America’s flawed strategy towards new Asian bank

America’s opposition to China’s creation of an Asian Infrastructure Investment Bank is degenerating into a self-defeating farce. Having failed to prevent western allies from joining the fledgling bank, Washington has been left scowling on the sidelines. The Obama administration’s handling of the issue has been embarrassing — and it may hold ominous portents for Asia and the rest of the world.

This week, 57 prospective members assembled in Singapore to devise the rules of the new Beijing-sponsored development institution. Among those attending are US allies such as the UK, France, Germany and South Korea. Aside from Washington, only Canada and Japan have stayed away

Since 1945, the US has played a hegemonic role in the world’s financial system, propped by the might of the dollar and the lapidary heft of the Bretton Woods institutions: the World Bank and IMF. Top dogs rarely welcome a pushy rival. Surrendering the role of primus inter pares is hard.

But Washington’s principled reasons for opposing the bank do not stack up. True, China’s bilateral lending practices have hardly underpinned its claim to good governance. But it is premature to dismiss the AIIB as Beijing mercantilism writ large.

China is keen to show that it can host a respectable multilateral institution. It has been careful not to politicise the bank. It has put Jin Liqun, an international bureaucrat with experience of the World Bank and the Asian Development Bank (ADB), at its head. His brief has been to apply globally accepted principles of governance.

Convincing doubters that the AIIB is not a vehicle for brute Chinese power was never going to be quick or easy. But Mr Jin’s early steps give some confidence. He has for instance recruited widely: roughly half the nascent institution’s employees so far are non-Chinese. And while AIIB has yet to settle upon a final governance structure, Beijing seems willing to give oversight to its other members.

China is understood to favour a 75 per cent-25 per cent voting split between Asian and non-Asian members (with allocations made according to gross domestic product). On the basis of the current membership roll, that would give Beijing about 43 per cent of the votes, according to analysis by Benn Steil and Dinah Walker at the Council for Foreign Relations.

There are reports that China has forsworn its veto power. If this is the case, then it would be more democratic than the approach taken by the US, which retains a final say at both the IMF and World Bank despite having less than 20 per cent of the votes.

The Obama administration’s reflexive hostility to the establishment of the AIIB risks giving the impression that the US is less interested in Asian development than in restraining Beijing. The US would be unwise to give China further excuses to claim that it is bent on containment.

Washington’s stance has relevance to its Asian allies, particularly Japan. Tokyo is understood to be considering joining the AIIB, even though it is already the leading power in the ADB. Rather than leaning on Japan to stay out, the US should realise that the presence of its allies in the AIIB would give its allies a much bigger say in the bank and dilute Chinese voting power.

Far from being a point of contention, the AIIB’s establishment could still turn out to be an example of how China can reinforce the principles that underpin multilateralism in the west. The US has played a poor hand in regard to the AIIB and its allies. The best course would be to acknowledge the mistake and be present at the creation.