China’s AIIB furore overdone, says Deutsche

Emerging Markets, May 2015

The furore around China’s Asian Infrastructure Investment Bank is “surprising and unwarranted,” according to a senior investment banker – but there are potential flashpoints ahead as it takes shape.

Peter Garber, a US-based analyst at Deutsche Bank, said yesterday that 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.”

He did, however, identify two significant potential problems that the institution’s development could ignite.

The first is Chinese dominance of the AIIB, and the knock-on effects of that dominance. Gerber suggested that, even if China has limited control over loan contracts, AIIB projects will likely employ Chinese builders even if the awarding of contracts is conducted on objective standards and competitive bidding, because the Chinese are likely to be the legitimate low bidder on most projects in the region anyway. “Chinese contractors will probably walk away with the lion’s share,” he said.

That, in turn, links to questions of governance, Garber said. “China will still face the same problems of placing capital in poor countries as always, even with this new institutionalization 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 concerns 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 raises 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.”

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 USA, accounting for about 13% of the vote each; both have declined to be founding members of AIIB, though the UK and France have joined. At the ADB’s annual meeting last week President Takehiko Nakao said the AIIB was years away from parity in resources or potential influence.

Garber stressed that he hoped neither flashpoint would materialize. “The best way the bank can defy its critics is to grow into a mature, respected and rational part of the global financial architecture,” he said.