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The Conflicted Role Of The AIIB In Southeast Asia – Analysis


By Stuart Larkin*

There are 35 Prospective Founding Members (PFMs) of the Asian Infrastructure Investment Bank, (AIIB), and a further 23 countries applying for this status.1 As many as 28 of the PFMs are from Asia, including all the ASEAN countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam,2 – the large economies of China and India and the oil rich states of Qatar, Saudi Arabia, Kuwait and Kazakhstan among others. The non-regional members are France, Germany, Italy, Luxembourg, New Zealand,3 Switzerland and the United Kingdom. Applicant countries include other OECD4 countries such as Australia, South Korea, Spain, Portugal, Netherlands, Austria, Poland, Hungary, Turkey and the four Scandinavian countries. Brazil and Russia are large-economy applicants and the Hong Kong territory has also applied. Belgium, Canada and Ukraine are considering joining; Colombia, Japan and USA have no immediate intention to participate; and North Korea and Taiwan’s applications to join have been rejected by China.

Thus, the AIIB is set to commence operations by the end of the year with a long list of founding members. A reliable assessment of the AIIB’s role in Southeast Asia is only feasible once the bank is operational and its public statements and research outputs, as well as the details of the actual projects and financing structures it expedites, can be scrutinized. However, the membership is diverse with each PFM having its own reasons for wanting to get on board.

For the purpose of analysing the range of interests and objectives of PFMs I group them into three: (i) loan recipients within Southeast Asia, (ii) China, and (iii) OECD members and the oil rich states. The differing interests and objectives of these three groups will be advanced by members during the course of the bank’s operations, (and during the set-up period when governance procedures are established), and the playing out of these tensions will determine the nature of AIIB’s evolving role in Southeast Asia. For example, the AIIB is China-led and yet multilateral – how will decision-making power be distributed, both according to the bank’s founding covenants and in practice? The core themes of AIIB as an instrument of soft power in China’s rise and the region’s need to get infrastructure projects off the ground will coalesce around common interests.


ASEAN members as developing countries have inadequate infrastructure and therefore welcome the new source of infrastructure financing that AIIB presents. (Singapore and Brunei have good infrastructure and much higher per capita incomes and although sharing security concerns with their neighbours, have more in common with the OECD and oil rich states).5 Southeast Asian nations have three principal hopes and concerns regarding AIIB’s role in the region. First, they hope that AIIB will view Southeast Asia as a compelling market opportunity in infrastructure finance, supplying “public goods” in an essential sector where private sector financial intermediation has fallen short. Second, they hope AIIB will act as a knowledge bank providing much needed advice and assistance, helping countries to build capacity in establishing “shovel ready” infrastructure project pipelines. Third, they hope China will not seek to use AIIB to gain undue political influence in the region.

The Southeast Asian Infrastructure Market

The market has been well defined by governments and international organizations such as ASEAN, APEC, ADB and World Bank with their programmes for development of national and cross border infrastructure (CBI), as well as regional frameworks. Such plans are well formulated and have been long in the making; for example, APEC Leaders’ 2013 Declaration of shared aspiration for seamlessly and comprehensively connected and integrated Asia Pacific through the pillars of Physical Connectivity, Institutional Connectivity and People-to- People Connectivity.6 But implementation has been slow. There is deemed to be a massive “funding gap”, regionally as well as globally. Asian nations need infrastructure investments of US$ 750 billion per year through 2020 (ADB), whereas ADB and World Bank combined are making infrastructure investments of just US$ 20 billion a year worldwide.7 The infrastructure deficit for developing countries overall is particularly acute: they spend about US$ 1 trillion a year on infrastructure and need at least an additional US$ 1 trillion per year to meet demand and maintain growth rates.8 A United Nations report in July 2014 notes an additional 2.5 billion people will live in cities by 2050, with nearly 90 per cent of that increase concentrated in Asia and Africa.9 The UN estimates Asia’s urban population to increase by 630 million people by 2030 led mainly by China, India and Indonesia.10

Table 1: Total National Infrastructure Investment Needs in Asia 2010-2020

Asia is the world’s largest and most populous region, covering 26 million square kilometres and, with 3.77 billion inhabitants, it accounts for about 60 per cent of the world’s population and 30 per cent of the world’s total land area.11 Such statistics might suggest that South and Central Asia will be AIIB’s near term focus for infrastructure finance, but this would be misleading. Central Asia certainly has energy and mineral deposits that China is developing. However, vast distances (and some of the world’s remotest geography), sparse population, and Russian geostrategic interest, to link up to the European market all challenge the economic feasibility of Eurasian connectivity investments. India, which dominates South Asia, has high population and production and market potential. But its chaotic form of government presents huge challenges in infrastructure planning.

Table 2: Asia’s Infrastructure Requirement, 2010–2020 (2008 $ billion)

The largest infrastructure market within Asia is East and Southeast Asia, (see Table 2 above). ASEAN countries will require infrastructure investments amounting to US$ 1.08 trillion during 2010-20, with an average investment of US$ 98.5 billion per year (see Table 3 below). Of this projected amount, around US$ 731.6 billion (68 per cent) will be needed for investment in new projects while US$ 351.6 billion (32 per cent) will be required for maintenance.

Table 3: Projected infrastructure Requirements in Developing ASEAN* Economies 2010–2020 by Sector (US$ million)

There are a number of reasons why infrastructure investment in Southeast Asia may be particularly attractive to the China-led AIIB. ASEAN is currently China’s third biggest trade partner with US$ 443.6 billion of annual bilateral trade.12 Production networks and supply chains are already China-centric and the region also supplies many natural resources to China. ASEAN has a population of 600 million which offers low cost labour as well as a good sized middle class of sophisticated consumers; ASEAN has high and middle income countries as well as low income ones. Most importantly, the potential returns to infrastructure investment are greatest because the region already has an advanced economic integration agenda based on a combination of infrastructure and connectivity development and trade and investment liberalization.

ASEAN’s major projects in transport are the ASEAN Highway Network and Singapore- Kunming Rail Link projects but a large portion of national infrastructure such as airports, ports, roads and railways can be considered as cross border infrastructure (CBI) and building blocks for regional connectivity. The ASEAN Secretariat, APEC, ADB and World Bank have all contributed to the regional economic strategy strongly encouraged by outside powers such as USA and Japan, and of course China. Buy-in by national politicians in ASEAN countries has been lacklustre and the ASEAN Secretariat is inadequately resourced and lacks enforcement power. There is a leadership role for AIIB to play in financing connectivity investments that encourage national politicians to implement their agreements on ASEAN Free Trade Area (AFTA) and ASEAN Economic Community (AEC) 2015.

Developing Capacity in Southeast Asian Countries to Establish Project Pipelines

ASEAN countries can look to the AIIB to help with their financing needs – for example, Philippines needs US$ 20 billion annually to finance its infrastructure needs until 2020 (ADB)13 – but many ASEAN countries are weak in infrastructure planning. They could benefit from the AIIB providing a pool of experience and expertise, drawing from China’s own experience. Consider progress with Jakarta’s monorail project with China’s record of building urban transit systems in recent years.14

Bankers often maintain that the financing deficit for infrastructure is not due to an unwillingness to contribute capital. The problem is mostly caused by a lack of well- structured, bankable projects; regulatory and political stability that decrease investor confidence; and the lack of capacity on behalf of governments, city leaders and project sponsors. The investments needed are typically for public goods which are large-scale, long term and illiquid, and present challenging cost recovery problems. Constraints, particularly in attracting private sector investment, include problems of project selection and preparation, implementation risks, the need to translate sound economic rates of return into financial returns, and intermediation challenges. AIIB will need to build up considerable expertise if it is to help Southeast Asian countries acquire the capacity to address these challenges. Without a pipeline of “bankable” projects the AIIB has no deal flow.

Fear of AIIB as Instrument to Advance China’s Political, Economic and Security Interests

Although AIIB is a multilateral institution, prospective loan recipients in Southeast Asia worry that China may use it as instrument with which to pursue purely national goals. Fear of China domination is hard-wired in Asia. This is due to the geography, that is, the size asymmetry, and the history – from the ancient tributary system, through the cold war (when ASEAN was formed under the “communist threat”) and up to contemporary territorial disputes in the South China Sea. Furthermore, ASEAN countries are particularly sensitive to the issue of external interference in their internal affairs, perhaps because of their experiences in the struggle for independence from colonial powers. They are in no mood to see unwanted western influence replaced by China domination.

There are two fundamental principles of China’s engagement with ASEAN: mutual security and economic cooperation.15 However, in practice the latter is far more developed than the former. Southeast Asian production networks and supply chains are quite well integrated with China, and energy and other natural resources also flow from the region. But mutual security understanding has been shaken by China’s perceived belligerence in the South China Sea. Also, while President Xi Jinping’s “Belt and Road” speeches (see below) have outwardly been well received by Asian countries eager to attract foreign investment and infrastructure financing, there is disquiet about the China-centric vision of regional integration they articulate. The core-periphery structure of connectivity envisaged differs from the multilateralism that ASEAN has entertained. It is also a challenge to the principle of ASEAN Centrality which implies that ASEAN, instead of the bigger economies like those of China, Japan, the US or India, should be the hub of developing a wider Asia-Pacific regional architecture.16 Also, the difference in economic scale between China and its neighbours creates asymmetric interdependence that favours China and makes ASEAN countries wary.

ASEAN countries wish to take advantage of AIIB’s project loans and other “public goods” to advance their development but fear doing so might leave them vulnerable to unwanted political influence. The main safeguard against this is to balance these loans with financing from elsewhere. The more financing ASEAN countries can secure from the China-led AIIB, the more they can hope to secure from countries fearful of China’s growing influence in the region, spurring an “investment race”. For example, shortly after China talks with Indonesia over the refurbishment of 24 ports, the US Chamber of Commerce in Jakarta, Amcham, staged a US-Indonesia Investment Summit on the prospect of US$ 61 billion of US FDI over the next five years.17 Jokowi’s concept of Indonesia as a “global maritime axis” can play in with Xi’s Maritime Silk Road. ADB’s plan to provide US$ 1.5 billion in loans to Indonesia in 2015 (nearly triple the amount in 2014, US$ 550 million)18 is not a coincidence. Conversely for China, there is the risk they will disburse funds for infrastructure development without markedly increasing their political influence and security cooperation with countries in the region.


There are a number of reasons why China may have taken the initiative to launch AIIB. It may partly be out of frustration with its inability to expand its influence within the IMF and World Bank19 commensurate with its rising economic status. Also, China may see enormous potential in the obvious need across Asia to improve its infrastructure. With a domestic slowdown underway leaving many infrastructure-related industries operating with spare capacity – such as in construction, cement and iron and steel – the timing may be auspicious. Also related to the domestic economy, there is a need for China to step up the export of capital. However, the official reasons are encapsulated in the “Belt and Road” vision articulated by China’s top leadership, of which AIIB is seen as a leading execution agency. Since its leadership of AIIB is indisputable, how China perceives AIIB’s role is of utmost importance.

“Belt and Road” and AIIB as Instrument of “Soft Power”

“The basic purpose of [AIIB] is to support infrastructure in Asian countries and investment of other productive areas, promote economic development in the Asian region and regional economic cooperation”,20 and it is Beijing’s brainchild to steer development along the proposed “Belt and Road”. The Silk Road Economic Belt is a programme to build land transportation corridors that connect China to Europe and all other major Eurasian sub- regions, including Indochina, South Asia and Southwest Asia. The 21st Century Maritime Silk Road is a port development initiative to broaden Chinese trade channels targeting the maritime regions of Southeast Asia, South Asia, the Middle East, East Africa and the Mediterranean.21

Connectivity has a compelling economic and commercial logic to it but it easily takes on geostrategic and security connotations. China’s interest in extending its maritime capability is consistent with it becoming the world’s largest goods trader, overtaking the USA in 2013 with total imports and exports of over US$ 4 trillion.22 Over 80 per cent of global traded goods are carried by maritime transport (WTO 2013). Expanding blue water naval capability is thus a legitimate goal for China and it provides greater visibility, deterrence, reassurance and can earn prestige and permit becoming “a neighbor of every other country.” Developing roads, railways, ports, and energy corridors is part of a strategy based on the politics of routes, which create access and may increase neighbour’s reliance on Chinese markets and capital. The idea is to draw in the countries of Eurasia and of the maritime Asia Pacific into China’s economic orbit to form what Xi Jinping calls a “community of shared destiny”. Xi Jinping is clearly thinking in terms of “grand strategy”.23

But “Belt and Road” creates unease in the region with its considerable ambition and scope and its China-centric conception of regional connectivity and economic integration. Southeast Asian leaders fear having to kowtow to Beijing for their project loans. Unperturbed and possibly insensitive to this, perhaps Xi Jinping’s “Belt and Road” speeches were primarily directed at the domestic audience. A patriotic vision of how China regains its rightful place in the world is a welcome morale booster for China’s nationalistic people experiencing hardship amidst a serious domestic economic slowdown that has not yet found bottom. Also, China’s business leaders, bureaucrats and bankers are being primed for the new opportunities that they will have to go out and nail down in the region.

The execution of the “Belt and Road” requires China to assume a leadership role within the region which cannot be based solely on coercion and economic and military might. China must be seen as providing benefits to the countries of Southeast Asia. Within the politically more acceptable multilateral approach, AIIB is being framed as an instrument of China’s “soft power” .24 As a provider of regional public goods, AIIB dispatch of infrastructure loans and related services to countries in the region is to help convince them that China’s rise will be peaceful. This will be quite a challenge for AIIB while perceptions of ongoing China belligerence in the South China Sea persist.

AIIB as Conduit for Capital Exports

With strict capital controls restricting most of China’s huge savings to deployment in the domestic economy, China has become oversupplied in infrastructure and real estate (and heavy industry) and the returns on investment have fallen to very low levels; and resource allocation in the economy has become highly inefficient. The marginal productivity of domestic investment has fallen so low that in the macro-economy it now takes RMB 5 of investment to produce RMB 1 of GDP growth.25 China has to drain off surplus savings from its domestic economy to improve resource allocation and returns on investment. Regional infrastructure finance markets have the advantage of scale, the prospect of work for Chinese companies, e.g. in construction and steel, and economic benefits from enhanced connectivity.

AIIB can sell renminbi-denominated bonds to China’s huge commercial banks and lend the proceeds to infrastructure projects in Southeast Asia (and the wider region). In global financial markets, capital is allocated through trillions of individual investment decisions, but because China’s domestic savings are held captive by the state they can be exported in a highly concentrated and strategic way. AIIB will play a leading role in the intermediation of domestic savings into regional infrastructure investment. But China’s other outbound investment institutions will also play an important role. The China Development Bank had outstanding foreign exchange loans in 2010 of US$ 141.3 billion (Peoples’ Daily Online, February 14, 2011). The Export-Import Bank of China (Eximbank of China) is another important policy bank.26 China’s will also seek to redeploy some of its foreign exchange reserves, which stood at US$ 3.84 trillion in December 2014,27 away from low yielding US Treasury Bonds, drawing further on the services of Chinese Investment Corporation (CIC) and China International and Trust Investment Corporation (CITIC). There is also the New Development Bank, (NDB), with a capital endowment of US$ 100 billion to consider, and the US$ 40 billion Silk Road Fund announced in November 2014.


The British decision to join the AIIB on 12th March has triggered a widespread reaction to the US effort to deter its allies from being a part of the China-led bank. The City of London trumped the City of Westminster in a clear demonstration of global capital owing no loyalty to nation state allegiances, and opened the floodgates for many OECD countries, including France, Germany and Italy to join AIIB. As non-regional members, along with the oil rich states, these countries will not be seeking infrastructure loans from AIIB: they are joining for other reasons. For all practical purposes, Singapore and Brunei can also be considered within this category; they account for much of the ASEAN-5 countries considerable savings worth US$ 457 billion and foreign exchange reserves amounting to US$ 409 billion.28

OECD members and oil rich states are PFMs in AIIB as providers of long term capital. OECD members in particular have high standards of governance and their participation will boost AIIB’s credit rating and allow them to borrow at a lower rate of interest. However, they will want to see high governance standards for two reasons. First, they will not want to see their reputations tarnished by scandals concerning corruption and inappropriate project selection and execution regarding labour, social and environmental standards. Second, they will want to see high standards of due diligence conducted so that non-performing loans (NPL) are minimal. OECD countries will want to participate as creditors and investors alongside AIIB and the oil rich nations, on project loan syndicates, for example.

Apart from the sovereign wealth funds as a source of infrastructure finance, this grouping also includes various sources of private sector financing that may be interested in participating in infrastructure projects alongside AIIB. There are approximately 8,000 institutional investors worldwide but only about 300 are dedicated to infrastructure. As at 4th November 2014 there are 148 private infrastructure funds currently in the market.29 However, capital does not appear to be the main problem. Despite very low interest rates, huge gaps in infrastructure coexist with comparably massive accumulation of savings and underused global capacity. The world’s capital is concentrated in vast pools of value with US$ 80 trillion plus in global bond markets, US$ 60 trillion held in worldwide bank deposits, upward of US$ 50 trillion captured in equity markets and US$ 47 trillion plus controlled by 10 million high net worth individuals.30 So it is not the case that there is inadequate savings to finance the world’s infrastructure requirement but rather that there is a massive failure in the intermediation of savings into investment. It is for AIIB to meet that intermediation challenge within the region.

The problem is that there is a scarcity of “bankable” infrastructure projects within Southeast Asia. Singapore will be hoping that AIIB will open its first branch in the lion state so that it can add infrastructure finance as another pillar to its financial services sector. International professional services firms, specialized engineering companies and fully fledged construction and infrastructure companies can then all set up their regional offices in order to help facilitate infrastructure development within the region, hoping to pick up contracts in the design, construction and operation phases. In short, OECD countries want to join AIIB so their companies can benefit from this new source of financial intermediation and funding. In this endeavour they will be expecting to both compete and collaborate with Chinese firms.


China has its China-centric conception of regional connectivity and economic integration in its “Belt and Road” vision to serve its interests and guide its rise as a regional, and later global, power. But what is the political buy-in for this from Southeast Asian governments? It clashes with the principle of ASEAN centrality which keeps the initiative for connectivity and economic integration with Southeast Asian countries and away from outside powers. Southeast Asian governments want infrastructure loans but they don’t want to kowtow to China for them. In any event they have access to other sources of finance. The US and Japan, and even India, perceive a need to limit China’s influence in Southeast Asia and appreciate that that involves spending money. In fact the world is glutted with capital and the main problem appears to be the dearth of “bankable” projects within Southeast Asia. Is AIIB able to acquire the necessary knowledge culture for a politically diverse Southeast Asia under the leadership of an authoritarian monoculture?

China wants to use the AIIB to intermediate domestic savings into Southeast Asian infrastructure investment. But OECD members and oil rich states want their own institutions to finance some proportion of Asian infrastructure given the region’s growth prospects in both production and consumption. Both of these groups also want their own companies to win contracts in infrastructure project design, construction and operations. As a multilateral institution, how are the tasty morsels of business going to be divvied up among members? Not only will AIIB have to acquire the financial, economic and legal knowledge to expedite the financing of large and complex infrastructure projects but also the in-house diplomatic skills to reconcile all of the conflicting interests and objectives of its diverse membership.

About the author:
*This is the first in a three-part series on the AIIB by Stuart Larkin. Stuart Larkin was Visiting Fellow at ISEAS from 26 May 2014 to 25 September 2014, and 20 October 2014 to 19 April 2015.

This article was published by ISEAS as ISEAS Perspective Number 23, May 2015 (PDF)

1. All membership data is sourced from Wikipedia accessed on 9th April 2015 and held to be the situation as at 7th April 2015. http://en.wikipedia.or /wiki/Asian_Infrastructure_Investment_Bank#Countries_with_no_intention_or _refused
2. This is all of Southeast Asia except Papua New Guinea and East Timor, which are neither regional members nor applicant countries.
3. Wikipedia lists New Zealand as one of seven non-regional members as at 9th April 2015 even though its geographical position would suggest its classification as a regional member.
4. Organization for Economic Cooperation and Development, (OECD), has 34 members and can serve more or less as a proxy for the developed world.
5. See later section entitled ‘OECD Members and the Oil Rich States’.
6. Asia Pacific Economic Cooperation, (APEC), Leaders Declaration, 2014, Annex D – APEC Connectivity Blueprint for 2015-2025, Declarations/2014/2014_aelm/2014_aelm_annexd.aspx
7. Gallagher, Paul, U.S. Suicidal War on New Chinese Infrastructure Bank, Executive Intelligence Review, July 7th 2014;
8. World Bank, Public Private Partnerships: Global Infrastructure Facility (GIF), 17th November 2014,
9. Yahya, Yasmine, Singapore Eyes Slice of Pie Worth About $4 trillion, Straits Times, 6th September 2014.
10. Wilson, Karl, Funding the Future, China Daily Asia, March 28th 2014;
11. Bhattacharyay, Biswa, Institutions for Asian Connectivity, ADBI Working Paper No. 220, 2010.
12. China Daily, ASEAN Welcomes China’s New Maritime Silk Road Initiatives, 15th August 2015,
13. Ong Junio, Don Rodney, The Diplomat, Asian Infrastructure Bank: An Idea Whose Time Has Come? 4th December 2014, idea-whose-time-has-come/
14. More issues halt monorail’s progress, Jakarta Post, April 30th 2014,
15. David Arase, China’s Two Silk Roads: Implications for Southeast Asia, ISEAS Perspective, 22nd January 2015
16. Sanchita Basu Das, The ASEAN Economic Community: An Economic and Strategic Project, ISEAS Perspective, 29th January 2015.
17. Jakarta Globe, Indonesian Ministries Step Up for US Firms’ $61b Investments, 12th November 2014, investments/
18. Nikkei Asian Review, ADB Lends US$ 1.5 Billion Ahead of AIIB Establishment, January 14th 2015, establishment
19. China currently commands only 5.17 per cent of the vote in the World Bank and 3.81 per cent in the IMF. Forbes, China Challenges Dollar Hegemony with New Infrastructure Bank, 6th April 2015. dollars-world-hegemony/
20. Lou Jiwei answered reporters on the Asian Infrastructure Investment Bank, Ministry of Finance, PRC, March 7th 2014.
21. David Arase, China’s Two Silk Roads Initiative: What It Means For Southeast Asia, unpublished draft, February 2015
22. Jamil Anderlini and Lucy Hornby, China Overtakes US as World’s Largest Goods Trader, Financial Times, 10th January 2014, 00144feabdc0.html#axzz3RVdkoAQF
23. Grand strategy denotes ”a country’s broadest approach to the pursuit of its national objectives in the international system”.Robert H. Dorff, A Primer in Strategy Development, in Joseph R. Cerami and James F. Holcomb, Jr. (eds.), U.S. Army War College Guide to Strategy, Strategic Studies institute, 2001, p. 12.
24. “Soft power” can be usefully defined as “the ability to cause others to admire, respect and emulate”. David Arase, Unpublished draft, Op Cit.
25. David Arase, China’s Two Silk Roads: Implications for Southeast Asia, Op Cit.
26. Although it shares CDB’s mandate to help ease China’s energy and natural resource bottlenecks and to help Chinese firms expand overseas, Eximbank is a much smaller institution with assets of RMB 792million in 2009 against CDB’s RMB 4.5 billion, (Downs, 2011).
27. Trading Economics, China’s Foreign Exchange Reserves, accessed 17th February 2015,
28. Bhattacharyay, Biswa Nath, Infrastructure for ASEAN Connectivity and Integration, ASEAN Economic Bulletin, Volume 27, Number 2, August 2010.
29. GIB Summit Report 2014, Op Cit.
30. Global Energy Basel, infrastructure for a Changing World, 2012.

ISEAS - Yusof Ishak Institute

ISEAS - Yusof Ishak Institute

The Institute of Southeast Asian Studies (ISEAS), an autonomous organization established by an Act of Parliament in 1968, was renamed ISEAS - Yusof Ishak Institute in August 2015. Its aims are: To be a leading research centre and think tank dedicated to the study of socio-political, security, and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. To stimulate research and debate within scholarly circles, enhance public awareness of the region, and facilitate the search for viable solutions to the varied problems confronting the region. To serve as a centre for international, regional and local scholars and other researchers to do research on the region and publish and publicize their findings. To achieve these aims, the Institute conducts a range of research programmes; holds conferences, workshops, lectures and seminars; publishes briefs, research journals and books; and generally provides a range of research support facilities, including a large library collection.

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