Stakes are high for Australia in Asian infrastructure bank

China’s demand for infrastructure finance cannot be met by existing development banks. Image sourced from Shutterstock.com

Australia will likely join more than 40 countries signing on to the China-initiated Asian Infrastructure Investment Bank (AIIB), following news it will sign a Memorandum of Understanding to participate in negotiations to set up the bank.

America’s continued effort against the bank has significantly set back diplomacy between the two nations. A flurry of its European allies have expressed interest in becoming founding members of the new development bank, including four of the G7 countries, the UK, France, Germany and Italy.

With interest mounting just days before the formal conclusion of the expressions of interest process on March 31, Washington has been left with little time and space to react.

A decision by Australia to join would bring the bank’s membership to 41, and would include eight of the top ten economies in the world - except the US and Japan.

Washington has every reason to worry that the AIIB will challenge the existing US-dominated international regime of development finance. However Jin Liqun, tasked with establishing the bank, has repeatedly sought to assure the West. He says the bank will be designed “not to compete but to complement” the established institutions such as the Asian Development Bank (ADB), the IMF and World Bank.

Ultimately the bank serves China’s political and diplomatic purposes; China will contribute up to half of the bank’s capitalisation, host its headquarters, and appoint its top management team. So it’s fair to say China will play a major role in a new institution that would have profound implications for the global political and economic landscape.

However, it is in Australia’s interests and therefore a right decision to join the bank as a founding member. This is despite reasonable concerns within the international community regarding Beijing’s intention and capacity to operate such an institution.

No matter what Beijing’s strategic considerations, Australia and the broader region in Asia stand to benefit from the initiative. Australia has high stakes in the long-term prosperity of the region.

The AIIB could be one of the financial arms of Chinese president Xi Jinping’s ambitious strategy to deepen China’s trade and investment links with Asian and European countries. But in essence, it is more like a Chinese Marshall Plan - a way to utilise China’s excess capacity in response to the decline in external demand. The export of China’s expertise and capacity in infrastructure building, to be partially financed by the bank, could well stabilise and boost the Chinese economy out of deflation.

Infrastructure shortfall

According to an estimate by the ADB in 2010, there is demand for about US$8 trillion of infrastructure investment over the ten years to 2020 in developing Asia, including US$2.5 trillion for roads and railroads, US$4.1 trillion for power plants and transmission, US$1.1 trillion for telecommunications, and US$400 billion for water and sanitation investments.

Beijing’s own estimate is that from now to 2020, the annual demand for infrastructure spending in Asia will be US$730 billion, well exceeding the combined capacity of the World Bank, the IMF and the ADB in this region. The new development bank is poised to narrow the structural financing gap for infrastructure in the region, fostering long-term growth.

This type of growth in China and in the wider Asian region would create more sustained demand for Australia’s major export products in mining, resources and agriculture.

China expects to conclude the negotiations on the bank’s governing structure by June and formally launch operations by the end of this year. By joining the bank, Australia, together with other member countries in and outside the region, should help elevate its internal governance structure to the required international standard. Beijing has also demonstrated its willingness to have an “open” and “inclusive” negotiation of the bank’s charter.

In fact, China has relinquished its veto power in the bank’s decision making in exchange for the support of the European countries, which would result in a more consensus-based governance regime. It has also been recruiting former staff from the World Bank in an effort to increase the bank’s credibility in governance and management.

Australia has squandered six months in hesitation as Canberra weighed the membership against the uneasiness in Washington. We could have played a leading role as one of the first members of the bank, but instead will be a last-minute follower. But that’s better than being a bystander when future rules of a game Australia has high stakes in are crafted.

The negotiations on the bank’s charter will be an uphill battle. Apart from the governance issue, Australia’s priority should be to secure its membership as a regional (Asian) one, which will grant Australia a larger share of equity (hence voting rights) within the bank. Under the rules of the AIIB, non-Asian member countries are restricted to 25% of equity in total; the remaining 75% goes to Asian countries, which would be allocated on the basis of their relative weight in GDP.

For Australia, being an Asian member would see it ranked 4th on equity among current planned members (at 5.69%), after China, India and Germany. This is higher than the 5.32% of France (a non-Asian country) despite the latter having a GDP almost twice that of Australia.