West worried over AIIB

The US and the West has reasons to be worried about China's new Asian Infrastructure Investment Bank (AIIB) that has been recently launched.

This well though-out Chinese initiative is a direct challenge to American leadership in Asia in a more subtle but more powerful way than Beijing's moves to torpedo Obama's Asia Pivot by calculated military gambits in the East and South China Seas. But, as Australian professor Hugh White says, America and its allies are wrong to oppose the AIIB, because that just makes them look weak.

The AIIB is more about political influence and less about economics, or perhaps a grand combination of both. Since 1945, US strategic and political pre-eminence has been backed by its primary role in international financial institutions like the World Bank and the Asian Development Bank (ADB). So Americans know more than anybody else that the AIIB will provide the economic muscle to bolster China's influence in Asia.

The economic rationale for such an institution is very strong. Asia's economic growth will be grounded or at least constrained without massive infrastructure spendings over the next few decades. Some estimates suggest that US$8 trillion (S$10.2 trillion) may be needed in East Asia alone over just the next six years for the region to play to its potential.

Existing institutions simply do not have the capital needed to fund even a tiny fraction of that. Nor do they have the administrative capacity to get money and projects moving fast enough to meet the urgent demand. The ADB, especially, has acquired an unenviable reputation for slow, bureaucratised decision-making.

China has plenty of capital to invest, and strong economic incentives of its own to get Asia's infrastructure moving. Moreover, it has unrivalled expertise in just the kind of breakneck programmes that will be required to keep Asia growing, having itself delivered over the past two decades the most remarkable infrastructure development in history.

For China, the advantages are many and obvious. By taking the lead in the development of Asia's infrastructure, China can ensure that it is developed in ways that best serves its interest, consolidating its place as the hub of Asia's regional economy and the focus of Asia's links with other regions.

It will provide exceptional opportunities for Chinese companies to win contracts and profits. And, of course, it will offer great scope for enhancing China's political influence among its neighbours.

But America's interests would have been much better served by persuading China to help recapitalise and reform the old funding institutions rather than build a new one. But one can say it pushed China to start the new bank by consistently rebuffing China's bid for a larger voting weight on the governing boards of the ADB, International Monetary Fund and World Bank, which would have given Beijing a bigger say in their running and a bigger stake in their success.

Beijing has quite naturally concluded that its interests are better served by setting aside the old bodies and creating a new one.

The interests of other Asian countries may well be better served by the AIIB too, but there are some risks to be considered.

Every country in Asia finds itself pulled two ways by the rise of China's power. They all welcome the immense economic opportunities that China's rise offers them, and they all recognise and accept that as its wealth and power grow, China will inevitably come to exercise more regional influence.

These are real issues, but they do not necessarily cut much ice in Asian capitals. Western-imposed standards are not necessarily seen as a great boon in Asia, and the reputation of the old-established institutions have never really recovered from their ill-conceived, Washington-imposed role during the East Asian financial crisis in the late 1990s.

At any rate, Washington's concerns do not seem to have dissuaded many Asian governments from signing up as founding members of the new bank last week. And those, like Australia, that have held back for now are unlikely to do so for long. The momentum behind the AIIB looks irresistible.

This must be especially galling to Washington as its own attempt to use economic leverage for political and strategic advantage in Asia seems headed for failure. The Obama administration clearly saw the Trans-Pacific Partnership (TPP) trade deal as central to the US "pivot" to Asia. It hoped this would reinforce US regional leadership against Beijing's challenge by marginalising China and allowing the US to displace it as the focus of Asia's regional economy.

The TPP was supposed to be concluded this year, and high-level ministerial talks continue with this aim in view. But it faces a raft of formidable and even insurmountable problems – a hostile US Congress not the least of them. And even if it does materialise, the TPP is not going to shift the patterns of trade enough to erode China's immense and growing economic weight and political clout.

The US decision to oppose the AIIB seems a serious strategic error. Rather than buttressing America's strength in Asia against the China's challenge, it has simply confirmed its growing weakness.

If the US still suffers the illusion that it will continue to lead Asia in future despite China's growing economic and military clout, it can only do so at its own peril.