China's launch of its Asian Infrastructure Investment Bank could face two significant problems, Peter Garber, a US-based analyst at Deutsche Bank, said on Wednesday.
The first was Chinese dominance of the AIIB, and the knock-on effects of that dominance. Gerber suggested that even if China had limited control over loan contracts, AIIB projects were likely to employ Chinese builders even if the awarding of contracts was conducted on objective standards and competitive bidding.
He said the Chinese were likely to be the legitimate low bidder on most projects in the region. “Chinese contractors will probably walk away with the lion’s share,” he said.
Garber said that, in turn, linked to questions of governance. “China will still face the same problems of placing capital in poor countries as always, even with this new institutionalisation of capital exports,” he said.
“So far China has managed to export capital to problematic sovereign states by ignoring the ideological concerns about, say, the environment and corruption that have handcuffed the existing multilaterals.”
The second issue Garber identified concerned tension with India. “That is because those most in need of the AIIB’s infrastructure investment are very low-wage countries,” he said. But with the Modi government planning to develop a manufacturing-for-export sector and opening its doors to foreign direct investment, that raised a policy question for China.
“Does China really want to launch India as a major competitor in the exportation of cheap manufacturing labour?” Garber asked. “China’s export gains from managing infrastructure construction risk would be offset by lost exports in manufacturing as it undercuts its own unskilled labour and opens a challenge that directs Western investment, technology and management elsewhere.”
Defying the critics
However, he said the US reaction to the AIIB’s China-led formation — notably former Treasury secretary Larry Summers’s comment that “this past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system” — was overdone.
He called the reaction surprising, because the birth of such a Chinese-led institution was inevitable given regional geopolitics and the scale of China’s economy, and unwarranted, “because the impact is likely to be far less pronounced than feared”.
He said: “The AIIB is small relative to similar lending bodies and barely a partial substitute for bilateral lending that would have likely proceeded anyway.”
The comments come at a time when the world’s multilaterals are trying to make sense of the impact AIIB will have on them, especially the Asian Development Bank. The ADB’s largest shareholders are Japan and the US, accounting for about 13% of the vote each.
Both have declined to be founding members of AIIB, though the UK and France have joined. Recently, ADB president Takehiko Nakao said the AIIB was years away from parity in resources or potential influence.