Asian Infrastructure Investment Bank: China's Trojan Horse?

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The struggle for hegemony in Asia has entered a critical phase.

China has stepped closer to claiming full-fledged economic leadership in Asia by officially launching the Asian Infrastructure Investment Bank (AIIB), which has been the centerpiece of the Xi administration's efforts to enhance Beijing's influence. The AIIB is part of Xi's "Peripheral Diplomacy", which it announced in October 2013 in an effort to win the favor of neighboring countries estranged by China's territorial expansionism.

With massive $4 trillion currency reserves, China wants to not only purchase the good will of its many neighbors by lavishing multi-billion infrastructure projects, but it also wants to find more sustainable and tangible opportunities to invest its huge foreign exchange cache. As many as fifty countries, from across five continents, signed the 35-page-long Articles of Agreement (AOA), which determines the AIIB's governance structure as well as the contributions and shares of individual members and the lending agency's initial capitalization.

The AIIB has been welcomed by much of the world, including international financial institutions such as the World Bank and the Asian Development Bank (ADB), has welcomed the AIIB as a much-need complementary mechanism to address the $8 trillion infrastructure spending gap in Asia alone. In a highly symbolic gesture, Australia, a key American ally, reportedly led the signing ceremony amid much fanfare and symbolism at the Beijing's Great Hall of the People. To have a key Western ally leading the way says a lot about China's growing economic reach.

The Skeptics

But not all prospective members signed up. Seven countries, from across three across continents, have deferred formal membership to later this year. Importantly, the Philippines (along with Malaysia and Thailand) was among the three Association of Southeast Asian Nations (ASEAN) members, which chose to defer signing the AOA. The Philippines' decision is largely driven by lingering suspicions via-a-vis China's intent behind establishing the new lending agency.

The Philippines' Finance Secretary Cesar Purisima openly admitted Manila's lingering suspicions with the AIIB, saying the Aquino administration is "taking the time given to prudently consider [author's emphasis] its membership" in the AIIB, probably joining later before the December 2015 deadline. Earlier this year, when the U.K. and European powers broke the U.S.-led siege on the AIIB, Manila still expressed its concern over the necessity to "make sure [the AIIB] is inclusive" and "complements rather than competes" with the US-Japan-dominated ADB and the World Bank. The Philippines doubts that the new lending body will be "truly multilateral in nature."

Manila and Beijing are locked in a bitter territorial dispute in the South China Sea. China's massive construction activities in disputed features have raised concerns that China will soon impose an Air Defense Identification Zone, or at least have the latent capability to choke off Filipino supply lines to the Thitu Islands and Second Thomas Shoal, among other 6 features under Philippine control.

With the likely conclusion of the ongoing arbitration case at The Hague -- vigorously opposed by Beijing from the very beginning -- in coming months, and the beginning of the oral arguments and hearing at the Arbitral Tribunal in coming weeks, Philippine-China bilateral tensions are on the rise.

Also, the Philippines' two leading allies, the United States and Japan, which have stepped up their strategic footprint in the South China Sea through growing maritime patrols and joint exercises, have refused to join the AIIB.

Competing with the Dragon

In an official statement, the AIIB claimed that its "foundation will be built on international best practices and the lessons and experiences of existing multilateral development banks and the private sector," with the lending agency expected to be operational by the end of 2015. In an effort to appease concerns that the lending agency will be a Chinese-dominated entity, Beijing has openly foresworn seeking any "veto power".

But the Philippines is concerned over the fact that China will still be the largest contributor (30 percent) to the bank's capitalization, enjoying a whopping 26 percent voting shares. This is almost twice higher than the United States' voting shares in the World Bank, which is dominated by and hosted in Washington.

China also refused to heed Indonesian President Joko Widodo's call for the the AIIB to be based in Jakarta in order to make it look as neutral and multilateral as possible, but China forged ahead with its decision to place the bank's headquarters in Beijing, showing how the AIIB will most likely be staffed by numerous Chinese bureaucrats and be under the shadow of Beijing's leadership.

Japan's Chief Cabinet Secretary Yoshihide Suga stated Tokyo will "watch it closely, including its actual operations," reflecting the depth of the Northeast Asian power's skepticism vis-à-vis China's intentions. Japan has refused to join the AIIB altogether. Same thing with the United States, which questions the AIIB's compliance with accepted principles on good governance, transparency, and environmental sustainability, and sees the AIIB as nothing but a Chinese strategy to win friends and loyalty in Asia at its expense.

Learning from Past

The Philippines' past experiences with Chinese investments were also bad. So Manila is not very sanguine with prospects of Chinese state-led investments in its infrastructure. Under the Arroyo administration (2001-2010), the Philippines' National Broadband Network (NBN) signed a $329.5 million contract with China's ZTE Corp. to upgrade its facilities and communications network. It also signed the $431 million Northrail infrastructure contract, which was awarded to China National Machinery and Industry Corp. (Sinomach) and largely financed by the China EximBank.

The NBN-ZTE venture, however, would be mired in a massive corruption scandal, after investigations revealed huge kickbacks, cost inflations, and irregularities in the contract. Failing to meet laws requiring competitive bidding, the Philippines' Supreme Court, meanwhile, struck down the Northrail project.

The common perception in the Philippines is that the ZTE and Northrail contracts were some sort of bribe to pressure/persuade the Arroyo administration to compromise on South China Sea and sign up to the controversial and secretive Joint Maritime Seismic Undertaking (JMSU) agreement in 2005, which was deemed unconstitutional and in violation of Philippine national patrimony and requirements for transparency and consultations with other branches of the government, particularly the legislature.

During his recent visit to Tokyo, Philippine President Beningo Aquino also complained about the alleged decision of the China EximBank to prematurely demand drawdowns from its Northrail project loan at the risk of default. In short, Aquino suggested that China wanted to punish his government for standing up to China by using its loan payment card.

In Japan Aquino openly expressed his concern that "the economic help that is supposed to be afforded [by AIIB loans] will not be subjected to vagaries of [geo]politics." Both Japan and the United have tried to push back against China's growing economic influence in Asia. Under the Abe administration, Japan has expanded its trade and investment reach across Asia, pledging up to $110 billion for Asian infrastructure development.

Eager to court new allies, Tokyo has pledged $20 to the ASEAN and up to $35 billion to India in recent years. The Obama administration, meanwhile, managed to secure, at the 11th hour, the trade promotion authority (TPA) to expedite the Trans-Pacific Partnership (TPP) free trade agreement negotiations, a centerpiece of the Washington's pivot to Asia policy, which excludes China.

Clearly, the Philippines continues to see the AIIB as some kind of Chinese Trojan horse to buy the loyalty of neighbors and some measure of territorial acquiescence in exchange for economic carrots. Manila is also not comfortable with China having huge presence in its strategic, infrastructure sectors.

An original version of this piece was published on Straits Times, Singapore.