Home > News > The G-7 wants to mobilize new global financing as an alternative to China’s multilateral push
173 views 8 min 0 Comment

The G-7 wants to mobilize new global financing as an alternative to China’s multilateral push

Our research examines loans from the Beijing-led Asian Infrastructure Investment Bank

- June 15, 2021

Over the weekend, President Biden and other Group of 7 leaders announced a new Build Back Better World (B3W) partnership to mobilize hundreds of billions of dollars toward infrastructure and other development projects. A key aim of B3W is to counter the global Chinese infrastructure push, which has happened bilaterally through the Belt and Road initiative and multilaterally through loans from the Asian Infrastructure Investment Bank, or the AIIB.

Critics of China’s global infrastructure ventures underscore the dangers of “debt trap diplomacy” and accuse Beijing of using multilateral development banks to its advantage. But is China actually using its growing economic clout to reshape the existing multilateral economic order?

Our research on AIIB loans during the institution’s first four years of operation offers a novel understanding of Chinese economic statecraft. While the United States has historically used its preeminent influence in multilateral institutions — like the World Bank and International Monetary Fund — to reward its allies, China appears to have taken a different path. We find the AIIB has generally provided preferential treatment to members with fewer economic ties to China.

China’s ‘wolf warrior’ diplomats like to talk tough

China may be able to influence AIIB lending

The AIIB, which is headquartered in Beijing, began operations in 2016 with $100 billion in capital to foster regional infrastructure investment. Today, it has more than 100 approved members. The U.S. government initially took for granted that the bank would become a political tool for its founder, China. When the United Kingdom announced it was joining the bank, for example, the Obama administration noted concerns over a “… trend toward constant accommodation of China, which is not the best way to engage a rising power.”

Such fears, along with concerns about the growing number of Belt and Road projects, played a role in U.S. initiatives like the Build Act, a $60 billion effort to mobilize private-sector investment for development. The Trump administration and supporters in Congress framed this legislation, and the newly established U.S. Development Finance Corporation, as a way to compete with Chinese funds.

China enjoys a privileged position in the AIIB, similar to that of the United States in the Bretton Woods institutions. It has the single-most votes in the bank, for example, holding de facto veto power over decisions about institutional capital, the selection of its president and other critical policies. Its current president, who recently ran for reelection unopposed, is a Chinese national.

And just as IMF and World Bank proximity to the White House facilitates U.S. influence, the AIIB’s Beijing location could work to China’s advantage. Yet simply having opportunities to influence the AIIB does not mean that China will exercise this influence in practice.

Is the AIIB favoring Chinese allies?

Analyzing about 60 loans, we find that AIIB lending does appear to be related to Chinese interests. Yet rather than rewarding countries with stronger political and economic connections to China, the bank’s lending actually favors countries with fewer existing economic connections to China.

China’s Belt and Road Initiative invests in African infrastructure — and African military and police forces

All else being equal, countries that trade less with China typically receive more AIIB funds. Those with less debt to China are more likely to receive loans in the first place. And those that receive less Chinese investment overall tend to see their loans approved more quickly after joining the institution.

Great powers like the United States have traditionally used their influence over international institutions to provide favorable lending to their allies, thereby reinforcing their existing political and economic ties. The AIIB, by contrast, appears to be filling in gaps in China’s connections by making overtures to countries that aren’t already close partners. India, for instance, has been one of the largest recipients of AIIB funding — the bank approved a $750 million loan to India last year even as the two countries were fighting a heated border skirmish.

Is China embracing a new form of multilateralism?

What could explain this pattern of AIIB lending? One possibility, as other research suggests, is that countries with existing political and economic ties to China are more likely to support its international initiatives. Thus, preferential AIIB treatment for these countries may yield diminishing returns for China.

Don’t miss any of TMC’s smart analysis! Sign up here for our newsletter.

Additionally, China faces a more challenging task as a latecomer to a populated landscape of international organizations established by America and its allies — which attracts scrutiny to Beijing’s actions. Hence, China’s efforts at a more indirect form of influence in the AIIB might be less likely to provoke the ire of a skeptical international audience on the watch for preferential treatment of Chinese allies.

Without “smoking gun” evidence of direct Chinese interference with the institution, it’s impossible to say conclusively whether these lending patterns are driven by the preferences of the AIIB’s founder. The bank’s lending may simply be an overcorrection by AIIB officials worried that loans to Chinese allies would create the perception of political bias — that China can exert leverage over the AIIB to favor its friends. Regardless, such lending opens up new avenues of influence for China while protecting the AIIB’s legitimacy as a multilateral lender.

The AIIB is still in its early days

The AIIB’s lending patterns may change as the institution matures. China may be more cautious in wielding influence over lending in the bank’s early years, but take a freer hand as the organization’s reputation solidifies. Conversely, Beijing may soon have fewer opportunities to use its influence as the AIIB continues to grow in membership and mature as a multinational bureaucracy.

While the Group of Seven has yet to offer further details on its proposed infrastructure package, one thing is clear: The Chinese economic statecraft to which it is responding is complex, situation specific and evolving.

Professors: Check out TMC’s expanding list of classroom topic guides.

Ayse Kaya is an associate professor of political science at Swarthmore College in Swarthmore, Pa.

Christopher Kilby is a professor of economics at Villanova University in Villanova, Pa.

Jonathan Kay (@_JonathanKay) is a James C. Gaither Junior Fellow at the Carnegie Endowment for International Peace.