Australia and the Asian Infrastructure Investment Bank

The Asian Infrastructure Investment Bank 亚洲基础设施投资银行 (AIIB) is a China-led multilateral development bank (MDB) first proposed by Chinese leader Xi Jinping in a speech to the Indonesian parliament on 2 October 2013. Its stated purpose is to address a shortfall of infrastructure financing in Asia, a shortfall estimated to be as much as US$8 trillion by the Asian Development Bank (ADB). The AIIB will also support Xi’s ‘One Belt, One Road’ economic diplomacy strategy, provide new markets for China’s infrastructure-oriented state-owned enterprises and diversify Chinese foreign exchange reserves away from low-yield US treasury bills. The AIIB’s initial capital will be US$100 billion, of which China will provide half.

Throughout late 2013 and 2014, China canvassed support for the AIIB around the region. Australia was invited to become a founding member and was offered ‘a senior role in running the bank’. As little was then publicly known about the AIIB, this offer was not widely discussed in Australia.

The AIIB proposal split the Australian government leadership. Treasurer Joe Hockey and Trade Minister Andrew Robb initially convinced Cabinet that Australia should participate in the AIIB to advance its financial influence in Asia — especially as Singapore, India and Indonesia all urged Australia ‘to take a regional leadership role by joining’ and as fellow US-ally South Korea looked to follow Australia’s lead. But Foreign Minister Julie Bishop convinced Prime Minister Tony Abbott and his National Security Committee to not join due to security concerns that China could ‘convert financial power via investment loans into direct military advantage in vulnerable nations close to Australia’.

The Australian media reported that US President Barack Obama and Secretary of State John Kerry both requested Abbott, as part of the US regional alliance system, not to join. The US opposed the AIIB because of concerns that China would dominate the new institution and make lending decisions that were based on China’s national interest, that lending standards would disregard environmental and human rights protections and that the AIIB would compete with existing MDBs such as the US-led World Bank and Japanese-led ADB. Abbott also consulted with Japanese Prime Minister Shinzō Abe, who likewise urged him to preserve the existing MDB regime. In response, China said that the AIIB is designed to ‘cooperate’ with existing development banks and its governance will be ‘lean, clean and green’. Many observers interpreted the US and Japan’s opposition as based on hostility towards China’s rising regional influence.

On 24 October 2014, the AIIB was formally launched in Beijing when twenty-two countries (including China) signed a Memorandum of Understanding (MOU) that officially recognised the bank’s establishment and declared its headquarters would be in Beijing. Australia declined to sign the MOU, with Abbott saying that Australia could only join the AIIB if China addressed concerns regarding governance arrangements and lending transparency.

The Australian government’s decision was widely criticised in Australian business and policy circles, with numerous commentators arguing that Australia should join the AIIB. These arguments were that: the AIIB was inevitable and Australia would be more influential in shaping and running the AIIB as a founding member; Australian trade would benefit from increased infrastructure investment in Asia; not joining risked economic isolation in Asia; not joining jeopardised ties with China and the China-Australia free-trade agreement; and, Australia’s national interest would be better served by supporting constructive Chinese leadership in the region rather than backing US resistance to Chinese influence.

There followed some months of relative quiet as China extended the deadline for prospective founding members (PFM) to 31 March 2015 and the Australian government mulled over its decision not to sign up.

On 11 March, the Cameron Conservative government in the UK made the surprise announcement that it would become the ‘first major Western country’ (and American ally) to join the AIIB, drawing a strong rebuke from the US. The UK decision opened the floodgates for other Western countries to join, and Germany, France and Italy soon followed suit. The impending sign-up deadline and strong indications of a policy shift from the Australian government generated another flurry of pro-AIIB commentary locally.

On 29 March 2015, the Abbott government announced that Australia would sign the AIIB MOU and ‘participate as a prospective founding member in the negotiation of setting up the bank’. It stated that while Australia’s full membership of the AIIB would still depend on China implementing high-level lending oversight, China had improved its proposed governance structure sufficiently and Australia declared it was committed to addressing regional infrastructure shortages. Hockey and Robb said Australia would also encourage Japan and the US to join the bank. Shortly after Australia’s decision, fellow regional US ally South Korea also announced that it would apply to join the AIIB as a PFM.

In June 2015, the fifty-seven PFMs concluded the AIIB’s Articles of Agreement. Australia has committed A$930 million of ‘paid-in’ capital to the bank over five years, meaning it will be the sixth-largest stakeholder. China expects the AIIB to be operational by the end of 2015.

Australia and the Asian Infrastructure Investment Bank

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