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How China and the United States Can Come to Terms on the Asian Infrastructure Investment Bank

1/29/15
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An earlier version of this essay was published in the Boao Review.

With two major announcements on trade and climate at November’s APEC meetings, the United States and China have leaped into a highly productive bilateral
relationship in the economic sphere. It’s all the more striking then to hear the discordant tone struck around the Asian Infrastructure Investment Bank
(AIIB). In recent months, the White House has made clear its displeasure about the AIIB and Asian countries that would seek to join the Chinese in this new
institution.

If both countries can find common ground on politically sensitive climate and trade issues, why would the question of how the US and China choose to
support development in other countries be such a lightning rod?

The confrontational stance becomes clearer when we recognize that institutions like the World Bank, Asian Development Bank (ADB), and now the AIIB play
multiple roles. Yes, they are critical, sometimes indispensable sources of financing and know-how for a diverse and large number of developing countries.
But for this very reason, they are also critical sources of strategic influence for the countries who exercise control over them as their largest
shareholders. For the World Bank and to a lesser degree the ADB, that means the United States, and for the AIIB, that will mean China.

Hence the alarm coming from the US as China moves quickly to establish a new multilateral development bank (MDB) and attracts much of the region, including
key US allies, to join. US officials have taken to the press and to diplomatic channels to cast a skeptical tone toward the AIIB and try to dissuade other
countries from participating in the new institution.

But if the world’s two largest economies can come to terms on trade and climate, then surely they can find common ground on the MDBs. To do so will require
some concessions from both countries. The good news is that a deal here would not just benefit the US and China. In fact, the biggest beneficiaries of a
“development détente” would be the region’s poor, as more financing would be unlocked for pro-growth investments in Asia’s developing economies.

If the US and China can come to terms on trade and climate, then surely they can find common ground on the MDBs.

Yes, the Australians may have been temporarily persuaded to decline
China’s invitation as a result of US diplomatic efforts, but for the longer term, this is a losing strategy since it amounts to telling countries not do
what they view is in their best interests.

And with little likelihood that the United States itself would ever become a member of the AIIB – legislative procedures alone make it prohibitive – it is
all the more useful for the Americans to have like-minded countries as AIIB shareholders who can serve as effective proxies for US views within the
institution.

But the real opportunity for a constructive policy shift from the United States comes at the ADB, not the AIIB. After all, if the US wants to maintain
regional influence through a multilateral institution, then it ought to focus on the regional development bank where it already has influence. To put it
bluntly, the US strategic aim should be to ensure that the AIIB does not eclipse the ADB, something that can be achieved not by criticizing the AIIB, but
by making the ADB as attractive and robust in the region as possible.

Even better, a pro-ADB strategy is something the Chinese will likely embrace. They have demonstrated through their own engagement with the bank that the
regional choice does not need to be ADB or AIIB. It can and should be both.

So what would make for a more attractive ADB? Perhaps more than anything else, more capital.

Fortunately, the United States will have an opportunity over the next few years to lead a capital-raising effort at no new cost to US taxpayers. The US
stands to “save” about $60 million a year as a donor to the ADB’s grant-making activities as a result of the bank’s pending financial reforms. Rather than
pocketing that money, why not put it to use as new “paid in” capital in the bank? Combined with other countries’ contributions to a capital increase and
the leverage of the ADB’s own borrowing, that $60 million could boost the bank’s infrastructure investment capacity by about $5 billion annually in just
five years.

The United States could also ease tensions with the Chinese by dropping the wrongheaded drive to kick China out of the ADB’s club of borrowers. The bank’s
lending to China actually delivers financial stability to the institution and serves as a useful market test of the ADB’s products and services. After all,
China, more than any other country in the region, has options when it comes to development finance. The bank’s efforts to remain attractive to the Chinese,
particularly when it comes to technical assistance and knowledge products, are a useful discipline and motivator for the institution that ultimately
benefits all ADB borrowers.

While the United States has some work to do at the ADB, China in turn could move quickly to make a number of constructive overtures at the AIIB. These
actions are less about making concessions to the US than demonstrating a desire to have the AIIB operate as a peer within the existing MDB system by
adopting key principles, norms, and values that are firmly established at the World Bank and ADB.

First, China’s advertised 50 percent shareholding is far too much for any one country in a multilateral institution. The US is widely characterized as
dominating the World Bank, yet its shareholding there is just over 15 percent. China and other emerging market countries have been rightly frustrated by
the slow pace of shareholding reform at the IMF and World Bank, but China’s shareholding stance at the AIIB undercuts its principled arguments on
governance at the other institutions.

China in turn could move quickly to make a number of constructive overtures at the AIIB.

Specifically, by signing on to the IMF-World Bank
debt sustainability framework, the AIIB would demonstrate its willingness to operate within international principles aimed at preventing unsustainable debt
in developing countries. And when debt problems occur, there should be no doubt about the AIIB’s intention to work constructively alongside other
multilateral and bilateral creditors toward resolutions.

China could also make straightforward commitments to universal and transparent procurement rules without adopting a line-by-line version of existing MDB
rules. After all, the World Bank’s own procurement standards are in the midst of an overhaul, so the AIIB has no fixed target even if it wanted to adopt
all of the existing rules. But a commitment to universal procurement would set a good tone by demonstrating that the AIIB is not intended to be an
exclusive club for member countries’ commercial interests.

Other areas of operational standards and safeguards are more challenging, and the Chinese would do well to avoid a wholesale adoption of existing MDB
rules, even as they take steps to demonstrate a firm commitment to underlying principles. Like procurement, rules related to environmental and social
standards are under active review at the existing MDBs, where more regulation over the years has too often been falsely equated with more effective
standards.

Starting with a clean slate, the AIIB has the opportunity to explore a new path for these standards. The new institution will be facing skeptics in the
West when it comes to social and environmental issues, so the Chinese would do well to demonstrate a serious approach early on.

There are a number of areas where the AIIB could usefully depart from the norms of the existing MDBs entirely. For example, would the Bretton Woods
architects have so quickly established resident boards of directors, with annual costs in the tens of millions of dollars, in an era of instantaneous
global communications?

Chinese officials have already made broad-brush commitments to align the AIIB with existing MDB practices and standards. The difficult work of translating
those commitments into detailed policies remains ahead. A key demonstration of good faith will be active consultation and engagement with the ADB and World
Bank as policies are developed.

With a development détente, the United States and China can add a third major outcome to their recent string of bilateral successes. Much like the climate
agreement, coming to terms on the AIIB and ADB is not just about what is good for the US and China. It’s ultimately about how these two actors, working
through multilateral institutions, can better serve the development aims of the global community.

CGD is grateful for contributions from its funders in support of this work.

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