Can China-Led AIIB Support ASEAN Connectivity Master Plan? – Analysis

By Sanchita Basu Das*

An Asian Development Bank (ADB) study done in 2009 generated significant interest and discussion on the need for infrastructure financing in the Asian region. It stipulated that from 2010-2020, Asia would need US$8 trillion in national infrastructure and about US$290 billion in regional infrastructure to connect its economies to each other and the world.1 The information came at a time when many were increasingly taking for granted that this is an Asian century with global growth being driven by emerging economies like China, India and the smaller countries of Southeast Asia. In order to play its role, it became obvious that Asia is indeed in need of infrastructure funding.

The ADB study was soon followed by ASEAN’s Master Plan for ASEAN Connectivity (MPAC) in 2010. This Plan seeks to further integrate a region of over 600 million people with a combined GDP of about US$2.3 trillion across ten countries. It identifies several priority projects, including the ASEAN Highway Network, the Singapore Kunming Rail Link, the ASEAN Broadband Corridor and a roll-on roll-off network; and divides the projects into three components:

1. physical connectivity that includes hard infrastructure;
2. institutional connectivity comprising of soft infrastructure; and
3. people-to-people connectivity that promotes the idea of increased people’s mobility
   and interaction.

The critical aspect of the Master Plan is resource mobilisation to implement key projects, and according to ADB estimates, ASEAN countries require infrastructure investment amounting to as much as US$596 billion during 2006-2015 (Table 1). This figure should however be taken as a reference point, rather than as a substitute for bottom-up and country- or sector- specific estimations.2

According to the ADB, resource mobilization is a concern. Currently, 30-40 per cent of the regional funds are expected to come from public and government contributions, and 10-12 per cent from banks, with almost an entire half of the necessary US$60 billion per annum left to be covered by private investors.3

To meet this financing requirement, ASEAN has explored both traditional and new ways of financing. These include commitments for funding and loans from international institutions and dialogue partners and engaging the private sector through approaches like Public Private Partnership (PPP). The new ways of generating funds include the establishment of the ASEAN Infrastructure Fund of US$485.2 million, as well as the setting up of a regional and domestic capital market like the Credit Guarantee Investment Facility (CGIF), a US$700 million trust fund involving ASEAN+3 countries (includes China, Japan and South Korea), and managed by ADB.

Following the ASEAN connectivity initiative, the Asia-Pacific Economic Cooperation (APEC) developed its own plans, and in 2014 adopted a Blueprint to promote regional connectivity by 2025. The Blueprint mirrors ASEAN’s initiative and sets the target to enhance connectivity in the Asia-Pacific in three dimensions: physical; institutional; and people-to-people. Chinese President Xi Jinping, commending the connectivity development, mentioned that “the APEC members will focus on raising more funds for infrastructure development and breaking the financing bottleneck, for example, through public-private partnership”.4

Observing this wave of interest in connectivity and its financing discussions, China seized the moment, with its Finance Ministry proposing the idea of an Asian Infrastructure Investment Bank (AIIB) in early 2013. Thereafter, in October 2014, 21 members – China, India, Thailand, Malaysia, Singapore, the Philippines, Pakistan, Bangladesh, Brunei, Cambodia, Kazakhstan, Kuwait, Laos, Myanmar, Mongolia, Nepal, Oman, Qatar, Sri Lanka, Uzbekistan and Vietnam – entered into a Memorandum of Understanding (MOU) to establish AIIB. Subsequently, another 36 countries have joined or expressed interest in joining the bank.5 The authorised capital of AIIB is announced to be US$100 billion, with 50 per cent to be contributed from China’s foreign reserves.6

This initiative seems a godsend to ASEAN, but is this Chinese-led AIIB a solution for ASEAN’s financing need for its connectivity projects? This is a pertinent question as China is considered by ASEAN to be one of its key Dialogue Partners. It is also a country that is repeatedly said to be supporting ASEAN Centrality in the evolving regional architecture. And most importantly, during the 17th ASEAN-China Summit in 2014, under Myanmar’s Chairmanship, ASEAN noted:

We appreciated China’s continued support for the implementation of the Master Plan of ASEAN Connectivity (MPAC). We were pleased with the signing of the MOU between ASEAN and China on the establishment of the Asian Infrastructure Investment Bank (AIIB) as founding members. We expected the AIIB to provide financial support to regional infrastructure projects, with an emphasis on supporting the implementation of the MPAC.’ 7

This Perspective concludes that while the Chinese-led AIIB may not be a complete solution for ASEAN’s financially-challenged MPAC projects, there are ways Southeast Asian countries can ensure that China’s interest, and thereby its AIIB initiative, is maintained in efforts of ASEAN connectivity.

1. The AIIB is framed as an Asian Bank

It should be noted that AIIB is conceptualised as an Asian bank, rather than one oriented towards Southeast Asia. The Bank includes 28 countries from Asia – including all the ASEAN member states, as well as China, India and the resource-rich states of Qatar, Saudi Arabia, Kuwait and Kazakhstan. In addition it also includes European countries such as France, Germany, Italy, Luxembourg, Switzerland and the United Kingdom.8

Beyond its membership, the Bank is also part of the Chinese grand scheme of ‘One Belt, One Road’. This refers to the New Silk Road Economic Belt, linking China with Europe through Central and Western Asia; and the 21st Century Maritime Silk Road that connects China with Southeast Asian countries, South Asia, Central Asia, the Middle East, Africa and Europe. The core objective of the scheme is to encourage Chinese firms to venture into emerging economies that already have trade and investment linkages with China.

The AIIB can, thus, be viewed as a broader initiative by China to extend its influence in the Asian region, along with other new multilateral bodies, such as the New Development Bank announced during the BRICS Summit in July 2014 and the Shanghai Cooperation Organization Development Bank whose members include China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.

Even before the AIIB, China has been lending to countries far beyond its immediate neighbourhood. It has been observed that Chinese banks such as the China Development Bank (CDB) and the China Export-Import (Exim) Bank, while providing billions of dollars of financing to developing countries, extend their influence beyond Asia. Between 2003 and 2011, these two Chinese banks provided around US$79 billion to Latin America. In comparison, the World Bank provided for the continent with US$57 billion and the Inter- American Development Bank with US$78 billion.9

Hence, it is highly unlikely that AIIB can completely address the financing concerns of ASEAN regional connectivity projects. The China-led development bank is likely to have a more pan-Asian view. It is yet to develop its voting structure. Though it can be supposed that the AIIB is bound to give strong voting rights to its Asian members, commensurate to the size of GDP. It has been stated though that the decision process will be consensus-based and should not be decided by members’ voting shares alone.10 With a total of 57 prospective founding members for the AIIB, ASEAN members are relatively small in number.

Nevertheless, China is highly likely to have a commanding share of the votes and much will thus depend on the country’s strategic interest in the ASEAN region. This leads to the second argument of the paper.

2. The MPAC and China’s Strategic Interests

A second aspect regarding whether AIIB will meet the financing needs of the MPAC has to do with China’s strategic interests in the ASEAN region and its related infrastructure projects. Since 2009, China has been ASEAN’s largest trading partner. According to trade statistics, two-way trade between ASEAN and China reached US$350 billion in 2013, accounting for 14 per cent of ASEAN’s total trade and representing a growth of around 10 per cent year-on-year. It is expected to increase further to hit US$500 billion by end-2015.11 This growth of ASEAN-China trade is attributed to the integration of ASEAN economies into China-centric regional production networks. These networks were formed in the late 1990s as China assumed its regional position of manufacturing and assembly hub. ASEAN countries such as Malaysia, Thailand, Indonesia and Singapore took advantage of the development by exporting intermediate goods and raw materials to China, which then exported the completed manufactured products to the final destinations. This phenomenon was boosted by the ASEAN-China Free Trade Area signed in early 2000, which includes liberalisation and facilitation measures and promises to develop seamless transport infrastructure.

China’s interest in MPAC will thus depend on how far the infrastructure projects can contribute to ASEAN economies’ linkages to China. Although the interests of AIIB, with its Asia focus, and those of China may not be synonymous, the former will contribute to the latter’s enhancement of soft power. The choice of Beijing as the bank’s headquarters is one indication of this. It is also highly likely that China will have a commanding share of votes.

One MPAC project that may be of strategic interest to China is the Singapore-Kunming Rail Link (SKRL). The railway link, spanning 7,000 kilometres, connects China (city of Kunming) and seven Southeast Asian countries – Singapore, Malaysia, Thailand, Vietnam, Cambodia Laos and Myanmar. The project will provide an economical mode of cross-border cargo transportation and be a significant step towards integrating participating ASEAN economies with the economic powerhouse of Asia. While parts of the project have already been completed, the whole link is yet to be operational due to a lack of funds and technical glitches. In the past, China has showed interest several times, but its participation has been rejected by ASEAN members for fear of Chinese dominance in the region. However, with AIIB as a multilateral development bank – as opposed to an exclusively Chinese organization – such fears can be partially mitigated.

The AIIB’s funding support for ASEAN’s MPAC will also be determined by whether China considers such funding useful for its soft power. In the past, China’s investments and official development assistance (ODA) in Southeast Asia have been used as a way to showcase its support and goodwill. The same will continue with AIIB, provided there is compatibility between ASEAN’s MPAC projects and China’s Silk Road and other projects. While details regarding MPAC projects have been mostly laid out and high-level technical discussions have been ongoing since 2009, the Chinese ‘One Belt, One Road’ initiative was announced only in 2013 and details remain sketchy.

To benefit from the AIIB, it is important for ASEAN members to maintain China’s interest in the region. One way is for ASEAN members to work on the Economic Community and to strive to create a single market and production base beyond 2015. While the economic rise of China may create apprehension, especially for Vietnam and the Philippines, it can also offer benefits in terms of increased trade, investment and infrastructure financing.
However, much will also depend on whether ASEAN member-states can get their act together to benefit from the potential of the AIIB. It would do well for ASEAN countries to fully support the entity’s centrality in the region’s architecture, where it is presumed that it is ASEAN and not China or Japan that should lead.

3. United ASEAN Diplomacy for AIIB Funding

Finally, one factor that will determine the extent of the AIIB’s financial support for ASEAN’s MPAC projects is the capacity of ASEAN countries to work together for cross- border infrastructure project funding.

The ten Southeast Asian countries are different from each other, not only in terms of their economic structure and per capita income but also in terms of their infrastructure availability and quality. According to the Global Competitive Report 2014-2015, published by the World Economic Forum, the average score for infrastructure availability and quality among the ASEAN countries is around 3.8 (Table 2)12. This is against a score of 6.0 for the United Kingdom, 5.9 for Japan and 5.8 for the United States. In addition, there is a wide variation in infrastructure availability and quality across the countries. While Singapore and Malaysia are among the top 25 of the 138 countries being ranked; Vietnam and Indonesia are in the middle, ranked in the 60s; and Myanmar is almost at the bottom.This leads the countries to compete, rather than to cooperate, with each other to attract infrastructure funding. The issue is accentuated by the bilaterality of China’s trade and investment relations with individual ASEAN members. The attitude of competition was noticeable when Indonesia, during its APEC chairmanship in 2013, put infrastructure investment as its top priority for sustainable growth and enhance connectivity, not only between Indonesia and its regional neighbours but also within Indonesia itself.

However, the attitude of competition is not likely to benefit ASEAN with regard to its desire to receive funding support from the China-driven regional bank. As most of the MPAC projects do not belong to one but multiple Southeast Asian countries, the countries need to have a cooperative stance towards regional requirements and try their best to harmonise rules and regulations across states to implement cross-border projects. Even if some of the projects are domestic in nature, their regional benefits should be maximised.

Given these facts, one may conclude that AIIB is not a complete solution to the financial needs of MPAC projects. However, the Southeast Asian economies should ensure that the Chinese interests are maintained in the region. They should develop a consensus mechanism when advocating for infrastructure financing from the new Chinese-led multilateral bank, and in that way increase the chances of AIIB being part of ASEAN MPAC projects.

CONCLUSION

Since 2009, the push for connectivity – ports, highways, railways, pipelines, and telecommunication – has gained momentum in the Asian region. While ASEAN adopted its Master Plan for Connectivity (MPAC) in 2010, APEC endorsed its own in 2014. Subsequently, China came to the forefront by launching the ‘One Belt, One Road’ initiative and its related financing plans, including the Asian Infrastructure Investment Bank (AIIB).

Since ASEAN countries and China enjoy a significant economic partnership, there are discussions whether the Chinese AIIB is a solution to ASEAN’s MPAC financing problems. It is highly unlikely that the pipeline of AIIB funded projects will include MPAC projects in isolation. The projects chosen for AIIB funding will be of strategic interest to China and are likely to complement its pan-Asia view. Much will also depend on ASEAN’s united advocacy for AIIB funds for regional projects instead of domestic ones.

That said, while China may have seized the limelight in relation to regional connectivity and its financing, it is yet not clear whether the small developing economies of Southeast Asia which have signed up to the AIIB will gain or lose from it. Indeed, there has been significant criticism of existing multilateral banks such as the International Monetary Fund and the World Bank, but it is also not apparent that the China-driven AIIB will solve ASEAN countries’ need for regional infrastructure financing. Going forward, as more information on AIIB’s structure, function and voting power becomes clear, it would become more apparent how far the new institution can support the implementation of ASEAN Connectivity projects.

About the author:
* Sanchita Basu Das is ISEAS Fellow and Lead Researcher (Economic Affairs) at the ASEAN Studies Centre, ISEAS, Singapore.

Source:
This article was published by ISEAS as ISEAS Perspective Number 30 (PDF)

Notes:
1. Asian Development Bank (ADB) and ADB Institute, ‘Infrastructure for a Seamless Asia’, September 2009 (http://www.adb.org/publications/infrastructure-seamless-asia)
2. Bhattacharya, Biswa N. (2009), ‘Infrastructure Development for ASEAN Economic Integration’, ADBI Working Paper Series, No. 138 (http://www.adbi.org/files/2009.05.27.wp138.infrastructure.dev.asean.economic.pdf)
3. Basu Das, Sanchita, (2013) ‘Conclusion and Policy Recommendations’, in Sanchita Basu Das (ed.) Enhancing ASEAN’s Connectivity, ISEAS
4. APEC members agree on connectivity blueprint, Xinhua, 11 November 2014, (http://news.xinhuanet.com/english/china/2014-11/11/c_133782132.htm; accessed on 21 may 2015)
5. Asian Infrastructure Investment Bank, Wikipedia (http://en.wikipedia.org/wiki/Asian_Infrastructure_Investment_Bank)
6. Where will the funds come from for the Belt and Road Strategy?, China Merchant Securities (HK) Co Ltd, Macro Report, January 16, 2015; One Belt, One Road, Caixin Online, 12 October 2014 (http://english.caixin.com/2014-12-10/100761304.html); The AIIB: China’s Rising Influence in Asian Development Finance, ANZ Research, 26 March 2015..
7. Chairman’s Statement of the 17th ASEAN-China Summit, 13 November 2014, Nay Pyi Taw, Myanmar (http://www.mofa.gov.mm/wp-content/uploads/2014/11/Chairmans-Statement-of-the-17th- ASEAN-China-Summitfinal.PDF.pdf, accessed on 21 May 2015)
8. The Conflicted Role of the AIIB in Southeast Asia, Stuart Larkin, ISEAS Perspective #23, 8 May 2015.
9. China’s lending hits new heights; Geoff Dyer, Jamil Anderlini and Henny Sender; 17 January 2011 (http://www.ft.com/intl/cms/s/0/488c60f4-2281-11e0-b6a2-00144feab49a.html#axzz3akPJBGo7; accessed on 21 May 2015)
10. China Forgoes Veto Power at New Bank to Win Key European Nations’ Support, Lingling Wei and Bob Davis, The Wall Street Journal, March 23, 2015 (http://www.wsj.com/articles/china-forgoes- veto-power-at-new-bank-to-win-key-european-nations-support-1427131055; accessed on 21 May 2015)
11. Chairman’s Statement of the 17th ASEAN-China Summit, 13 November 2014, Nay Pyi Taw, Myanmar (http://www.mofa.gov.mm/wp-content/uploads/2014/11/Chairmans-Statement-of-the-17th- ASEAN-China-Summitfinal.PDF.pdf, accessed on 21 May 2015)
12. World Economic Forum, The Global Competitiveness Report 2014-2015 (http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf).