Poland will soon stop being the only CSE country among the co-owners of the Asian Infrastructure Investment Bank (AIIB). As many as 25 countries will join this year, including Hungary, Romania and the Czech Republic.
Looking from Central and Southeast European perspective, the lack of Hungary – whose Prime Minister Viktor Orbán has consistently pushed the strategy of "opening to the East" – among the "founding fathers" of the AIIB was quite a surprise. Bureaucratic procedures in Hungary did not work properly, and several officials were even fired as a result. Now, however, Hungary is pushing to quickly join the AIIB (the Minister for National Economy Mihály Varga submitted the official application on January). According to observers and experts, Hungary’s accession will not change a lot within the bank.
The authorities in Budapest have already understood that, and therefore they are not so much focused on activities inside the AIIB, but rather on projects linked to the Chinese initiative of the New Silk Road. Hungary was the first country, not only from the CSE region, to sign a plan of bilateral cooperation with China within the framework of this project. The agreement was signed in 2015 by the Foreign Ministries. Hungary was primarily motivated by the expectations of new investment and increased trade.
This agreement resulted in the pioneering meeting of a bilateral working group held in December 2016 in Beijing. The parties agreed, among others, on visa facilitations, including the guarantee of 2-year visas for Chinese businessmen. Meanwhile, the head of Hungarian diplomacy Peter Szijjártó, who frequently visited China, became known as a politician making bold pro-Chinese declarations.
So far, however, the construction of the Chinese high-speed rail link that is supposed to connect Belgrade with Budapest hasn't been launched in Hungary – the European Commission alleges that the project lacks transparency. The authorities in Budapest hope that maybe joining the AIIB will allow them to gain more leverage and finally break through the obstacles.
The Chinese writer Song Hongbing, who authored three widely read but controversial books entitled "Currency Wars", would not be able to come up with a more effective way to promote China as a first-class banking player than the AIIB. The AIIB is a structure still under construction, but it is dynamic, continues to develop rapidly and has great ambitions and goals. Experts across the world are in no doubt that the establishment of this bank, which is Asian in name, but Chinese in terms of idea, structure and portfolio, is a great geostrategic and geo-economics challenge for the world. After the Chinese Dragon entered the fields of trade and the economy, a similar process is now likely to take place in the sphere of banking.
China is consistent and does not heed the open resistance of the United States supported by Japan. It is also satisfied, as the majority of American allies, such as the United Kingdom, Germany, and even South Korea, announced their participation in the AIIB.
However, China's dominance in this structure is almost absolute. Even though the Chinese are doing everything to ensure the international status of the new institution, e.g. by hiring top financiers and bankers for positions at the AIIB, the key facts tell a different story.
The head of the AIIB is a well-known Chinese economic politician Jin Liqun. While the decisions are formally made by the Board of Directors, the bank's President, as well as the headquarters in Beijing, clearly shows who has the decisive voice in this institution.
The AIIB is a relatively complex structure. It was divided into 12 territorial departments, of which only three, subordinated to China, India and Egypt, do not share their responsibilities with others. The majority of the departments include directors and their deputies, who form the Board of Directors. Poland, which was the only state from CSE region to join the bank on time and is among the group of 57 founding members, is subordinated to the Director from the United Kingdom (Poland’s Deputy Director is Radosław Pyffel, who is acting alongside the representatives of Switzerland).
Although there are certain discrepancies regarding the publicly presented division of weighted votes in the AIIB, and these figures will further change after the accession of new members, the general proportions are clear: China – 28.69 per cent, India – 8.28 per cent, Russia – 6.53 per cent, Germany – 4.57 per cent and finally South Korea – 2.86 per cent. These are the key players. The remaining countries, including Poland (0.98 per cent), are not as important, just like in the case of the controlling interest, where China's advantage is even greater – 30.34 per cent, followed by India – 8.52 per cent and Russia 6.66 per cent.
This domination is far greater than the American domination in the Bretton Woods system after the World War II. Back then, the United States had a controlling interest barely exceeding 17 per cent. Although in that case the gap between the first shareholder and the second member, i.e. Japan, followed by Germany, was very large as well.
China's stake is worth USD100bn. This year this amount is expected to increase, because of the planned extension, but also the first summit of the One Belt, One Road project, which is planned for May.
Today, however, it is still not clear which of the objectives of the AIIB will be pushed more consistently by the authorities in Beijing after 2017. There are two main ones, which seemingly complement each other, but are not identical.
The first one isn't declared openly, but is more than obvious: to show the world that the Chinese are able to build and manage a structure more efficient and more modern than the Bretton Woods institutions. So it’s an open challenge to the current American domination.
The second objective is to promote Xi Jinping's vision, that is, the development of the New Silk Road. There are ongoing disputes among experts as to where the funds from the AIIB will be directed.
What will the AIIB give to the world?
According to its objectives, the AIIB is primarily supposed to invest in the land route of the One Belt, One Road project, including mainly Russia and in Central Asian countries, but also all of Asia. It is also emphasized that the funds for new investments will depend on the given country’s participation in the bank’s shares, as well as its status ("founding member" – like Poland, or "ordinary member” – like Hungary and Romania).
It is therefore not surprising that the already approved projects (the first project was accepted in June 2016) include the modernization of the road in Tajikistan leading from Dushanbe to the border with Uzbekistan (the value of the project: USD27.5m), the modernization of an energy network in Bangladesh (USD165m), the construction of a new power plant in Mandalay in Myanmar (USD20m), the construction of the M-4 motorway in Pakistan (USD100m), two projects in Oman – a railway and a new port (no data available), and a big project to clean up slums in Indonesia (USD216.5m).
Apart from funds spent on symbolic projects, e.g. the erection of monuments to those who contributed to the development of the Silk Road in ancient times, we are mainly dealing with infrastructure projects aimed at the modernization or improvement of the living conditions of the beneficiaries.
It seems that this will also be true of projects that are next in line for implementation, including primarily India (power plants), Indonesia (water reservoirs and economic zones) and Kazakhstan (a solar farm system and modernization of the road connection between the old capital Almaty and the new capital Astana, along with a number of tunnels). In general, the AIIB is supposed to spend more than USD200bn on investment projects over the next few years.
For the time being, there are no news of funds that the AIIB would assign directly to CSE, because there are no founding states outside of Poland, and such symbolism is of a great importance in China. Meanwhile, the fact that the Polish authorities, unlike their Hungarian counterparts, do not express great enthusiasm towards the One Belt, One Road or other AIIB projects, is also undoubtedly significant. There is potential here, but so far it has not been utilized.
The United States also have not changed their attitude. After Donald Trump's victory, the Chinese evidently hoped for a turnaround in American policy towards the AIIB. Right after the election Jin Liqun publicly expressed the hope that the instinct of a businessman would win and that the new President of the United States would approach positively the idea of the AIIB.
He had to quickly get back to reality. President Trump quickly withdrew from the project of the Trans-Pacific Partnership (TPP), simultaneously strengthening the tone of his anti-Chinese speeches. The new administration also rejected the suggestion of experts, presented among others by Gal Luft in "Foreign Affairs", that the USA should selectively engage in the One Belt, One Road initiative, supporting at least some of the projects, for example selected from over one hundred ideas that were identified as mutually beneficial during the annual summits of the US–China Strategic and Economic Dialogue.
However, the fact that the USA is against the project will certainly not discourage China. It will rather encourage the Chinese to more firmly seek new alliances. A few months ago, Canada announced its accession to the AIIB, seemingly in anticipation of the developments concerning free trade following the elections in the United States.