold a share of around 33%. So if countries like Japan and America also were to join, China’s weight in the new organization would probably be different than what is currently foreseen.

The share of ADB financing that is used by borrowers to place orders with Japanese companies is only 0.5% (based on the actual figures for 2013). With this in mind, some argue that Japan will not experience significant losses even if it does not join the AIIB. The low share of ADB funding won by Japanese firms is a matter that should be examined separately. But can we really say with certainty that staying out of the new bank will have no impact on the future expansion of business chances for Japan’s companies? Many of the countries that signed up have explicitly declared that the bank will provide additional opportunities for their domestic firms.

The Game Will Continue

In the game of international politics, no player wins everything in a single round. The game goes on for multiple rounds. The prospective members of the AIIB are pursuing their various agendas in the negotiations on the articles of agreement for the bank, and we can expect them to continue their political jockeying within the bank after it is established.

As this political dynamic unfolds, the AIIB can be expected to function as a key institution and forum for setting the course of regional integration in Asia. And if the new bank operates smoothly without Japan as a member, Japan’s presence is likely to suffer a sharp decline.

Meanwhile, China’s advocacy of this new multilateral institution shows that it is adopting a mixture of hard-line and soft-line policies toward its neighbors in the region and taking a flexible approach to gaining legitimacy for its behavior from the international community. This change of posture is welcome for Japan, other Asian countries, and the world. But it also means that Beijing has become an even more formidable player in the game of international politics.

As I noted above, the existing ADB has decided to promote cooperation with the private sector and expand its lending for infrastructure building. This may be considered a response to the challenge from the AIIB. It thus runs counter to the suggestion that the ADB can change the AIIB’s rules and standards by entering into a cooperative relationship with it.

We should squarely recognize this current state of affairs. Japan should consider joining the AIIB, recognizing that it is its responsibility as a major country to turn this new bank into an institution that will contribute to the economic development of the region as a whole. Furthermore, many other Asian countries hope that Japan will become a member; we must also consider the significance of their wishes.

(Originally written in Japanese and published on May 26, 2015. Title photo: Jin Liqun, secretary general of the Multilateral Interim Secretariat of the Asian Infrastructure Investment Bank [right] meets with Asian Development Bank President Nakao Takehiko on the sidelines of the ADB’s annual meeting in Baku, Azerbaijan, on May 1, 2015. Photo courtesy of the ADB.)

China IMF ADB Joko Widodo Asian Infrastructure Investment Bank AIIB