Asian Infrastructure Investment Bank | Banking on China

Canada’s comment that it would conduct an ‘expeditious’ review of its involvement in the AIIB has underlined the continuing shadow of politics over the functioning of the multilateral lender in which China holds the most voting power with 26.58%

Updated - June 18, 2023 11:14 am IST

Published - June 18, 2023 02:02 am IST

Canada’s decision to “immediately halt” its involvement in the Asian Infrastructure Investment Bank (AIIB) has brought the spotlight to the inner workings of the Beijing-based multilateral development bank.

The announcement by Deputy Prime Minister Chrystia Freeland that Ottawa would conduct an “expeditious” review of its involvement in the bank followed the sudden resignation of a Canadian executive who led the bank’s global public relations team and said the bank was being “dominated” by members of China’s ruling Communist Party. Chinese officials rejected those claims as “outright lies” and “sensational hype”.

The recent controversy has underlined the continuing shadow of politics over the functioning of the bank, which was started in 2016 with 57 founding members. The membership has now grown to more than 100 countries. China holds the most voting power with 26.58%, having contributed $27 billion. India is the bank’s second largest shareholder with a 7.6% voting power, and committed $8 billion.

The bank has often been billed as a “rival” to the World Bank and the Asian Development Bank (ADB), but that widely used description largely overstates its capacities. Indeed, the bank’s founding members viewed it more as a vehicle to fulfil a growing need for development finance in the region. The “competitive” element has also been somewhat exaggerated considering many of the bank’s early projects have been those that were co-funded with the World Bank or the ADB, particularly in the bank’s early years when its capacities to evaluate projects was limited, although the share of co-funded projects has decreased.

The AIIB was, at the same time, no doubt a diplomatic coup of sorts for China, which was able to launch the bank and attract countries, including India, that were wary of China’s other significant development initiative — President Xi Jinping’s Belt and Road Initiative (BRI).

At the bank’s launch in 2016, Mr. Xi said the goal was for “member states [to] act in strict compliance with multilateral procedures, making sure that the AIIB becomes a truly international, rule-based and high-standard institution”. The idea was “to give impetus to economic growth in Asia and the wider world”. Mr. Xi also noted that the “founding and opening of the AIIB also means a great deal to the reform of the global economic governance system” and would “help make the global economic governance system more just, equitable and effective.”

Among the countries that joined the bank were the U.K. and Germany, both of which ignored a prominent push by the U.S. discouraging its partners and allies from doing so. After China and India, Russia holds the bank’s third largest voting power (5.97%), followed by Germany (4.15%), South Korea (3.49%), Australia (3.45%), France (3.17%), Indonesia (3.16%) and the U.K. (2.89%). China was able to get on board countries, including India, that were wary of the BRI and stayed away from that initiative, by setting up a clear structure for the bank’s functioning — even though the bank’s host, China, retained a crucial above-25% voting share that would give it an effective veto on key decisions that require 75% approval.

India’s rationale

In explaining India’s rationale for joining the China-founded AIIB but staying away from the BRI, officials at the time said the two initiatives were neither comparable nor linked in any way. The first initiative, in India’s view, was not only merely a domestic initiative of China’s but one that was also violating India’s sovereignty by including within its scope the China Pakistan Economic Corridor (CPEC) running from Xinjiang through Pakistan-occupied Kashmir (PoK). Participating in it was hence out of the question.

Moreover, as far as the AIIB was concerned, Indian officials were satisfied with the early discussions in the period from 2013 until 2016 that were focused on ensuring the AIIB remained multilateral, transparent and governed by laws, in contrast to the opaque BRI that has no formal governance structure as such. India also saw a welcome opportunity for securing development financing.

The bank’s President is China’s Jin Liqun, who earlier served as Vice President of the Asian Development Bank and is a former Vice Finance Minister. India’s Urjit Patel, former Governor of the Reserve Bank of India, is among the five Vice Presidents, and in his role, oversees all lending in South and Southeast Asia.

Since its launch, the bank has largely tried to keep a low profile and stay away from politics, and its lending has sought to focus on promoting green projects in the region.

But avoiding politics hasn’t always been easy. Among the political questions faced by the bank, particularly since 2020, is the worsening relations between its two biggest shareholders, China and India.

Months into the Line of Actual Crisis, Mr. Jin said publicly that the bank would not involve itself in any problems between its members, and pointedly noted that the bank had lent more to India than any other country. As of 2020, he said, India had secured around 25% of the total loans, accounting for $4.35 billion of the total $19.6 billion that had been granted to 87 projects in 24 countries. The major projects in India include $438 million for Chennai Metro Rail Phase 2, $378 million for the Chennai Peripheral Ring Road (Sections 2 and 3), and $320 million to improve Assam’s secondary road network.

Impact of Ukraine war

Russia’s invasion of Ukraine was another political challenge. The AIIB shortly announced after the invasion that it had put on hold all activities related to Russia, its third biggest member.

The bank’s headquarters in Beijing, however, has meant that questions about China’s influence have continued to swirl, including the recent allegations of Communist Party control. In an interview with The Hindu in 2020, D.J. Pandian, former Chief Secretary in Gujarat who spent six years working for the bank, including as Vice President, until 2022, strongly rejected descriptions of the bank as “Chinese” by members of the Opposition in India who had at the time criticised the Narendra Modi government for its involvement with the “Chinese bank”.

“We are very, very, apolitical,” he said. “We are a multilateral bank of 103 members, of which 77 are active members. All of Europe are Bank members. Canada, Australia, New Zealand are also members. The Vice President of Investment Operations is an Indian….”

On whether India-China tensions would affect the bank’s functioning, Mr. Pandian said, “We are apolitical. Our decisions are based on the merit of the project, not on what is happening, or on internal or external problems.”

“This [criticism],” he noted, “is a lesson for us, that we need to educate people about what the bank really is.”

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