Rebuffed in its bid to be among the bank’s founders, Taiwan is expected to apply for regular membership.
Several hours before the midnight deadline on the evening of March 31, Minister of Finance Chang Sheng-ford sent a fax to the preparatory office for the Asian Infrastructure Investment Bank (AIIB) in Beijing expressing Taiwan’s desire to join the proposed institution as a founding member.
Taiwan made the last-minute overture after sensing that the U.S. government had relaxed its opposition to the China-led initiative in the wake of Britain’s announcement on March 12 that it would join the project, prompting other major U.S. allies – including Germany, France, and Italy – to follow suit. Relevant government units had already conducted an evaluation as early as last November, concluding that AIIB participation as a founding member would be to Taiwan’s advantage.
Just two weeks after the application was submitted, however, word came back from Beijing that Taiwan’s bid had been rejected. Responding to queries from legislators, Mainland Affairs Council Minister Andrew Hsia explained that the obstacle was Beijing’s stipulation that founding AIIB members must be sovereign states. China certainly does not include Taiwan in that category.
At the same time, Beijing held out hope that Taiwan could reapply later for ordinary membership “under an appropriate name.” Taipei is likely to do so, following the same logic that led to the decision to seek charter membership. In addition to the business potential that involvement in the bank could bring to Taiwanese companies, the government generally welcomes any opportunity for Taiwan to enjoy greater participation and visibility in the international arena.
As of mid-April, 57 countries had enlisted as prospective founding members (PFMs) of the AIIB. Among them are four G7 members (the U.K., Germany, France, and Italy), five ASEAN members (Indonesia, Malaysia, Singapore, Vietnam, and Thailand), Australia, India, South Korea, Russia, Pakistan, and Saudi Arabia. With projected initial registered capital of US$100 billion, the AIIB is slated to begin operations in 2016, mainly as a funding source for China’s “Belt and Road” project. The ambitious plan calls for building transportation links – one terrestrial and the other maritime – to facilitate close economic ties among nations along the routes. It has been attracting increasing attention internationally since being introduced by Chinese leader Xi Jinping during overseas visits in September and October 2013.
The “Belt” portion of the project, also known as the “Silk Road Economic Belt,” will follow the path of the traditional Silk Road, starting from Xinjiang and other western regions of China and passing through central Asia and Russia before reaching Europe. The “Road” part–also called the “21st Century Maritime Silk Road” – envisions a shipping route originating from China’s coastal provinces (notably Fujian and Guangdong) and passing by Southeast and South Asia, the Middle East, and North Africa before hitting the shores of Europe on the Mediterranean.
The “Belt and Road” project has entered the implementation stage. During the annual meetings of the People’s National Congress and Chinese People’s Political Consultative Conference in March this year, various provinces put forth “Belt and Road”-related projects totaling more than one trillion yuan in value. The Beijing-based, Chinese-language China Times reports that hundreds of “Belt and Road”-related projects will be signed or break ground in the next several years – mainly in the fields of rail, highways, energy, information technology, and industrial parks–in China, Central Asia, and South Asia. The investment value in 2015 is estimated at 300-400 billion yuan.
During the 2105 Boao Forum for Asia, held in China’s Hainan Province in late March, Xi Jinping reported that more than 60 countries and international bodies had expressed a desire to take part in the project. Among the infrastructure projects to be included under the aegis of the “Belt and Road” plan are a 1,000 kilometer-railway in eastern Africa, high-speed rail project in Thailand, Sino-Myanmar railway, harbor project in Sri Lanka’s Colombo, and Pakistan-Iran gas pipeline.
To fund this enormous undertaking, China came up with the AIIB concept, which is designed as a multilateral inter-government development institution. The plan was unveiled by Xi Jinping during a meeting with General Susilo Bambang Yudhoyono, then the Indonesian president, in Jakarta in October 2013.
The AIIB will come on the heels of the US$40 billion Silk Road Fund, which was established on December 29 last year, and the founding of the Silk Road Fund Corp. with initial capital of US$10 billion. Both the AIIB and Silk Road Fund are backed by China’s forex reserves, which currently exceed US$3.8 trillion.
Alternative financial system
The AIIB reflects China’s desire to create an alternative global financial system to supplement the existing International Monetary Fund (IMF) and World Bank, which it has regarded as too dominated by the United States. AIIB aims to raise initial funds of US$50 billion, 70-75% of which would be contributed by Asian members according to the weighting of their GDPs. To ensure the success of that effort, China has pledged to contribute up to 50% of the initial fund, if necessary. At the same time, to overcome the reservations of some prospective members, China has stressed that the AIIB will operate on the basis of consultation and consensus among members, rather than making decisions based on voting rights as is done in the World Bank and IMF.
The infrastructure-oriented AIIB is expected to supplement the function of the ADB, which takes the reduction of poverty in Asia as its primary objective. With registered capital of US$165 billion, the 67-member ADB provides some US$13 billion in loans to member nations annually. That is a far cry from the US$776 billion needed in the region for infrastructural investments each year, notably in the fields of power, transportation, and telecommunications, according to the ADB’s own estimate.
Members of the AIIB will have opportunities to profit from participating in loan extensions and contracts for various aspects of infrastructure projects, including technology transfer, engineering work, and supply of materials, while reducing risk exposure due to the bank’s presumed greater expertise and stricter procedures in screening loan applications. In case of bad debt, in addition, the loss is shared by all members, rather than a single nation.
China is likely to be the biggest beneficiary of the AIIB, generating business opportunities for its companies while lessening the risk involved in overseas projects. In the past, Beijing has had problems with bad debt on overseas loans; for example, Venezuela defaulted on loans from China in the wake of the plunge in global oil prices. “A multilateral institution like AIIB can help China control the risks for overseas loans,” notes Pang Zhong-yin, a professor of international relations at Renmin University of China.
The World Bank has also pledged to join hands with the AIIB in combating the world’s poverty problem, as long as the bank can comply with international standards in terms of environmental protection, labor conditions, and the procurement mechanism, according to Jim Yong Kim, the World Bank’s president. “We have so much need for infrastructure that we would welcome any new player,” Kim told the audience at a forum in Washington on April 7.
So far, the United States and Japan have stayed aloof from the AIIB project, citing concern over its operating mode and the mechanism for screening loan applications. The Kyodo news agency reports that Japan may take part in the AIIB at a later stage, on condition that it wins the understanding of the United States and that the AIIB can assure compliance with international standards in its operations.
Observers note that the AIIB represents a major advancement for China in the international arena, enabling it to carve out a leading role outside the U.S.-led global financial system that has been in place since World War II. It could facilitate the formation of an Asian-European economic bloc that would rival, if not eventually eclipse, the U.S.-European bloc that has been the longstanding axis of the global economy.
The Taiwanese government’s bid to join the AIIB received considerable support domestically. Yu Chun-yien, chairman of CTCI Corp., a large engineering and construction company, points out that many Taiwanese construction firms have strong management expertise and abundant experience in overseas civil-engineering work, capable of partnering with mainland Chinese firms in tapping the “Belt and Road” market. Lee Jih-chu, chairperson of Taiwan Financial Holdings, adds that AIIB membership could help Taiwanese banks tap the global market by joining international syndicated loans.
Roy Chun Lee, deputy director of the Taiwan WTO and RTA Center at the Chung-Hua Institution for Economic Research (CIER), while agreeing that the government should apply for AIIB membership so as to keep all options open, cautions against harboring too high a level of expectations about the potential benefits, citing Taiwan’s experience with the ADB. “Taiwan has been a member of the ADB for 40 years but has hardly obtained any substantial business opportunities from the membership,” he says. “The chances for the Belt and Road project may be even slimmer, in view of the acute competition for infrastructural projects, not only from China’s construction groups but also European firms.”
Although Taiwan was a founding member of the ADB under its formal name of the Republic of China, in 1986 it was forced to change the title of its ADB membership to “Taipei, China” following China’s accession to the organization. It has continued to participate in the bank, but has issued a protest against the new title every year ever since. For AIIB membership, the government has vowed to reject any title it deems detrimental to national dignity.
The opposition Democratic Progressive Party DPP appears willing to support AIIB membership for Taiwan as long as the title and other conditions for entry are not demeaning.