Commentary / Japan | SENTAKU MAGAZINE

Why Japan won't join the AIIB

The world has been shaken by the decisions of major Western European powers to join China’s scheme of creating the Asian Infrastructure Investment Bank (AIIB), which have left Japan and the United States out of the picture — as intended by Beijing.

Initially the supporters of the plan were limited mainly to developing countries in Asia. On March 12, however, Britain surprised the world by announcing its intention to become a founding member of the bank. This news was followed soon by similar announcements by Germany, France and Italy.

A major question now is whether the AIIB will become a savior for Asia, which faces enormous needs for infrastructure-related construction projects or will the bank become a tool to help China gain hegemony in the region. Japan holds the key.

The recent turn of events in favor of China has had a strong impact on Japan, which had sought to join hands with countries like the United States, Britain and Germany to prevent China from gaining economic dominance in Asia. A Finance Ministry official described the development as serious as the one that Japan faced in 1939 when Nazi Germany concluded a nonaggression pact with the Soviet Union, which Tokyo regarded as a potential enemy.

Even though there are voices within Japan’s political, bureaucratic and academic circles favoring Tokyo’s participation in the AIIB scheme, the administration of Prime Minister Shinzo Abe has adopted a policy of not permitting the expansion of China’s economic influence, insisting that infrastructure-construction needs in Asia should be met by strengthening the Asian Development Bank (ADB), which is principally under a Japan-U.S. umbrella.

The AIIB scheme was first announced by Chinese President Xi Jinping in 2013 as an international financial institution to fund rapidly growing infrastructure projects in Asia. Among those agreeing to become founding members were the Association of Southeast Asian Nations (ASEAN) countries, Kazakhstan and other Central Asian states, India, Saudi Arabia and a few other Middle-Eastern oil rich countries, and New Zealand.

As Britain, Germany, France, Italy, Switzerland and Luxemburg announcing their intentions to take part in the AIIB, the number of prospective founding members of the bank grew to 33. In addition, Australia’s participation was certain as 40 percent of its iron ore and natural gas exports goes to China. South Korea, which relies on China for 25 percent of its exports, announced that it would join on March 26 despite Washington’s call against such an action. [The number of founding members eventually expanded to 57.]

The AIIB will have an initial paid-up capital of $50 billion (about ¥6 trillion), of which one half will be contributed by China. With its headquarters likely to be in Beijing, the bank will probably be headed by Jin Liqun, the former head of the China International Capital Corp. who once served as vice president of the ADB. With so much Chinese influence, the bank can without much exaggeration be called “a financial institution by China and for China.”

The ADB, the rival of the AIIB, was founded in 1966 with the participation of 31 countries and regions not only from Asia but also from North America and Europe. The ratios of its capital contribution are quite diversified, with Japan accounting for 15.67 percent, the U.S. 15.56 percent, China 6.47 percent, India 6.35 percent, Australia 5.8 percent, Canada 5.25 percent, Indonesia 5.17 percent and South Korea 5.05 percent. Headquartered in Manila, its president’s office has to date been occupied by Japanese.

The ADB maintains fairness and impartiality as applications for loans are screened by its Board of Governors, which is made up of representatives from all member nations so that no one country exerts undue influence.

The AIIB, on the other hand, not only will be under strong Chinese influence but also will not have such a board for screening loan applications. It is said that since the days when he was ADB vice president, Jin has been of the opinion that decision making by the board was a waste of time and prevented quick action.

Thus once the AIIB starts its operations, nobody would be able to stop Beijing from making unilateral decisions. Another way of looking at it is that the bank will become a tool for implementing the external economic policies of the Chinese Communist Party, enabling China to use funds contributed by other countries for projects that best suit its own strategies.

The reason why major industrialized economies initially hesitated to join the AIIB scheme was that such ulterior motives of Beijing were obvious and also that they feared the possibility of Asia becoming dominated by China. This stance allowed those countries without uttering any words to persuade Beijing to follow global standards in structuring the AIIB, and to make it a democratic and highly transparent financial institution that contributes to economic development.

Therefore the negative impact of Britain’s about-face is all the more far-reaching. While welcoming London’s move, Beijing warned Germany and France that unless they join the bank, they would not only be put into disadvantageous positions in doing business with China but also be discriminated against in the bank’s loan projects.

These were serious threats to both countries as China is the largest market for Volkswagen Group of Germany while Areva SA of France has won many orders to build nuclear reactors in China and is looking for more. Britain hopes that China’s leading corporations and banks will raise funds in the City of London. Perhaps the West European powers are not worried about China’s exercise of greater hegemony in Asia because of the huge distance separating them from Asia.

Although the idea of making the AIIB an impartial international financial institution through inside efforts after joining it may sound feasible, no member countries will be able to clash head on with China and change the AIIB since Europe is preoccupied with its own problems, like the situation in Greece. Should one country make such an attempt, Beijing would likely respond with “divide and rule” tactics, threatening to give more favorable terms to other countries.

Japan and the U.S. are faced with a different kind of pressure because if the AIIB is established in the form now being contemplated, China will likely have a strong voice in international tenders for AIIB-funded projects. If the bank adopts an explicit or implicit rule that bidding is limited to corporations from AIIB member-nations, Japanese and American companies will automatically be excluded from major AIIB-funded projects, leading them to beg their governments to join the bank. This would be another victory for China’s divide and rule tactics.

The ADB estimates that an annual sum of $750 billion (about ¥90 trillion) is needed for Asian infrastructure projects to build and improve roads, railways, dams, electric power stations, airports and so on. It is clear that this sum far exceeds what can be provided by the ADB, the World Bank, the Japan Bank for International Cooperation (JBIC), export-import banks of various countries, and other public and private sector financial institutions.

That is why many policymakers and experts agree on the need to create a bank devoted exclusively to funding new medium- to long-term infrastructure projects.

But such projects include dam and pipeline construction, which, it is feared, could damage the ecosystem or lead to the eviction of local residents without proper compensation. Another source of concern is that the project contract system could spawn graft and other forms of corruption.

It is highly questionable whether the AIIB will be capable of filling its social responsibilities by fully comprehending and coping with these and other problems when selecting appropriate projects.

Xi’s vigorous anti-corruption campaign shows that corruption in both China’s private and public sectors is serious. It is simply too naive to believe that a banking institution run by such corrupt government officials will perform its public duties in a fair and clean manner.

Late in September 2011, President Thein Sein of Myanmar revoked a $3.6 billion (¥43 billion) Chinese project to construct a hydroelectric power station in Kachin state. Known as the Myistone Dam project, it would have sent to China the entire 6 million kilowatts of electricity it was supposed to generate. Thein Sein took the action out of concern over environmental damage and corruption — the very issues that many worry will result from the Chinese-run AIIB.

In March, Narendra Modi became the first Indian prime minister to visit Sri Lanka in 28 years for talks with President Maithripala Sirisena, putting an end to a protracted period in which their two countries were at loggerheads.

For nearly three decades, Sri Lanka relied on economic assistance from China. But Sirisena won the presidential election in January with a campaign promise to free the country from the influence of Beijing, which has attempted to make the country a satellite by building naval and other facilities.

These moves by Myanmar and Sri Lanka indicate that China is beginning to face a deadlock in its pursuit of a strategy of gaining economic and military footholds in Asian developing countries by providing them with monetary aid.

With suspicions about China’s policies growing among Asian countries, Beijing must have thought that aid to them through the AIIB would be more palatable than direct aid from the Chinese government, again proving that the bank scheme is but a tool for implementing China’s diplomatic strategies.

The ultimate goal of establishing the AIIB is to implement the “one belt, one road” initiative proposed by Xi. The “one belt” is a new overland Silk Road connecting inland China with the Central Asia and the Middle East. It would consist of highways and railroads that would facilitate industrial and economic development along the route. The “one road” is a maritime trade route spanning from China to the Middle East via the South China Sea, the Strait of Malacca and the Indian Ocean.

Behind the two-route initiative is China’s energy security strategy as Beijing seeks to ensure supply of oil, natural gas and other energy sources, and to obtain the right to develop natural resources. It also hopes that those routes will facilitate the export of steel, cement, home electric appliances, electronic products, automobiles, clothing and other manufactured goods as China is now stuck with excessive production capacity. Another hope is placed on the growth of Chinese corporations in the fields of construction and engineering.

In short, China needs the AIIB to achieve all these aims.

For the one belt, one road initiative, China created a “Silk Road Fund” of $40 billion late last year. But this sum is just for pump priming and the truly necessary funds will come from the AIIB.

Such being China’s true intentions, it is only natural for Japan to decline to join the AIIB. Japan will do well if it continues to cooperate in infrastructure projects in Asia by strengthening the ADB and working in close collaboration with the World Bank and the United Nations. Before long it will become clear on which side justice is, Japan or China.

This is an abridged translation of an article from the April issue of Sentaku, an monthly magazine covering political, cultural and economic scenes.