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China and the Asian Infrastructure Investment Bank: Threats to the Existing Norm?

By: Yifan Zhou, LLM ’16

China’s Asian Infrastructure Investment Bank (“AIIB”) has not only recruited many old Chinese allies, but it has also attracted quite a few developed countries, including the United Kingdom and Australia. Judging the AIIB as a potential rival of the Bretton Woods banks, the press has speculated that the AIIB, influenced by its biggest shareholder China, will adopt a very loose policy of lending conditionality. Government officials of the two conspicuous absentees, the United States and Japan, have publicly expressed the same concern.

Should the AIIB apply standard conditionality rules? The short answer is “yes,” in light of the AIIB’s financial and institutional interests and for the sake of China’s own reform. Conditions from procurement guarantees to environmental protection should be implemented. However, considering China’s traditional stance on sovereignty and its political system’s incompatibility with that the West, political conditionality will likely be excluded.

The AIIB started recruiting founding members in 2014 and gathered fifty signatures on its Articles of Agreement in Beijing on June 29, 2015.[1] As of November 1, 2015, fifty-four states have become signatories and two of them have ratified the Articles.[2]

While the signing and ratification process is still in progress, there is wild speculation that the new infrastructure bank will impose much looser conditionality than its Bretton Woods “rivals,” i.e., the World Bank and the Asian Development Bank.[3] This speculation largely comes from Reuters’ September 2015 exclusive report that the AIIB will not impose privatization and deregulation lending conditions.[4] The reason often cited in the press for the United States and Japan’s absence from the new investment club is their concerns on good governance, including the possibility of lowered lending standards surrounding environmental protection and labor rights.[5]

Analysts believe that this concern does not come out of nowhere. According to Rebecca Liao’s analysis, the International Monetary Fund and the World Bank, as the AIIB’s competitors, have been criticized for their excessive conditionality during the 1990s.[6] Meanwhile, China is not happy with its underrepresentation in the Breton Woods banks. In order to compete with those banks, it seems to be a fair strategy for the AIIB to lower its threshold for loans and waive some of the conditionality requirements to attract creditors.

Besides, as one Turkish scholar points out, the loose-conditionality strategy fits the dichotomous narrative of the Washington Consensus versus the Beijing Consensus.[7] The Washington consensus, coined by John Williamson, favors a market-based approach to economic development in developing countries. In contrast, China has achieved its great economic success over the past thirty years by adopting a government-oriented approach and departing from the neo-liberalist model, providing developing countries with an alternative.[8] According to a Chinese professor’s recent commentary on the AIIB, China, as a rising power, has been trying to “go beyond” the Western approach to unite less-developed countries like the Group of 77. [9] Low standards for investment in the AIIB can be a favor to those developing nations as well as an opportunity for the bank’s biggest shareholder China to achieve further economic integration and possibly gain more political support.

These policy concerns and speculations are rooted in China’s history of dissenting from the existing international norm. As Professor William Burke-White elaborates in his recent paper, the rising powers of the BRICS states (Brazil, Russia, India, China and South Africa) diverge from the U.S.-European interpretation of international law on the notions of sovereignty, legitimacy, and economic development.[10] The Chinese government has a consistent standpoint on the non-intervention principle while dealing with sovereignty-related issues, which not only serves its own interest in inter alia Cross-Strait relations, but also keeps China away from becoming mired in the chaos plaguing the rest of the world.

The insistence on sovereign supremacy is also linked to China’s position in economic development. Admittedly, China has embraced the international economic norm as well as its underlying free-market ideology since it joined the World Trade Organization (“WTO”) in 2001. However, as Professor Pitman Potter characterized China’s involvement in international economic law, China’s is a “selective adaption” only.[11] On the one hand, China reluctantly accepted the existing international rules, for example, “ha[ving] no other choice but to” implement the TRIPS Agreement and enhance intellectual property rights protection at the domestic law level.[12] Furthermore, China generally moved from a negative adaptation to a positive one and proactively filed antidumping and countervailing lawsuits against other WTO members, including the U.S. On the other hand, however, China has decried injustice in the process in integrating into the international market. It disagreed with the WTO appellate body’s mischaracterization of state-owned enterprises as “public bod[ies].”[13] More recently, China protested that it was treated unfairly when the appellate body refused to trigger a public policy exception clause by interpreting the accession protocol rigidly.[14]

Apart from trade, China’s outbound investment practice has forged a unique path as well. For instance, the China Development Bank imposes no conditionality like that the World Bank employs in giving development loans to Latin American countries.[15] Meanwhile, controversy has arisen that Chinese investment backed by its national banks, though boosting local economies, has resulted in serious environmental pollution.[16]

The clash between China and the West on the notions of sovereignty and economic development has existed from day one, but never garnered so much attention on the international stage until China announced its intention to lead the establishment of the AIIB. China is no longer just “adapting” to the rules; it’s making its own. A question arises as China participates in international lawmaking: will its history of being different lead China to a disparate approach in crafting the rules?

A lawyerly but precise answer to the question above would be “it depends.” China’s emphasis on sovereignty and non-interference derives from the five principles of peaceful coexistence proposed by Zhou Enlai during the early period following the establishment of the People’s Republic of China. They served China’s interests as China did not have much support from global powers. Now, though China has never abandoned the principles rhetorically, its attitude toward sovereignty has been evolving over time inter alia in Africa.[17] Likewise, China’s economic policy, hard to nail down as any theory like nationalism, liberalism, or structuralism, has been pragmatic, evolving toward the Western standard as it grows stronger and gains benefits from the international free market.

When it comes to the AIIB’s setting of lending conditions, I argue that China and the AIIB will be better off if the institution adopts a standard conditionality rule. China’s aim of creating the AIIB goes beyond its interest in investment, since it has a wide range of investments operated by its domestic investment banks competing against the World Bank.

As a rising power, China is trying to create a better image on the international stage. The AIIB has very diverse state members, with European and Oceanian states participating in the table of shareholders meeting. Even though they possess small shares, their recognition and endorsement is key to China, carrying a symbolic meaning of recognition from international society when the U.S. together with Canada and Japan are absent.

Unfortunately, the AIIB has not succeeded in terms of publicity with the American media. A development bank such as the AIIB that focuses on building infrastructure is portrayed as akin to the Marshall Plan. Moreover, the AIIB together with the newly created New Development Bank and the BRICS Contingent Reserve Arrangement fit as the perfect geographic counterparts to the Asian Development Bank, which is dominated by Japan, as well as the World Bank and the International Monetary Fund, controlled by the U.S. Under such pressure, adopting a risky policy can ruin China’s not-very-optimistic image.

Apart from that, China has been changing its attitude toward human rights and environmental protection since the advent of the Xi Jinping administration.[18] Xi’s reforms, like any other reforms, will have to overcome opposition from those with vested interests in the status quo. A concrete international commitment can help to allay this opposition.

Lastly but most importantly, the new bank, though initiated and led by China, is a separate entity from China with its own institutional interests. The AIIB, though with a vision of development, is after all an investment business. To have quality investment, there must be some conditions to ensure investors can get the money back from the perspective of risk management. Also, at the very beginning of the operation, rational investment is usually inclined to be risk averse and therefore comes with a higher standard of conditionality.

Therefore, having a standard conditionality rule is generally beneficial to China and the AIIB. As a matter of fact, the AIIB does include environmental protection and labor rights lending conditions in its Environmental and Social Framework draft.[19]

But there is one exception: political conditions. As Olav Stokke’s book on the World Bank notes, the AIIB has the following areas to choose from: (a) financial and administrative conditions; (b) economic reform including privatization and deregulation; (c) human rights protection such as environment and labor rights; and (d) political reform such as democratic promotion.[20] As I have analyzed above, the first three items do not necessarily conflict with China’s policy values and are even necessary for this financial institution to achieve good governance. A real divergence between China and the West, however, lies in the multi-partisan political system. Although China seems to be more open to the idea of the deconstruction of sovereignty, political intervention in a sovereign state still remains taboo in China’s foreign policy.

 

[1] AIIB, What is the Asian Infrastructure Investment Bank?, http://www.aiib.org/html/aboutus/AIIB/ (last visited Nov. 1, 2015).

[2] AIIB, Denmark’s Foreign Minister signed the Articles of Agreement of the Asian Infrastructure Investment Bank, http://www.aiib.org/html/2015/NEWS_1027/27.html (last visited Nov. 1, 2015); Dutch Government Information and Services, Articles of Agreement of the Asian Infrastructure Investment Bank, https://verdragenbank.overheid.nl/en/Verdrag/Details/013207 (last visited Nov. 1, 2015).

[3] E.g. Paola Subacchi, The AIIB Is a Threat to Global Economic Governance (March 31, 2015), Foreign Policy, http://foreignpolicy.com/2015/03/31/the-aiib-is-a-threat-to-global-economic-governance-china/ (last visited Nov. 1, 2015);

Yoichi Funabashi, Shaping China’s Influence (Jan 15, 2015), Japan Times, http://www.japantimes.co.jp/opinion/2015/01/15/commentary/world-commentary/shaping-chinas-influence/#.VjbC8Xg0slI (last visited Nov. 1, 2015); Rebecca Liao, Say Goodbye to American Supremacy (April 3, 2015), National Interest, http://nationalinterest.org/feature/say-goodbye-american-supremacy-12535 (last visited Nov. 1, 2015).

[4] Koh Gui Qing, Exclusive: China’s AIIB to Offer Loans with Fewer Strings Attached (Sep 1, 2015), Reuters, http://www.reuters.com/article/2015/09/01/us-aiib-china-loans-idUSKCN0R14UB20150901 (last visited Nov. 1, 2015).

[5] Geoff Dyer, Obama Says AIIB Could be “Positive” for Asia (April 28, 2015), Financial Times, http://www.ft.com/intl/cms/s/0/80271e0c-eddc-11e4-90d2-00144feab7de.html#axzz3qDWCaeW9 (last visited Nov. 1, 2015); Addressing Concerns with the AIIB (July 1, 2015), Japan Times, http://www.japantimes.co.jp/opinion/2015/07/01/editorials/addressing-concerns-aiib (last visited Nov. 1, 2015).

[6] Rebecca Liao, Out of the Bretton Woods How the AIIB is Different (July 27, 2015), Foreign Affairs, https://www.foreignaffairs.com/articles/asia/2015-07-27/out-bretton-woods (last visited Nov. 1, 2015).

[7] Mustafa Yağcı, Beijing Consensus in the Making: The Rise of Chinese Initiatives in the International Political Economy (October 18, 2015). Available at SSRN: http://ssrn.com/abstract=2675819.

[8] Id.

 9 Guangbin Yang [杨光斌], How AIIB Changes the International Regime [亚投行改写国际体系变革方式] (Apr. 1, 2015), Huan Quan, http://opinion.huanqiu.com/opinion_world/2015-04/6064510.html (last visited Nov. 1, 2015).

[10] William W. Burke-White, Power Shifts in International Law: Structural Realignment and Substantive Pluralism (January 10, 2014). U of Penn Law School, Public Law Research Paper No. 14-2. Available at SSRN: http://ssrn.com/abstract=2378912 or http://dx.doi.org/10.2139/ssrn.2378912.

[11] Pitman B. Potter, China and the International Legal System: Challenges of Participation, China Quarterly, Vol. 191, (Sep. 2007), pp. 699-715.

[12] Chengsi Zheng, The TRIPS Agreement and Intellectual Property Protection in China, Duke Journal of Comparative & International Law, Vol. 9 (1998), pp. 218-227.

[13] See Ru Ding, “Public Body” or Not: Chinese State-Owned Enterprise, Journal of World Trade, Vol. 48 (2014), pp. 167-189.

[14] See Julia Ya Qin, Reforming WTO Discipline on Export Duties: Sovereignty over Natural Resources, Economic Development and Environmental Protection (March 28, 2012). Wayne State University Law School Research Paper No. 2012-04. Available at SSRN: http://ssrn.com/abstract=2030477 or http://dx.doi.org/10.2139/ssrn.2030477.

[15] Kevin P. GallaGher, Amos Irwin, & Katherine KolesKi. The New Banks in Town: Chinese Finance in Latin America (Feb. 2012), Inter-Amerian Dialogue Report, http://ase.tufts.edu/gdae/Pubs/rp/GallagherChineseFinanceLatinAmerica.pdf (last visited Nov. 1, 2015).

[16] BankTrack and Friends of the Earth, China Development Banks Overseas Investments – An Assessment of Environmental and Social Policies and Practices, http://www.foe.org/system/storage/877/2b/2/2245/China_Development_Banks_overseas_investments_-_An_assessment_of_environmental_and_social_policies_and_practices.pdf (last visited Nov. 1, 2015).

[17] Richard Aidoo, and Steve Hess. Non-Interference 2.0: China’s Evolving Foreign Policy towards a Changing Africa, Journal of Current Chinese Affairs, Vol. 44(1), pp. 107-139, http://journals.sub.uni-hamburg.de/giga/jcca/article/view/817/818.

[18]  Arthur R. Kroeber, Xi Jinping’s Ambitious Agenda for Economic Reform in China (Nov. 17, 2013), Brookings, http://www.brookings.edu/research/opinions/2013/11/17-xi-jinping-economic-agenda-kroeber (last visited Nov. 1, 2015).

[19] Asian Infrastructure Investment Bank, Consultation Draft Environmental and Social Framework. August 3, 2015. http://www.aiib.org/uploadfile/2015/0907/20150907061253489.pdf.

[20] See Olav Stokke, “Aid and Political Conditionality: Core Issues and State of the Art.” Aid and Political Conditionality, London: Frank Cass, 1995: 1-88.

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