China’s Belt and Road Initiative calls for investments in the billions. A number of actors are involved in financing the individual projects, one of which is the Asian Infrastructure Investment Bank. Largely controlled by China, it is still a comparatively small player, but its influence is growing steadily.
When the Asian Infrastructure Investment Bank (AIIB) was first set up in October 2013, many questioned the reasoning behind it. Was there a need for another Asia-related International Financial Institution (IFI), in addition to the globally active World Bank and the regionally based Asian Development Bank (ADB)? China and other emerging markets evidently believed so. They had long demanded that their voting weight in the World Bank be increased in proportion to their greater economic power. The US Congress blocked any such move, whereas the Europeans supported changes in voting rights. The AIIB therefore should be seen as an attempt on China’s part to overcome US dominance among IFIs.
Dr. phil. habil. Nora Sausmikat is a sinologist who worked for the Asienhaus Foundation from 2008–2019. Since 2019 she has been head of the China Desk at Urgewald, where her focus is on infrastructure investments and Chinese financial institutions.
Knud Vöcking has worked at Urgewald since 2002 and is an expert on international financial institutions. He has been a critical commentator on the AIIB since its founding.
Translation by Joshua Rahtz.
Yet the AIIB is also part of China’s emerging foreign policy, which has created new conditions for an aggressive investment strategy. Already after China joined the World Trade Organization (WTO) in 2001, it focused diplomatic attention on bilateral treaties and free trade agreements, specifically with neighbouring Asian countries. Step by step, the “dream of a rejuvenated China”—the slogan for Xi Jinping’s accession to power in 2013—developed. The AIIB is indeed a multilateral bank, as its Chinese President Jin Liqun consistently stresses. At the same time, together with the Silk Road Fund and China’s major state banks, it is used to finance costly infrastructure projects in the energy and transport sectors within the Belt and Road Initiative (BRI). Chinese state banks as a whole, however, retain a much greater share of the financing of BRI projects.
The founding of the AIIB in 2015 produced divisions among the industrialized countries of the Global North. The US went to great lengths to prevent its allies from joining it. It was, however, only successful in doing so in the cases of Japan and (for the moment) Canada. When Great Britain announced its accession, the dam broke, and other European countries joined the ranks of those willing to sign up. There was a suspicion that Downing Street’s aim was to anchor foreign exchange trading in Chinese currency in the financial centre of London. At the same time, it was feared that the AIIB would also be associated with an attack on the supremacy of the US dollar. This concern was denied by China. Yet the IMF subsequently included the yuan in the basket of currencies used to calculate its special drawing rights, and as a consequence the Chinese currency gained importance within the international financial system.
With the accession of the European states, the AIIB increased its initial capitalization from 50 to 100 billion dollars. One fifth was paid out directly, and the remaining 80 percent in the form of guarantees. In Germany’s case, the sum consists of 900 million dollars as deposits and 3.6 billion dollars in guarantees. Thus the AIIB succeeded in obtaining the highest rating from rating agencies, an AAA designation, which is likewise the highest rating according to the World Bank. The better the rating, the cheaper refinancing becomes through bonds issued by the bank. In mid-2020, the AIIB placed its first bond on the financial market, notably in Chinese currency. Due to their high rating, these bonds were a safe option for various types of investors.
Development banks each include limits on the number of loans offered to individual recipient countries, but because a new bank qualifies as a separate source of financing, these limits may be circumvented through co-financing. Country X, which can only get a loan from the World Bank for a maximum amount of Y, is thereby in a position to borrow further money from the AIIB for a given project. Of course the problem in this case is that the debt capacity of the recipient countries may not merely be reached, but even exceeded. Economic shocks such as those caused by the Corona pandemic can very well lead to a new crisis of over-indebtedness.
A “Chinese Bank” with a Strong President
In its organizational structure, AIIB conforms to the structure of all other development banks. China, as the largest shareholder, has the (unwritten) right to nominate the AIIB’s president, just as the US does with respect to the World Bank. The president is elected by a board of directors consisting of twelve members representing member countries. This body in turn advises the bank on policy, strategy, and allocation. In contrast to the World Bank, however, the members of the board of directors (the executive directors) are not based in Beijing, but rather meet regularly in person or through video conferences for their deliberations. The AIIB is aiming through this protocol to realize aspects of its mission statement, “lean, clean, and green”. But the structure does eliminate informal contact and the flow of information between board members and management, a component of the daily routine, at, for example, the World Bank and the ADB.
The commanding position of the AIIB’s president also gives cause for concern. Within the accountability framework, President Jin Liqun can independently approve projects worth up to 200 million US dollars in the public sector, those of up to 100 million in the private sector, and 35 million dollars in equity investments—without any prior decision by the board of directors. From mid-2021, the first two amounts will increase to 300 million and 150 million, respectively. Although each of the twelve members of the board of directors can request that individual decisions be referred to it, the board will not be able to take any decisions alone. This process is made more complicated by the questionable rules regarding information. Broadly, their aim is to let the board of directors deal with the “big picture”, while day-to-day business is left to the president and his management. Such an arrangement does not guarantee a sufficient level of control by the board.
Environmental and Social Standards, Yes; Disclosure Obligations, No
“Lean, clean, and green” is also identified by the AIIB as a guideline for its Environmental and Social Framework(ESF), as well as for its publication regulations and accountability rules. The ESF was adopted before AIIB began operations in January 2016; the remaining rules were not implemented until sometime afterwards. By involving former World Bank staff in the development of the ESF, the AIIB wanted to prove that such rules would withstand comparison to prevailing international standards. For someone unfamiliar with the finer points, such conditions do appear to be satisfied. All key words and targeted goals valued by interest groups are mentioned. As always, however, the devil is in the details.
The ESF assigns borrowers nearly all responsibility. They are expected to comply with every due diligence requirement regarding environmental and social impact, to inform and consult those who may be affected by a project, and to report on its progress and any problems that may arise. In the course of doing so, project sponsors are even expected to evaluate the possibility that it might be preferable that their own work should be abandoned. The AIIB is then held responsible for credit approval, basing itself on the filed documentation. Lean administration is thereby secured.
In principle, it is quite important for the local communities (negatively) affected by a project to be fully informed before any approval and implementation. In this way, potential problems may be identified early and avoided. This is precisely where the ESF’s greatest weakness lies, however, rendering the fine formulations of its outlined objectives meaningless.
There are no binding deadlines in the ESF for when information must be published. The matter is only stated as a suggestion regarding consultation with those affected by a project. Exactly when and how this should take place is left completely undefined. The option is even reserved for the bank to approve a project without completing an assessment of its environmental and social effects. It remains a mystery how the board of directors, in the event of uncertainty, is to reach a decision without access to such fundamental information.
When criticism has arisen that there are no binding disclosure deadlines for the period before a project’s approval, the AIIB refers to its publication guidelines. These deal with other bank documents; regarding projects themselves, the guidelines invoke the ESF. What emerges is a classic circular argument that leaves those seeking information in a Kafkaesque position. In the upcoming revision of the ESF in 2020/21, the European AIIB member countries want to close such loopholes by instituting clear rules. However, the first drafts of the new version still lack binding, time-critical guidelines.
Criticism of Grievance Mechanisms
Because the AIIB, like all other development banks, enjoys immunity as an international institution, it cannot be sued if persons or communities affected by projects feel their rights have been violated. The IFIs have established independent accountability mechanisms for such cases. At the AIIB, however, the office hearing complaints is one part of a unit also responsible for anti-corruption and evaluation. This unit is too close to management to be truly independent. Additionally, barriers stipulated by the regulations are so stringent that it is almost impossible for those affected to advance their claims. For projects jointly financed by the AIIB and other banks, this unit indicates that the partner financial institution is to handle the application of environmental and social standards, as well as any claims that may arise.
Yet another point of concern is the implementation of environmental and social standards by public or private borrowers, instead of by the ESF itself. The reasoning behind this setup is that it ostensibly allows clients to deal with rules with which they are familiar, and therefore strengthens their capacity where loopholes or deficiencies persist. However, here again there are no clear rules ensuring that the standards applied to borrowers are made public and are really adequate.
At first glance then, the AIIB has an organizational structure and a system of rules comparable to those of other IFIs. However, a closer look reveals serious shortcomings and gaps. The AIIB’s system is certainly lean, but the categories “clean” and “green” are dubious. Urgewald published a study in 2019 in which the organizational structure and standards of the AIIB are criticized in detail.
Germany, China, and the Bank
When the ratification of the German accession to the AIIB was imminent, the Bundestag drew up clear specifications pertaining to it, formulated as follows: “In view of this situation, all parliamentary groups urged the German government to demand high environmental, social, human rights, and governance standards, such as, at a minimum, those of the World Bank, in further negotiations on AIIB standards, including, for example, the exclusion of investments in nuclear and coal-fired power plants; to work towards the establishment of an efficient monitoring system; to support the standards of accountability and transparency of the AIIB in other international financial institutions, in particular the World Bank, in the further negotiations regarding AIIB standards; to support an independent grievance mechanism over the course of further negotiations...”
Unfortunately, the record of these efforts looks rather grim. There has been no coal phase-out, and environmental and social standards, transparency, as well as the grievance mechanism, all fall far short of World Bank standards. There are also fears that investments in nuclear power will be promoted under the Climate Change Investment Framework launched in September 2020.
This poor record will not of course lead to a withdrawal from the AIIB. Germany’s geopolitical and economic interests in China are far too highly developed. Moreover, even among the non-regional shareholders, agreement on questions such as the phase-out of coal or the obligation to provide information is not always a given. Nevertheless, these developments are contributing to an increasingly tense relationship with China. Negotiations have now been under way for nearly a decade, but even the EU-China Summit under the imprimatur of the German Council Presidency (held virtually in September 2020 due to COVID-19) was not able to bring the long-awaited investment protection agreement to a conclusion. The Federation of German Industries (BDI) has been talking about China as a systemic rival since 2019. But human rights are not the primary focus in that case.
From 2013–2017, financial resources amounting to 290 billion US dollars (primarily development aid funds from the DAC states as well as the World Bank, EU institutions, and the Council of Europe) have flowed from Western states mainly to the regions of South and Southeast Asia, and also to states in Central Asia and Africa. The infrastructure financing requirement through 2030 is estimated to be 90 trillion dollars. All multilateral development banks work closely together in this area, and standards are being fought over in various sectors. The European guidelines for sustainable finance are characterized by these disputes. Yet diluting standards to favour investment is not something welcomed by the AIIB alone. Worldwide, human rights, climate, and environmental protection are severely threatened, especially now, given the constraints of the pandemic. The AIIB and the promises of the German Bundestag’s finance committee to uphold the highest environmental and social standards will have a major role to play here.
The finance committee of the Bundestag is regularly briefed by the Ministry of Finance and German representatives at the AIIB, respectively. In the first two years, Germany supplied the executive director representing the AIIB’s eurozone members; thereafter it has sent a deputy to the AIIB. This arrangement enabled the Finance Ministry in Berlin to build up in-house expertise. There is, additionally, ongoing informal exchange among non-governmental organizations, the Ministry, and members of the Bundestag, to gauge the severity of problems and the need for political intervention.
It is clear that digital infrastructure is at the top of the agenda of the next Chinese five-year plan (2021–25). Just as with the recent determination of the Chinese Communist Party’s fifth plenum, innovation and digital infrastructure also rank high on AIIB's agenda. Under the banner of rebalancing the partnership with China and the changing situation in the wake of the U.S. election, the prospects of a multilateral, coordinated climate policy are once again improving. Nevertheless, the protection of human rights, transparency, and public access to information remains a major challenge. The extent to which the EU—and Germany in particular—will prioritize this outside of official rhetoric is an open question in light of the economic interests at stake in relations with China.