Japan and the Asian Infrastructure Investment Bank (AIIB)

When China announced it would spearhead the creation of a new development fund, the $100 billion Asian Infrastructure Investment Bank (AIIB) which formally launched in January 2016, it caused quite a diplomatic stir and aggravated geopolitical posturing. While many developing Asian nations were eager to jump on board – representatives from 21 Asian nations rushed to sign the initial memorandum of understanding on the AIIB in October 2014 – the United States and Japan were definitely less eager to embrace the new institution with open arms.

Beijing argues that the purpose of AIIB is not to challenge or disrupt the existing development architecture per se, but to fill the huge infrastructure funding gap in Asia. However, the United States and Japan remain skeptical that the new funding mechanism is a Trojan horse – a way to weaken transparency and accountability standards across the region by allowing corrupt regimes to get the funding they need for infrastructure projects without having to meet the stricter requirements that pre-existing institutions, such as the World Bank and the Asian Development Bank (ADB), usually impose.

Japan is especially sensitive to any challenge to the ADB’s primacy in Asia, as the ADB, established in 1966, provides Tokyo with special representation. Not only has every ADB president been Japanese, but Japan enjoys a voting share more than twice as large as China’s. 

Perhaps that is why Japan is the only major U.S. ally to stand fast against the new bank, even as Washington suffered a series of diplomatic embarrassments when its Asian and European allies (including Australia, South Korea, the Philippines, Thailand, Germany, and Britain) joined AIIB despite U.S. lobbying efforts to the contrary.

However, the conflict between China, the United States, and Japan through their respective financial proxies – the AIIB, World Bank, and ADB – may turn out to have been a tempest in a teapot.

After all, it is the ADB’s own report which predicted that Asia would need to invest some $8 trillion in infrastructure between 2010 and 2020. Despite the rhetoric about geopolitical competition, the World Bank and ADB are very likely to accept the practical benefits of cooperating with the AIIB. Indeed, the AIIB will apparently begin its operations by co-financing projects with the World Bank, ADB, European Bank for Reconstruction and Development, and U.K. Department for International Development (DFID).

In late March, Takehiko Nakao, president of the ADB, discussed with The Financial Times how the ADB and AIIB should work together on a loan project as well as on putting in place labor, environmental, and anti-corruption measures. The Financial Times reported Nakao as saying “People want to depict ADB and AIIB as rivals and [AIIB President] Mr. Jin [Liqun] and I as rivals. But actually we are friends, and ADB and AIIB can be partners… We’re already identifying projects for the first batch of AIIB loans. One of them should be co-financing between AIIB and ADB.”

In early April, AIIB and the World Bank signed a framework agreement to work together on co-financing projects. These co-financed projects will be prepared and supervised “in accordance with [the World Bank’s] policies and procedures in areas like procurement, environment and social safeguards” according to a joint statement between the World Bank and AIIB. It is expected that the AIIB will approve about $1.2 billion in financing, including about a dozen projects with the World Bank. Projects are likely to be in the transport, water and energy sectors, in Central Asia, South Asia, and East Asia.

Already, AIIB is planning on working with ADB and DFID to fund a 64 km-long motorway in Pakistan. While ADB will retain its leadership over the project, the project guidelines had to be revised to allow AIIB to participate: AIIB can only fund projects open to companies from all countries, while ADB restricts bidders to ADB member countries. Sources told The Financial Times that projects are expected to receive preliminary approval from AIIB before the end of April, and a formal approval in June.

Co-financing is a win for AIIB – the new bank can build up an investment portfolio more quickly and get a better credit rating than going it alone – as well as a win for the World Bank and ADB, because these existing institutions can tap into AIIB’s capital, saving their own resources for other projects.

Furthermore, it’s a win if the World Bank and ADB can influence AIIB to raise its standards. If U.S. and Japan officials can take Chinese officials at their word, then the path ahead may be smoother than it first appeared. Bloomberg News reported Jin saying that AIIB would match global best practices on standards and governance. “Credibility has to be earned. Trust has to be earned … The challenge now is how we live up to expectations of all shareholders,” he stated.

Yet, ironically, while when one can argue that the World Bank and ADB might be having a positive influence on AIIB by raising its standards, China may be having a negative influence on Japan by lowering its standards.

As Malcolm Cook analyzes in The Lowy Interpreter, the case of Japan criticizing Indonesia – for choosing China to fund the Jakarta-Bandung high speed rail project because China does not require a host government loan guarantee while Japan does – then lowering this very standard in its new $110 billion Partnership for Quality Infrastructure initiative highlights how Japan’s rivalry with China is “driving deep … changes” in Japanese foreign policy. It demonstrates how “the Abe Administration’s approach to its rivalry with China is warping long-standing bipartisan policy settings in ways that do not clearly benefit the Japanese people or those whom its aid program seeks to help,” Cook writes.

Despite the earlier rhetorical ripostes – and the lingering, real concerns that China will use the AIIB to advance its own economic and geopolitical interests at the expense of the United States, Japan, and aid recipient states – the future appears bright for the prospects of AIIB working with the World Bank and ADB in a way that every entity can gain something. The deeper, more disturbing question is whether Japan can maintain its own standards in light of the competition it faces from China.