The Façade and Reality of the Asian Infrastructure Investment Bank

The Façade and Reality of the Asian Infrastructure Investment Bank

 

Eisuke Suzuki❋

The prospective membership of the Asian Infrastructure Investment Bank (AIIB) led by China reached 57 countries, announced the Chinese Treasury Department on April 15, 2015. The number far exceeded any expectation of China’s leadership, said President Xi Jinping in high glee at the 60th anniversary of the Bandon Conference held on April 22, 2015 in Jakarta, Indonesia. The number swelled precipitatively after the United Kingdom announced to join the AIIB in the middle of March 2015, just about two weeks before the application deadline for prospective countries to be classified as “founding members.”

   The U.K.’s decision was made against the wishes of the United States government with which the U.K. has a special relationship. It was the first member of G7 industrialized countries to break the rank. It released any constraint on the part of all other countries close to the U.S., triggering an avalanche down the slope, carrying all undecided countries with it to the AIIB.

   That stunning turn-round has made the U.S. and Japan only two major countries not joining the AIIB, and that simple fact generated criticisms that “our decision not to join the band wagon was wrong;” “we missed the bus;” “we are left behind;” and our stance that we were not going to join the AIIB unless our concerns about the question of transparency was satisfactorily answered was misguided; and so on. They have now become popular commentaries in town, and they were all mixed with jeers and disappointment.

   This article shows why the position taken by both the U.S. and Japan is correct, even outside the framework of the U.S.-Japan alliance, by carefully analysing major issues we can discern from the currently available information on the AIIB.

   Before we embark upon the analysis of all major issues, let me confirm the following factual situations as a basic understanding: First, it is undisputed that Asia’s financial requirements for new bridges, roads, ports, power plants, communications facilities, and other infrastructure projects are gigantic. Secondly, it is also acknowledged that funding sources available today for such infrastructure needs are not only limited, but also inadequate. There is the real need for the AIIB.

   A new alternative funding source additional to the World Bank and the Asian Development Bank (ADB) creates a fresh competitive process to the hitherto U.S./Japan- controlled institutional practice. That it enlarges the total size of a funding pie is not only beneficial to the development of infrastructure in Asia, but it also promotes pluralism and diversity in the practice of international finance for the interest of everybody.  

 

I.

China wants a place in the global economic and financial architecture, commensurate with its economic power, which has long been denied either in the IMF/World Bank or ADB. The launching of the New Development Bank (NDB) commonly known as the BRICS Bank itself is a response to the failed implementation of the IMF’s far reaching reforms of quotas and governance approved in December 2010. The AIIB is China’s answer to its own quest for global power. It will provide an alternative financing in form and substance to those practices and procedures established by the Bretton Woods institutions.

   Japan should understand the extent of frustration and disappointment that China must have gone through in the failure of the 2010 IMF Reform. In the wake of the Asian Financial Crisis in 1997, Japan, too, suffered a bitter experience in pursuing its aspiration to establish an “Asian Monetary Fund,” an Asian version of the IMF, which was defeated due to the U.S. opposition.

   There is no doubt that the creation of an additional international financial institution (IFI) in itself increases diversity and pluralism. Nevertheless, such diversity and pluralism cannot be achieved without a politico-legal framework that will allow and promote reciprocal respect for the individual’s freedom of choice. Despite all the initial yearning for a better treatment and recognition in the IFIs, BRICS (Brazil, Russia, India, China, and South Africa) in the end followed the same practice of control as that of the IMF//World Bank in creating their own IFI which they called “the New Development Bank” (NDB) in 2014. Its Charter ensures that the founding members will maintain perpetual control in voting power by stipulating that the total voting power of the founding members will not go below 55 per cent of the total voting power of the members of the Bank. The power structure of the NDB represents the combination of two old systems of the capitalists’ oligarchy and the communists’ total control by politburo members of equal rights. And they call it, in an Orwellian fashion, “the New Development Bank”! Likewise, the AIIB is another response to a growing demand for alternative financing sources similar to the creation of the New Development Bank and El Banco del Sur (the Bank of the South) of South America.

   “The Silk Road Economic Belt and the 21stCentury Maritime Silk Road” or otherwise known as “the Belt and Road Initiative” which was originally announced by President Xi Jinping in pursuit of the “Chinese dream” in the realization of “the great national renewal.” It is a grandiose design to create a vast economic zone embracing a new Eurasian economic belt in the north and a new maritime route in the south starting from the eastern seaboard of China through the South China Sea, the Indian Ocean, and Middle Eastern and East African countries to the EU. The AIIB is a vehicle to realize that Chinese dream. In view of such a particular context and how the idea came about, doubt persists as to how various views and competing interests of its member countries will be treated and reflected in the decision-making process of the AIIB as an international financial institution.

   In the midst of the unprecedented and growing gap between the rich and the poor, China’s high economic growth era is now over, and China is saddled with the existence of surplus production capacity and the oversupply of work force in saturated domestic markets that are left with unsold goods. Given that, to solve the present growing social unrest, it has become imperative to find an appropriate outlet abroad for such “surplus production capacity” and “surplus work force” at home. Therefore, it is natural to suspect that the AIIB will be used not as an international organization, but as China’s instrument of policy of outward expansion that is being pursued nonchalantly with impunity in order to increase its national interest in defiance of international norms and comity. China’s on-going territorial and maritime expansion in the South China Sea in total defiance of international law attests to our lingering doubts, and reinforces our suspicion that China’s ambition is to build a new tributary system and the renminbi financial zone in a challenge to the U.S.-led Bretton Woods system.

   Why do we remain skeptical of the real purpose of the AIIB? It is because from the outset China has made all its decisions unilaterally—from the announcement of its plan to establish the AIIB up to the present, including the time table for the preparatory process. Unlike any other preparatory processes of international organizations where a series of discussions and consultations among major countries is normal and customary, in the case of the AIIB, China unilaterally proposed it without any discussion with other countries, declared March 31, 2015 as the last date for being considered “founding members,” and publicly announced to the world, “Follow me,” without disclosing any principal features of its organizational structure and decision-making process, not to mention a draft agreement establishing the AIIB.

   “The Asian Infrastructure Investment Bank” is an international financial institution, which is, in plain terms, like a “company limited” in which shareholders are member countries. To become a member country, a country must subscribe to shares. The voting power of a shareholder is not one vote per member country as in the United Nations, but it varies depending upon how much capital subscription a member country makes. A large shareholder will have a bigger voting power. Thus, China made it clear from the beginning that it will subscribe to 50% of the total authorized capital of the AIIB.

   These are the general contours of basis of suspicion expressed in terms of the questions of transparency and governance over the real agenda behind the establishment of the AIIB.

 

II.

   Japan decided to postpone its decision on the AIIB because of the lack of transparency in the AIIB’s decision-making process. Before jumping on the bandwagon, let’s consider a few points of concern that are not openly mentioned.

    The Memorandum of Understanding on Preparing to Establish the AIIB is just that: It is an instrument expressing those signatories’ intention to join the AIIB, subject to the final signing and ratification of the Articles of Agreement Establishing the AIIB. But the full text of a draft agreement has not been made available yet, even though the formal drafting process just began by those countries that were considered “founding members of the AIIB” on April 27, 2015. It already became apparent that no agreement reached on the question of the capital subscription ratio among prospective members. It is not conceivable that all the 57 founding member countries would agree on every detail of all the articles of agreement without discussion and negotiation.

    The drafting negotiation led by China will include the exact amount of the authorized capital, an aggregate par value of capital shares, the ratio of paid-in and callable capital, whether to set the ceiling or the floor for subscription applications, the presence or absence of the resident board of directors, the number of directors of the board of directors, the classification of regional and non-regional countries and the definition of the region, the decision-making organ to approve loan and investment applications, the question of procurement eligibility, i.e., whether non-member countries can participate in procurement, etc. As 57 countries as “founding member countries” are involved in this process of negotiations, their competing and often conflicting interests will naturally crisscross until deals are made and compromises are struck. Beside the nationality of the president and the location of the headquarters that seem to have been decided by China already, other areas that may be open for negotiation include the number of vice-presidents, the number and location of oversea representative offices, and even the official and working languages. Let us review principal issues of concern one by one below: 

  1. A Regional Bank in Asia?

    It is often mentioned that the AIIB complements the Asian Development Bank (ADB) with 67 members of whom the U.S. and Japan are the two largest equal shareholders. Apart from calling every country to join the AIIB, China has not explained how to classify regional and non-regional countries. The distinction between “regional” and “non-regional” has a direct bearing on the allocation of capital subscription between them. In the case of ADB no subscription can be allowed if it would have “the effect of reducing the percentage of capital stock held by regional members below sixty (60) per cent of the total subscribed capital stock.” The term “region” is defined to comprise “the territories of Asia and the Pacific” included in the Terms of Reference of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). In case of the AIIB, however, what comprises the “region” remain unstated even though Mr. Jin Lichun, Secretary General of the Preparatory Office for the Establishment of the AIIB, who is rumored to become the first president of the Bank, mentioned the maximum of 25 percent of the total capital stock of the Bank will be allocated to non-regional member countries. At ADB non-regional member countries are limited to only “developed countries” and they cannot borrow loans from the Bank nor can be recipients of other forms of Bank financing.

    The European Bank for Reconstruction and Development (EBRD) does not distinguish regional countries from non-regional countries, but stipulates that a majority of the authorized capital stock must be owned by members of the EU, EU, and the European Investment Bank, and the EBRD’s areas of operations are clearly defined in the Charter of the EBRD to comprise original “Central and Eastern European” and subsequently added “Mongol” and “member countries of the Southern and Eastern Mediterranean as determined by the Bank”.

   

    2. Composition of the Board of Directors

    The number of directors of the Board and how they are elected depends on whether member countries are classified as regional or non-regional. Given the difference in the capital subscription ratio between the regional countries and the non-regional countries like the 60:40 ratio of ADB, directors are elected separately by regional and non-regional member countries. On the other hand, like the BRICS-led New Development Bank where there is no regional classification, directors are elected on the basis of voting power of membership at large. However, BRICS countries as founding member countries are pre-allocated five directors for themselves out of the total of ten directors, and the remaining five directors are available for election by the rest of membership.

    The prospective membership of the AIIB is almost comparable to ADB’s 67 countries, which have 12 directors in total. Of 12 directors three largest shareholding countries, in effect, directly appoint their respective directors. The remaining 64 member countries are distributed to nine constituencies, each of which produces one director. Needless to say, the largest shareholder of each constituency will get directorship. Mr. Jin Lichun has already mentioned that the capital subscription ratio for regional member countries will be 75 per cent. The voting power of each member country corresponds to its shareholding, and the capital subscription ratio of non-regional countries is only 25 per cent. This 25 per cent must be allocated among the following 38 member countries: Oceania (2), the Middle East and Africa (11), Western and Eastern Europe (24 including 6 Central Asian countries), South America (1). These 38 member countries compete for the remaining few director seats! Thus, unless the capital subscription ratio of 75:25 is modified, it is obvious that the initial expectations about benefits of membership that were entertained at the time of application will not be materialized.

  3. Power Relationship between the Board of Directors and the President

    Normally, for an international organization the selection of a president is the subject of consultation and negotiation, but in the case of the AIIB it is already believed that its president will be most likely Mr Jin Lichun, Secretary General of the Preparatory Office. He will be elected by the Board of Governors, the highest decision-making body of the AIIB that usually meets once a year. But the Board of Directors is the highest decision-making body in residence at the site of the headquarters; therefore, it is the power relationship between the Board of Directors and the President that matters most.

   The World Bank Charter provides that the President conducts, under the direction of the Board of Directors, “the ordinary business of the Bank,” and that the Executive Directors are responsible for “the conduct of the general operation of the Bank.” These provisions do not delineate clear functions between the President and the Executive Directors. The collision and competition of powers thus created due to the ambiguous demarcation and unclear division of powers between the Executive Directors and the President led to the resignation of Mr. Eugene Meyer, the first President of the World Bank after mere six months of his assumption of the office. That sums up the depth of the problem. In the end, an understanding needed to be worked out on the functional differences between the President and the Executive Directors: “The Executive Directors are responsible for the decision of all matters of policy in connection with the operations of the Bank, including the approval of loans,” and “The Management is responsible for developing recommendations in all matters of policy requiring decision by the Executive Directors” (Memorandum with Regard to Organization and Loan Procedure (4 June 1947).The memorandum further provided that:“Whenever, in connection with the operations of the Bank, decision of a question of policy becomes necessary, the President will submit such question to the Executive Directors with the recommendation of the management as to the action to be taken."

   Thus the practice developed, since then, that all policy recommendations are submitted to the Board by the President. ADB's Board of Directors is responsible for “the direction of the general operations of the Bank” and not for “the conduct of the general operations of the Bank,” as in the case of the Inter-American Development Bank and the African Development Bank. In particular, ADB's Charter stipulates that the Board of Directors exercises a power, “in conformity with the general directions of the Board of Governor,” to “take decisions concerning loans, guarantees, investments in equity capital, borrowing by the Bank, furnishing of technical assistance and other operations of the Bank.” The subsequent charters of the EBRD and the African Development Fund adopted the formulation of the ADB Charter, stating that their respective board of directors shall be responsible for “the direction of the general operations.”

   Contrary to such thoughtful practice developed over time, the New Development Bank (NDB), in the creation of which China was a principal promoter, adopted, word for word, the exact text of the problem-prone provision of the World Bank Charter as if intentionally to keep the division and demarcation of powers so ambiguous and unclear as to make them compete each other. The reason for it lies in the BRICS’ own peculiar situation: five original founding members have the equal amount of capital subscription on the basis of the principle of sovereign equality; each of BRICS countries appoints a Director on the Board of Directors, which means five Directors out of a maximum of 10 Directors are already pre-determined; the Board of Governors elects a President from one of BRICS countries on a rotation basis, and his term is five years and non-renewable. There are four Vice-Presidents of the NDB, one from each founding member country except the country represented by the President, who are appointed by the Board of Governors on the recommendation of the President.　That means both the President and the four Vice-Presidents are equal being appointed by the same authority. The NDB Charter provides that the President is responsible “for the organization, appointment and dismissal of the officers and staff, and recommendation of admission and dismissal of Vice-Presidents to the Board of Governors,” but it also stipulates that Vice-Presidents “exercise such authority and performs such functions in the administration of the Bank, as may be determined by the Board of Directors [emphasis added].” There is a serious conflict between the President’s power and the Board of Directors’ power with respect to who determines Vice-Presidents’ authority and functions.

   It is particularly unsettling because the Board of Governors’ appointment authority of Vice-Presidents is not reserved to the Board of Governors as non-delegable to the Board of Directors. It means the Board of Directors may determine Vice-Presidents’ terms and conditions irrespective of the President’s recommendations.    

   These historical developments tell us how critical the presence of the permanent resident board of directors is for the purpose of oversight and check of the president’s conduct of operations and governance of the organization. Without the resident board of directors, each director remains at his home country and has to deal with matters presented for board consideration without a benefit of listening and consulting his colleagues directly in person. In such situations each director would face direct “bi-lateral negotiations” with, or be subject to strong lobbying by, the president or his representative for the support of the proposal presented for board decision. Needless to say, it is China’s most preferred mode of “bi-lateral consultation and negotiation” between the two parties directly concerned with the subject- matter in question, rejecting the third party arbitration and the rule of law, as evidenced in territorial and maritime disputes in the South China Sea between the Philippines and China, and the same problem exists between Vietnam and China.

    In short, the absence of the resident board of directors at the site of the headquarters produces a stronger and more powerful president than otherwise.

 

4. International Financial Institutions and Expectations of Major Shareholders

    Major developed countries use international financial institutions (IFIs) as a useful vehicle through which to pursue their foreign policy. Since these IFIs are multilateral institutions, they become a convenient "cover" under which the real source of policy initiatives could be hidden. Any adopted policy decision becomes a multilateral institution's policy. Given that, it is obvious that China’s influence and voting power in the AIIB’s decision-making process will shape AIIB’s policy contents. But it will not be China’s decision; rather, it will be a decision made by the AIIB. In the end, IFIs’ policy initiatives and those of individual bi-lateral assistance policies are conjoined.

    The past record of the China Exim Bank gives us a glimpse into the future of the AIIB.(See Eisuke Suzuki, Bi-lateral Policy Orientation in the Multilateral Development Policy: A Challenge for the China Exim Bank and its Accountability, Chinese Journal of International Law, Vol. 6, 2007, pp.127-133. <http://chinesejil.oxfordjournals.org/content/6/1/127.full> ) Any country’s export and import bank is an arm of the government; it promotes the national policy of that government concerned. History tells us that China’s Exim Bank is far more attuned to, and interested in, the promotion of the government’s directives than any other Exim banks which are, thanks to the presence of active civil society including NGOs, more mindful of multilateral policy concerns in development: governance, accountability, transparency, anticorruption, disclosure of information, gender equality, environment, sustainability, and so on.  After all, any one of the government agencies, be it the People’s Bank of China, the Bank of China or the People’s Liberation Army, is subject to the instruction of the Chinese Communist Party. The aggressive behavior and conduct of the China Exim Bank in pursuit of China’s foreign policy objectives in Africa and Central and South America would be the mirror image of the future of the AIIB when it becomes operational.

    With that in mind, our focus of attention should be trained on the influence and voting power of China as the single largest shareholder as well as the sole promoter of the AIIB in its decision-making process. According to the initial brief of the structure of the AIIB, China will control 50% of the total capital subscription of the stock of the AIIB. That means any major decision of the AIIB requires China’s consent. China alone will enjoy veto power just like the United States in the IMF. Story that China promised to forgo veto power is not convincing. If, as a matter of common international practice, a major decision requires the affirmative vote of two-thirds of the total number of member countries, representing not less than three-fourths of the total voting power of the member countries, China would ipso facto have veto power.

    China is awash with money. The money is seeking outlets. In China you can buy anything, even toddlers kidnapped off the street and military ranks. There are of course people who want to benefit from China’s riches. The business of the AIIB like all other IFIs is in “intermediation,” which in laymen’s term means “middlemen” making money through buying and selling by the price differential created at each transaction in that process. The money will be flowing to whoever wants funding for infrastructure projects. Who would be biggest beneficiaries of such funding? Borrowing member countries, of course, and construction companies and other suppliers of goods and services and their middlemen. Non-borrowing developed member countries are partners in this process as suppliers of heavy machinery, precision equipment, consulting services, and so on, and being cooperative with “the realization of Chinese dream of the great national renewal,” they are hoping, in light of China’s gigantic market size and its real market opportunities, that they will be treated by China more favorably than otherwise in many other potential deals with China. It is the same natural expectations that prompted the United States to demand the “Open Door Policy” toward China in the 19th century.

   To this end, one cardinal doctrine is set into play in this money game: the three wise monkeys’ proverbial doctrine to “see no evil, talk no evil and hear no evil.” The U.K’s limp response to the “Umbrella Revolution” by Hong Kong students in opposition and demonstration against the Beijing-controlled election system attests to it. AIIB could become a breeding ground for international corruption, the internationalization of China’s domestic system of corruption. Besides, as mentioned above, the AIIB is to be in the business of infrastructure in which China’s “surplus production capacity” and “surplus labor” are put together as a package for export. Indeed, it would be an export business of manufacturing plants of “bribery, graft, corruption”.

5. Eligibility of Procurement

    Normally, regional development banks such as the Inter-American Development Bank, the African Development Bank and ADB stipulate that only member countries of their respective banks are eligible to participate in the procurement of goods and services under their respective bank financing. The only exception to this rule is the EBRD which is founded to promote free trade and market-based economy. The framers of the ADB Charter incorporated the principle of “membership-tied procurement” that stipulates that the proceeds of any financing provided under the bank's facility shall be used only for “procurement in member countries of goods and services produced in member countries.” This is a comprehensive membership-tied procurement prescription, in that you may buy goods and services only from member countries, but those goods and services must also be produced in member countries. The need for such tied procurement does not exist for international institutions of universal scope since every country is a member of these institutions’ system. For a regional bank, however, in order to attract non-regional countries to become members not as beneficiaries, but as supporters, of the institution, an incentive was needed.

    The EBRD departed from the standard practice of RDBs, i.e. (a) the number of non-recipient member countries exceeded the number of recipient countries; and (b) the adoption of open procurement policy. The EBRD Charter stipulates that, “the Bank shall place no restriction upon the procurement of goods and services from any country from the proceeds of any loan, investment or other financing undertaking in the ordinary or special operations of the Bank, and shall, in all appropriate cases, make its loans and other operations conditional on international invitations to tender being arranged.” Which procurement policy would the AIIB adopt?

 

III.

   On March 23, 2015 Chinese Premier Li Keqiang asked the IMF to include Renminbi in the IMF’s Special Drawing Rights basket. It is designed to launch Renminbi as a global currency at par with the following four international currencies: Euro, Japanese Yen, Pounds Sterling, and U.S. Dollars which constitute a basket of foreign exchange reserve assets. China needs to have its currency Renminbi recognized as an international currency as a necessary step for forming the Renminbi financial zone, and for that purpose, the AIIB is the perfect vehicle and the organization that should be purposefully used. Most likely Chinese contractors and suppliers for AIIB-financed projects will demand the use of Renminbi as a currency of procurement payment.

   The more the Renminbi is used as an international settlement currency in terms of frequency and volume, the more it will be considered China’s challenge to the Bretton Woods system. The grandiose vision of the new silk road on land and the new maritime silk road now referred to as “the Belt and Road Initiative” is a wing that will sustain the development of “the Renminbi Financial Zone”. The United Kingdom became a convenient “helper” in aid of the Chinese dream. The U.K. used to be a colonial master as a suzerain power of Hong Kong. Once powerful British merchant companies such as Jardin, Hutchison Whampoa, and Swire have been replaced by Chinese groups such as Cheung Kong Group, Y.K. Pao, and others, British interests, both official and private, have retained a multitude of broad and powerful connections in Hong Kong, and through them, in mainland China. The center of the web of influence is said to be the former Hong Kong Shanghai Bank, present HSBC.

   What was a trade-off for the U.K. government to join the AIIB at the risk of displeasing its own special ally, the United States? It must have been an offer so attractive and lucrative that they cannot refuse even in the face of the United States request not to join the AIIB. That offer must have been that China wants to make London’s City host the euro-Renminbi market equivalent to the euro-dollar market with the British assistance to make Renminbi an international trading currency. Curiously and coincidentally, Prince William visited Beijing in early March, and 11 days thereafter the announcement came out that Britain would join the AIIB. For Britain Chinese money is more than welcome to stimulate and re-vitalize slack British economy.

   To have Renminbi recognized as an international currency is indispensable to secure funding sources necessary for the “Belt and Road Initiative” to be realized. For any international financial institutions, funds they use to finance their respective operations are not their own capital raised at the time of establishment, but the money they borrowed by issuing bonds in international capital markets. That reality questions whether the AIIB without the United States and Japan will be in a position to raise necessary money from international capital markets at a reasonable cost for it to run financial operations. Because it is unlikely that the AIIB will receive a triple A rating like that of the World Bank and ADB. As explained earlier, the AIIB is in intermediation; it makes a profit at the cost difference between the AIIB’s borrowing cost from the capital market and the AIIB’s lending cost to its borrowing member countries, and that difference will enable the AIIB to run its operations. A developing country would usually find it difficult or unable to secure loans cheaply from the market, and so it would apply to an IFI for cheaper loans as a member just like individuals who join a credit union for the same purpose. That is why the AIIB must secure the money from capital markets as cheaply as possible. Should the cost become higher, an increased portion of the cost will be passed on to borrowing developing countries, but they would stay away from borrowing and such banking business would eventually fail.

   China no doubt needs Japan for the AIIB to be successful. China’s credit alone as the largest and dominant shareholder of the AIIB will not be sufficient to secure from the capital market the money necessary for carrying out the AIIB’s operations at a reasonable cost. Although President X Jinping’s attitude toward Prime Minister Abe at the Bandon Conference in May might have created the impression that the deteriorated Sino-Japanese relations would start improving again, it is mere testimonial how badly China needs Japan. Without the Renminbi becoming an international currency, the AIIB will not be in a position to secure enough funds necessary for its operations. The participation of Japan in the AIIB and the recognition of the Renminbi as an international currency are a two-fold policy China is pursuing simultaneously as in Prince William’s visits to Tokyo and Beijing impressively undertaken consecutively in late February to early March 2015.     

       

IV.

    Some suggests that the best way is to join the AIIB and improve it from within. Of course, other member countries can watch its practice closely. People have forgotten that the AIIB will be the only and first international organization of any significance in history that will be headquartered in Beijing, the capital of the Communist Party’s government. The AIIB will be placed in the controlled thought environment in which any ideas, views or opinions deviating from, and contrary to, the officially sanctioned pronouncements and policies are not permitted.

    Any discussion for improvement and reform requires certain commonly accepted rules of conduct, in accordance with which an exchange of ideas, discussions, and debates can be freely and candidly undertaken, In China there is no freedom of speech, expression, thought, assembly and association. Normally, international organizations are accorded certain “privileges and immunities” that are recognized under international law. These privileges and immunities are designed to free the organizations and their staff from various restrictions and control of domestic legislation of member countries in order for the organizations and their staff to fulfill their respective purposes and to discharge their respective functions entrusted to them. Will China, a country in which the services of the Internet providers are arbitrarily terminated at will by the government, safeguard the independence and autonomy of the AIIB and the international character of its staff from China’s own national authorities? 

   The lure of China’s massive market is irresistible. Every country is dazzled by the sheer size of the landmass and population of China. The funding need for infrastructure is undeniable. Asia needs the AIIB. But no agreement has reached on the capital subscription ratio of member countries in the on-going negotiation process for drafting an agreement establishing the AIIB. It is odd in the first place to insist on 25 per cent for non-regional countries which almost double the number of regional countries to which 75 per cent is allocated. That itself is contrary to the international practice of the 60 to 40 ratio between regional and non-regional countries. The ball is in China’s court to negotiate various requests for subscription increases in conformity with international practices. There are other 56 countries at this negotiation process. China as the sole promoter and originator of the AIIB can no longer behave insolently to impose its own will on other countries with impunity even with China money.

   The establishment of the AIIB is a test case for China as a country that has become the world’s No.2 economic power and as a country that is also growing as a world military power. The test is whether China is capable of playing a leadership role and conducting itself as a responsible country in conformity with the established international norms and practice. That said, the idea of establishing the AIIB was not born in the course of multilateral cooperation or consultation process. Rather, it came about as the policy decision and directive of the Central Politburo of the Chinese Communist Party. Hardly will it operate as an international organization. Both the United States and Japan have made the right decision not to join the AIIB. ### 

❋ Professor of Law, Ateneo de Manila University, Manila, Philippines. Formerly, Professor of Policy Studies, Kwansei Gakuin University, Kobe-Sanda, Japan; Deputy General Counsel; Director General, Operations Evaluation, Asian Development Bank.