Shaping China’s influence

A launch ceremony was recently held in Beijing for the Asian Infrastructure Investment Bank (AIIB), which was established by China to meet the growing demand for infrastructure building across Asia. The finance ministers of 21 countries, including all members of the Association of Southeast Asian Nations, attended the ceremony and have since signed a fundamental memorandum of understanding to establish the bank.

According to estimates by the Asian Development Bank (ADB), Asia will require infrastructure investment of over $8 trillion by 2020. The question, however, is whether the ADB will be able to lend $10 billion per year. The ADB’s parent bank is the World Bank, whose largest contributing member is the United States. But there is no indication that the U.S. Congress will respond by increasing capital investment in the World Bank.

In particular, the Modi administration in India has made infrastructure building a cornerstone of its national strategy. In India’s case, no amount of investment in infrastructure can possibly suffice. India’s membership in the AIIB is testament to this enormous need.

At this point, however, the U.S., Japan, South Korea and Australia have announced that they will not participate in the AIIB. The U.S. and Japan are not in outright opposition to the concept of the AIIB. At present, it is more accurate to say that both countries harbor reservations regarding the new bank.

What are the reasons for these reservations?

First, there is the issue of governance. Over half of the bank’s initial capital of $100 billion comes from China. The AIIB can thus not be described as a “regional” bank. It is, in fact, a Chinese bank.

Next, there’s the matter of transparency. Isn’t it likely that things will be decided by the Chinese management? The AIIB lacks functions that would make the bank’s decision-making process transparent and allow for oversight.

Then there is the fact that the AIIB places inadequate conditionality on its lending with regard to environmental protection and workers’ rights.

Both the World Bank and the Asian Development Bank already invest in infrastructure — and China is a member of both banks. Could the same goals not be achieved by utilizing these existing institutions more effectively?

A veteran Chinese diplomat with whom I spoke recently disputed these concerns: “Building up infrastructure is the highest priority for national development in Asian countries, but the World Bank prioritizes goals related to alleviating poverty, protecting the environment, and improving medical facilities and education. This has led to a vacuum that China will now fill.

“China developed the AIIB initiative partially in response to strong demands from its Asian neighbors.

“We have been petitioned repeatedly by other Asian countries, saying that as China has enormous foreign currency reserves, why not use it for the construction of Asian infrastructure?”

Japanese and American fears focus on China’s plan to form a new regional order based on its own version of the Monroe Doctrine — such as its demand that the rest of the world “leave Asian matters to Asia.”

From this perspective, the AIIB provides China with a convenient pretext, in that it will enable China to present its vertical, bilateral assistance to other Asian countries in the guise of horizontal, multilateral lending. As with the CICA (Conference on Interaction and Confidence-building in Asia) leaders’ summit dedicated to confidence-building in Asian security matters, China’s intentions in establishing the AIIB is nothing more than a contrivance for expelling American influence from Asia.

China will use the AIIB to divide the Asia-Pacific, drive a wedge between the U.S. and its Asian allies and friends, weaken the Japan-U.S. alliance, marginalize Japan and force the U.S. to retreat from the region.

In this case, one can only admire the skill and strategic sense with which Chinese leaders have put this plan in place. Could China’s answer to former U.S. diplomat and strategist George Kennan lurk somewhere within Zhongnanhai (where the Beijing headquarters of the Communist Party and State Council are located)? Or perhaps there is a modern-day version of Sun Tzu , the ancient Chinese military strategist and reputed author of “The Art of War”?

In response, Japan must take an equally strategic approach. First, Japan must directly address the most important issues for all of Asia. These are economic growth, trade liberalization and investment in infrastructure. The rebalance against China in national security can only be sustained if these economic imperatives are observed.

In this sense, agreement on the Trans-Pacific Partnership free trade pact is absolutely essential.

Next, the Asia and Pacific regions must not be separated. In order to understand the importance of this, it should suffice for us to recall Japan’s failed proposal to establish an Asian Monetary Fund (AMF) following the 1997 Asian monetary crisis. The goals guiding Japan’s proposal were not mistaken. However, the failed proposal’s Asianist focus and exclusion of the U.S. drew Washington’s ire, and ultimately, the opposition of China.

China’s new “Asian Monroe Doctrine” stems from the fate of the AMF proposal. Then U.S. President Bill Clinton, in his autobiography “My Life,” acknowledged that America’s response to the AMF proposal was “one of my few policy mistakes.”

If we want to prolong the existing order, which has been beneficial to us, then we must continuously promote its evolution by proactively adapting to new environments. We must transform global governance so that the World Bank, which is one component of the Bretton Woods system, allows the emerging nations to have greater say.

To conclude, Japan, the U.S., South Korea and Australia should all become members of the AIIB. It is in all of our best interests to modernize the existing Bretton Woods system, and join China in shaping the future of the AIIB. Sun Tzu wrote about how to “win without going to war.” Here in Japan we must also deepen our study of Sun Tzu, and becomes masters of the “art of war.”

Yoichi Funabashi is chairman of the Rebuild Japan Initiative Foundation and former editor-in-chief of The Asahi Shimbun. This is a translation of his column in the monthly Bungei Shunju.

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