Why Tokyo, Manila and Washington are worried about China's development bank

For a while there, it was looking like a multilateral organisation without a quorum. Some sniggered when only 21 nations signed the original MoU of China's Asia Infrastructure Investment Bank (AIIB) in October 2014. But what a 21 it was: China, India, Pakistan, Bangladesh, Kazakstan and the ASEANs. All the big Asian customers of the existing financial institutions. The AIIB was more than a going concern from the start — and a headache for the incumbents.

It's no wonder the more savvy shareholders of the Asian Development Bank (ADB) and the World Bank belatedly broke ranks to buy into the competition. It now contains every single member of the East Asia Summit bar the US and Japan, illustrating just how important it has become to Australian interests – and how Washington and Tokyo are sitting on the outer.

But success brings its own complications. The 57 putative members comprise a diverse group: most of East, South and Central Asia, Australia and New Zealand, a smattering of Middle East countries, plus the UK, France, Germany and much of Europe.

ADB's Manila mandarins believe managing the 57 will be quite a headache, and they are right. They point to the twelve months it took to hammer out ADB's charter in the mid 1960s and doubt China can meet its self-appointed mid-year deadline for its Articles of Agreement. They also point to the potentially diluting effect of wider membership on China's control.

But this is not 1965, the search for consensus will not be absolute, and China will not allow a few non-regional hold-outs to over-ride the wishes of borrowing members. It will cut deals, claim mandates and ultimately crash through. The game will change. [fold]

Some of this change will be reflected in governance. China has said it will use the standard three-level system of a Board of Governors, a Board of Directors and a senior management team. But this does not mean it will replicate existing arrangements. ADB's resident Board of Directors costs $20 million a year and its distortionary impacts cost much more, as board members delve into everything from pavement quality standards to personnel decisions.

Strong governance is essential, but a board convened quarterly at member expense can focus on the big strategic issues. The risk is it would be dominated by diplomats juggling a huge number of competing priorities and not wanting to offend their hosts. That need not be. Smart member-states will send high-level delegations of financial, governance and development experts and smart diplomacy will facilitate their engagement.

An early test of commitment to good governance will be whether China can resist the pressure being applied by countries such as India and Indonesia to have their own nationals in key positions. Don't hold your breath on this one.

Many other potential roadblocks and speed humps are being raised. Will the Bank be able to achieve the AAA credit rating necessary to raise cheap and secure funds? If a substantial number of developed-country members stay in the tent, this will help, but there may be real difficulties for China in accessing US capital markets. Bond sales will require legislation in the US that may be a long time coming. That said, short of a catastrophic slowdown, China already has the capacity to ensure both capital adequacy and loan pricing that is attractive to borrowers.

There is a line of argument running in Manila that with an ADB-estimated $8 trillion worth of infrastructure required in Asia between 2010 and 2020, there is room for everyone. I am not so sure.

The national market for infrastructure borrowing is a very small proportion of the whole. Countries have hard constraints in terms of how much debt they can take on, and there are also very real capacity constraints in government and the private sector. When China recently announced a US $46 billion package for Pakistan you could hear the business being sucked out of the ADB pipeline.

ADB prides itself on offering 'gold standard' products, but this is a liability as much as an asset. Many ADB customers want bronze — and they want it fast. Major ADB projects typically take more than a year to design. Procurement takes as long. Five-year projects become seven-year projects due to complex business processes. 'Best practice' policies reflect the views and interests of Western shareholders more than those of borrowers.

The problems of success in recruiting members to the AIIB may slow China down, and some of Beijing's compromises will be messy, but China's business solutions will be faster, cheaper and more client-oriented. Western shareholders will have to be prepared to negotiate, this time from a position of weakness. Expect tantrums, ultimatums and some walkouts. Business and political counter-offers will be in the mix and likely some spoiling too.

Behind the declarations of complementarity and cooperation, Tokyo and Manila are concerned, as is Washington. Welcome to the future.

Photo by Flickr user ADB.

Richard Moore