The infrastructure of power

CHINA’s growing global clout can be unsettling for the incumbents who must make room for it. At the same time, China’s recent financial tumult has been unnerving for the investors exposed to it. This combination of vastness and vulnerability has left some people afraid of China and others afraid for it. Both groups have found reason to worry about the Asia Infrastructure Investment Bank (AIIB), which has just held its initial annual meeting in Beijing and approved its first $509m-worth of projects.

The AIIB reflects China’s new eagerness to institutionalise its official lending abroad, which has been generous but contentious. Another example is the sprawling “one-belt, one-road” initiative, which aims to revivify trade routes across and around the Eurasian landmass (see article). Harking back nostalgically to the Silk Road, it envisages a web of bilateral agreements between China and the beneficiaries of its largesse. The AIIB is more modern and multilateral in character. It is billed as China’s “21st-century” answer to lenders like the World Bank (always led by Americans) and the Asian Development Bank (dominated by Japan).

To its critics, the AIIB is early evidence of China’s determination to work around existing institutions rather than through them. Where some see aggression, others see hubris. The AIIB was conceived when China’s foreign-exchange reserves seemed headed inexorably towards $4 trillion. Since then, China’s yuan has fallen and capital has fled. Having lost over $500 billion of hard-currency reserves in 11 months, can China really afford to lend dollars to Tajikistan?

Neither fear stands up to scrutiny. China’s financial commitment to the AIIB is equivalent to less than one percent of its remaining reserves. Almost 70% of the institution’s $100 billion of capital is drawn from its other 56 participants. It will also raise money by issuing bonds of its own. Far from being a fair-weather folly, the AIIB appears well-timed. Global capital has retreated from emerging markets, leaving a gap the AIIB will help fill. By the same token, the retreating dollars are sheltering in safe assets, such as the highly rated bonds the AIIB proposes to sell.

Unlike the World Bank, which is pulled hither and thither by its members, the AIIB will keep a tighter focus on infrastructure. It has no sitting board or permanent branch offices in borrowing countries. It is also quick, approving four projects within six months of its launch date. More established multilateral lenders can take a year or two to do the same. Some fear the AIIB will deviate from prevailing norms in other, more troubling ways—undercutting environmental standards, say. But of its first four projects, three are joint ventures with existing institutions, subject to their protocols. Its $217m project to improve slum-life in 154 Indonesian cities, led by a veteran of the World Bank, seems alert to the dangers of soil erosion and groundwater pollution. Likewise, its road-improvement plan in Tajikistan, administered by the European Bank for Reconstruction and Development, will tactfully relocate a monument to Avicenna, a Persian polymath who memorised the Koran by the age of ten.

Any assessment of the AIIB’s safeguards must also consider the alternative. If the new institution did not exist, China would presumably lend the money bilaterally, escaping any scrutiny by its peers. It has instead invited outside participation, precisely because it wants the respectability such partnerships confer.

But if China is happy for its new bank to work with existing lenders, why not simply work within them? One reason is that they have been painfully slow to accommodate it. The IMF, for example, agreed in 2010 to give emerging economies a bigger say. But by the time America’s Congress ratified the deal five years later, China’s economy had grown by 80% (and Japan’s had shrunk by a quarter) in dollar terms. If international financial institutions make room for China, it may bypass them anyway, but if they do not, it definitely will. The AIIB’s first solo venture will bring electricity to 2.5m rural homes in Bangladesh. That is not the only kind of power distribution that needs modernising.