Expert Commentary

An Imagined Threat from China

Jan Zilinsky
Former Research Analyst, Peterson Institute for International Economics

When a multilateral bank, based in China, finances an upgrade of slums in 154 cities in Indonesia, do Americans need to be concerned about a new security threat? What if the project is co-financed by the World Bank? And what if China doesn’t even hold veto power in the institution that was established to support construction of dams, ports, and sanitation and road networks?

If such questions sound preposterous, then US policy toward China in recent years has been less than wise. The Asian Infrastructure Investment Bank (AIIB) was depicted by some US officials as a project to subvert existing international institutions, with US messengers discouraging US allies from joining (the UK was an early defector; Germany, France and Italy followed). While Japan has not joined the AIIB, and said last year that it would raise its contributions to the Asian Development Bank, Canada announced just a few days ago that it is applying to join to the AIIB. Assuming that its application is approved, the AIIB will have a regular (non-founding) member from North America in 2017.

Before the contours of the bank started to be legible in 2014, many US observers tended to look for reasons why the China-led initiative was a dangerous idea but – setting the tactless attempt to constrain Beijing aside – the concerns about a disruption of U.S. power are misplaced. The AIIB is not large enough in scale to reshape global financial governance and qualify as a “hard-power move.”

From a soft-power perspective, it would be a mistake to expect that Chinese money will be welcomed and cherished everywhere. Many are forgetting that foreign money (not just conditional disbursements from the International Monetary Fund, but also the less demanding kind from the World Bank or private investors) is viewed in many places with suspicion. The simple act of any financial exchange will raise eyebrows and make some analysts question China’s motives.

What has been lost during the score-keeping stage is that new players, like the AIIB, can stimulate competition between international financial institutions, or even augment successful projects supported by other multilateral development banks. As things stand, critics of China-financed projects abroad usually fail to distinguish between China’s Official Development Assistance from the more business-driven projects carried out by state-owned enterprises or by private companies that receive state funding or support. AIIB-backed projects are bound to become a new target for criticism for ideological reasons, or perhaps for valid reasons if AIIB projects fail to live up to its promise of being “lean, clean, and green.” Alternatively, some might be condemned simply due to confusion if multilateral development projects are perceived as resource grabs.

The upside is that green field investment is likely to remain more popular, or less disliked, than portfolio investment (outright purchases of existing companies), so China’s reputation can certainly be boosted if the AIIB is effective. In theory, China could win hearts and minds by building roads, but do not bet on that just yet.

One can easily envision situations which will be controversial on the ground when stakeholders and interests clash – yet even the messier projects will look like soft-power victories to those who are allergic to any form of success by China. Brace yourself for more stories about China overshadowing the United States in still another domain. One can safely rely on such China watchers’ ability to forget the “no good deed goes unpunished” heuristic of international development. In truth, perceptions of China around the Eastern Hemisphere will continue to be complicated.

Some commentators have questioned whether a new international financial institution was needed, sometimes bemoaning a proliferation of the “alphabet soup” of multilateral organizations. This is a strange quibble at a time when private and official institutions are in agreement that massive infrastructure gaps warrant new investment. ASEAN-5 countries alone (Indonesia, Malaysia, Philippines, Thailand and Vietnam) are estimated to need $7 trillion in new infrastructure by 2030.  The worldwide annual infrastructure financing gap is estimated to be about $1 trillion. Given this objective need for more transportation services, Asian economies could become more productive with improved and better maintained infrastructure. If green technologies are imported as signaled, AIIB projects could even contribute to skill transfers and human capital development.

A mobilization of capital for infrastructure development is commendable, but a clear risk is that the portfolio of projects could lean too much toward expansion of energy or road networks rather than efficiency improvements. The bank published an Environmental and Social Framework in February, which promises that projects will be screened for “potentially adverse environmental and social impacts” but it appears to take projects (presumably proposed by governments) as given. It does not seem to endeavor to explain to governments why density is environmentally preferable to sprawl, or why railroads can be more appropriate than new roads, even if they require more planning.

The projects chosen today will have durable implications for how people live, breathe, and travel. Disposable income of households in Asia is projected to double in the next twenty years, and private spending on transportation may increase fourfold, exacerbating well-known climate risks. Multilateral banks can play a robust rule in mitigating the damage to public health from speedy construction by being mindful of the environmental implications when selecting projects, but they are not tasked with investment in research and green innovation. China and other emerging economies can use their voice inside the AIIB, the New Development Bank, and other fora, to demand that backed projects meet high standards, but it would be naïve to expect such practices to be sufficient. It will take a separate – and probably more city-centric – endeavor in economic diplomacy to make meaningful adjustments to how residential areas, daily commutes, and commercial transportation contribute to climate change.

The Author is Jan Zilinsky

Jan Zilinsky was a research analyst at the Peterson Institute for International Economics where he focused on the Chinese economy and the euro area political and economic challenges. Zilinsky was also a research affiliate at the Massachusetts Institute of Technology, and holds a BA in economics from Harvard University, and an MBA from the University of Chicago. His latest paper about the consequences of economic transformation in Eastern Europe was published in the Read More

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