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Regular Uploaded the Minutes of the Panel Discussion “AIIB and Japan’s Pathway Forward”

Minutes of the Panel Discussion on "AIIB and Japan's Pathway Forward" on Monday, July 13, 2015

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[Panelists] Top row, from left: Professor Masahiro Kawai, Project Professor, Graduate School of Public Policy, University of Tokyo; Professor Takatoshi Ito, Professor, School of International and Public Affairs, and Associate Director of Research at the Center on Japanese Economy and Business, Columbia University; Ms. Yun Sun, Senior Associate, The Stimson Center; bottom row, from left: Dr. Phillip Lipscy, Assistant Professor of Political Science, Stanford University; [Moderator] Mr. Yoichi Takita, Nikkei Senior Staff Writer

【Takita】Ladies and gentlemen, I am Takita; I will be the moderator of the discussion; I am from Nihon Keizai Shimbun. In the interest of time, as well as because of the fact that we have excellent panelists and in view of the importance of the theme, I will not have any introductory remarks.

Without further ado, we will go to the presentations of the four speakers. First presentation will be given by Professor Kawai, and he will talk about the stance and positioning of Japan regarding AIIB, followed by Professor Ito, and then third speaker is Ms. Yun Sun, and the last speaker will be Assistant Professor Phillip Lipscy. That will be the order of speaking. First, Professor, Kawai, please take the floor.

【Kawai】 I am Kawai; I am with the University of Tokyo. Allow me to be seated while I give the presentation. First of all, the AIIB is to be launched with the Chinese leadership. As you well know, at the end of June, 57 prospective founding members, of them 50 signed the Article of Agreement. Remaining 7 members, at which speed and by when they are going to sign the articles, we don't know yet, but 50 or 57 countries are quite many countries. ADB, Asian Development Bank, 67 countries are members of ADB. In the case of ADB, more than 10 countries from Pacific and Oceania, island countries, small island countries, these are members of ADB, but these countries are not members of AIIB. Therefore if you want to expand AIIB, it's very easy and quick to do so. Japan and the United States are not members of AIIB yet, so that is a big difference between AIIB and ADB. Also, in the case of AIIB, known non-Asian countries like Brazil, South Africa, and these non-regional countries, including Russia as well, they are also members of AIIB. Therefore, compared to ADB, AIIB has a broader geographical coverage.

Then, why is it that China wants to build AIIB, why China has been trying to establish AIIB so far? I think there are four points here.

First, China itself is not satisfied with existing international financial institutions, very dissatisfied, particularly with IMF; 2010 reform packages are not making progress. As a result, China's voice is suppressed still. This is not very good, that is why China wants to build its own international financial institution.

Secondly, in particular, China has a strength in infrastructure development, and in that area China wants to take leadership. America and Europe have World Bank and IMF to lead, Japan has ADB to lead, and world's number two economy, China, has nothing or no international financial institution to take a leadership at. So, I think this was one of the major reasons.

The third reason, there is a domestic reason, domestic economy, its growth rate is slowing down. So against this backdrop, there is an excess production. In domestic market, excess capacity is building up. Infrastructure investment is also suppressed domestically. Therefore, China wants to explore infrastructure business abroad.

Fourth point is about China's foreign policy. As part of its foreign policy, AIIB will be used, so China wants to use AIIB, in my view, for its foreign policy. The other day, BRICS meeting was held, Eurasia economic summit meeting was held, Shanghai Cooperation Organization summit meeting were held simultaneously. Looking at these developments, AIIB and BRICS New Development Bank can be combined, and also using China's bilateral development fund, namely Silk Road fund, they can be all combined in order for China to expand its economic sphere of influence, and also perhaps political sphere of influence, it wants to expand.

Now, regarding AIIB, the Articles of Agreement was signed, and looking at these articles, I think there are several problems we can find.

First problem is about vision. What kind of vision AIIB is going to have, what it is aiming for, it is not clear yet. For instance, in the case of the World Bank and ADB, they are focused on poverty alleviation. They want to create a world without poverty or Asia without poverty. But in the case of AIIB, what kind of Asia is it envisaging, envisioning. That kind of vision is not clear yet.

Second problem, this is the biggest problem that is about governance. The share's holding structure - China has almost 30%; and voting right, 26% or more it has. Also, Board of Directors is going to be established; however, it is not resident Board in Beijing. Although BOD will be established, it will not be resident in Beijing. Also, important decisions, important or maybe the ADB and that World Bank, in those banks, lending decisions, not necessarily all the lending project, however a majority of lending, particularly important lending proposals have to be discussed and approved by the Board of Directors in the case of World Bank and ADB. However, just reading the article's agreement, we don't know, because it is not clearly mentioned that the decision will have to be approved by the Board of Directors. Particularly, when it comes to lending decisions, it is very critical and important for the institution, but we don't know who is going to decide lending projects, particularly AIIB management, namely President and Vice President, maybe their views will be reflected on the decisions to be made to a large extent.

The third problem is lending policy and lending criteria, lending standards, the environmental standard and social standards. Social standards mean that infrastructure, project site, people who are living on the site or in the vicinity of site will be affected by the project. How are we going to address these impacts? In the case of broader area infrastructure development, the impact will be very large and broad. So in that case to what extent the bank will be attentive to such potential impacts, which are not clear yet. Jin Liqun, the Secretary General of the Multilateral Interim Secretariat of AIIB, or Lou Jiwei, the Finance Minister, listening to the remarks of these people, environmental and social issues, the bank will be very attentive; however, at the same time, the World Bank and ADB, its way of doing is not necessarily the best practice according to them. Maybe we have to be cautious about this, because this is not clear yet.

Another problem, to what extent AIIB is going to be cooperative, collaborative with existing international financial institutions? When it comes to aid issues, I am sure you know this very well if you were engaged in the aid. One infrastructure, two infrastructure projects, that doesn't necessarily result in economic development for the future. Within one country, for the purpose of economic development, strategies have to be made, and for each sector, sector-specific strategy has to be built as well. Within its totality, very big impacts for projects have to be selected so that those projects can contribute to economic development. That is very important. However, for that to happen, not only AIIB, but also the projects which are pursued by other international lending institutions and other projects through bilateral aids have to be also considered in order to raise aid efficiency and effectiveness altogether. As you know very well, China's assistance provision or ODA, China is not necessarily cooperating with other countries, there is a duck in OECD, and cooperation with OECD duck is not realized yet by China. China doesn't want to be a part of DAC. We have to closely watch how AIIB is going to cooperate with other institutions.

Although the time is limited, I have my own assessment of AIIB. Infrastructure needs and demands are very massive in Asia. AIIB, if it is able to provide investment for infrastructure, which will be a big plus or positive. In addition, in the case of AIIB, voting rights, 70% of voting rights are to be distributed to Asian developing countries. That means developing countries themselves would have an ownership in this international financial institution, so it is going to be a bank by the developing countries and for the developing countries. So, we can consider this as a self-support by developing countries. This in itself is very good thing. I can give a positive commendation for this. Also, China, if we want to take a positive assessment of what China is doing, China wants to use its own financial and economic power to contribute to infrastructure development in Asia, therefore this power of China can be used as an international public good. If that happens, this is good for Asia and the world.

Having said that, on the other hand, if China is going to use AIIB as the tools to achieve its foreign policy objectives rather than focusing on international public good's aspect, if China wants to use the bank for its own interest, then it is not a good direction for the bank.For Japan, perhaps going forward, AIIB's real operation, we have to closely watch to see in which direction AIIB is moving, whether it is supporting international public goods or rather AIIB is being used by China in order to achieve China's political and geopolitical policy objectives. We have to watch it.

In the former case, social and environmental safeguards will be provided by AIIB, and AIIB will cooperate with existing international organizations in a very positive way. However, in the latter case, maybe AIIB will be receding from all of these positive elements. This is what Japan needs to closely watch.

【Takita】 Thank you very much. Professor Kawai made his presentation. The theme he spoke is appearing on the 1st of May at Nihon Keizai Shimbun's Keizai Kyoshitsu column. He has contributed an essay to that column of the 1st of May, so I hope that you will refer to it. Next, I'd like to go to Professor Takatoshi Ito. Floor is yours.

【Ito】 Thank you. I am Ito from Columbia University, and also I teach at GRIPS. Mr. Takita referred to Keizai Kyoshitsu column of Nihon Keizai Shimbun. I wrote an essay that is was appropriate that Japan postpone its participation. But Professor Kawai said that the Japan should have participated. Well, Japan should have participated in the negotiation, that's the comment by Professor Kawai. Anyway, Kawai-Ito's controversy is to be expected by the audience. I am sorry that I have to tell you that we have convergence of our views. What I am going to talk about in my presentation would be almost the same as Professor Kawai spoke. I believe that Professor Kawai has come closer to me rather than I come closer to Professor Kawai, but maybe his assessment may be different. Having said so, Mr. Kawai gave his view in his presentation, so I almost agree with him, so in the interest of time, I will fast-forward.

First is the intention of China. I think that Professor has analyzed the intention of China, and I think that is fair. In many ways, China acted very skillfully. One thing is that China is the second largest economy of the world, so taking advantage of the position, China is maintaining that it should be treated appropriate as the second largest economy; it is structured very well. The intra-regional members were to occupy 75%; extra-regional countries would have 25%. So they split, intra-regional versus extra-regional, that was very skillful. In the case of other multilateral institutions like African Development Bank or ADB, in the case of Asian Development Bank or EBRD, or the Inter-American Development Bank, always US takes the first position. It is regional institution, but the US keeps its first position. In the case of ADB, US and Japan share the first position. So US has to be first in all institutions. In order to control that, China has introduced the rule that extra-regional members would only occupy 25%, 75% will be occupied by the intra-regional members, and China is the largest economy intra-region, and therefore automatically China has the first position in terms of voting share. It was structured in the very beginning; so that was presented. If you like it, please do participate. Framework is given by China, and then it solicited possible members. It was absolutely skillful. I am not saying that China was bad or wrong, I never said that, but the structuring, this concept was quite smart and quite skillful.

In terms of timing, again, Professor Kawai emphasized, infrastructure demand is very important in Asia, and ADB presented that. IMF, the equity quota is taken into consideration, so American Congress, in 4 years, has not yet ratified the change in the quota. From the position 6 to position 3, it's not been realized, and therefore China is dissatisfied. Dissatisfaction was represented in the action of AIIB. In the past, Japan shared the same discontent. Japan used to be second largest economy, and Japan was almost coming closer to the United States. At that time, certainly, in terms of quota, Japan should have been given like 10%, but it was controlled at 6%. Japan was very much dissatisfied, but we could not cause any action to represent the dissatisfaction. In that sense, what Japan could not do is done by China now. So that could be one way to assess the current situation.

Professor Kawai did not talk about one thing, so I would like to talk about it. There are two kinds of banks existing in the whole world, development bank and the investment bank.

In the case of development banks, what we call is 'World Bank,' 'Asian Development Bank', and I momentarily mentioned, Inter-American Development Bank and EBRD, so these would be regarded as the multilateral development financial institutions based upon the Article of Agreement. US take the first position in most of the cases, and the Board of Directors is resident within the headquarters. It's a development bank, therefore in many cases, the lending will be done in order to increase its economic powers, and then poverty would be reduced, there will be social dimension, so that no problematical lending would be provided. So, in a way, best practice is realized by those established development banks.

On the other hand, what about the investment banks? If you can classify some institutions into investment banks, the biggest one would be the European Investment Bank, EIB, European Investment Bank. You have never heard of this, I am sure. It doesn't appear in newspaper articles, but there is a bank called EIB. Then, CAF or Islam Development Bank, or Black Sea Development Bank, there are institutions like this. They are more or less the intra-group investment bank. The largest feature is that the Board of Director is not resident within the headquarters. In a certain region, groups get together, and then they decide on investment projects, so it's intra-group investment bank. For example, in the case of EIB, members are mostly the EU members, limited to EU members. Within EU, they fund, and then they will work on the investment projects, so they are not particularly concerned about poverty reduction. Germany will fund, and at the same time Germany will also borrow from that, and France will have equity investment, at the same time they will have the borrowing as well, so it is like an investment union.

What direction China is going? I think China would like to go to the investment bank side. So, they would like to contest against ADB? No, not necessarily so. Within the group, some shortfall in infrastructure investment would be filled by China with the AIIB. One European financial official said this to me. China was very much interested in the EIB. How is it operated, how is it maintained, China came to listen to European people, and then he explained what EIB was all about. Once the operation starts, something like EIB is in the making. Their largest point as Professor Kawai mentioned is that the Board of Director is not resident within the headquarters. EIB is the same. Within the Ministry of Finance, in home countries, for example, the Deputy Minister class or Director General class people would serve as the director of the Board of EIB. Once every month they will go to the headquarters in Luxemburg, and then such investment and lending project is available, what you think, and then they decide on it. There is no particular rigorous screening procedure in place. That is EIB. It seems that China is after this image of EIB.

As a development bank they would like to race against World Bank or ADB? No, I don't think China wants to create such a thing. There are some advantages and disadvantages about that situation. This is how I see the Chinese project of AIIB in terms of my understanding.

Based upon my recognition, what are the problems that we find in AIIB? The share proportion, it is structured from the very beginning that it is crafted that China becomes number one position. Then, as a result, veto right is generated. If a project is not liked by China, then they can exercise veto. Actually, US has the veto power in World Bank and IMF. IMF and World Bank would say that they cannot run counter to the intention of the United States because one country has veto power, that's why World Bank cannot stand against the United States. China could say that US is doing, so what we are trying to do is the same thing, in Asia. If this logic is presented, US cannot refute very strongly. Is that a good thing to have? That's one issue.

The second point is the Board of Director is not resident within the headquarters, as Professor Kawai mentioned. What are the problems about that? The directors, on lending items, would not necessarily have an appropriate and accurate information. If they are resident in the headquarters, daily they will have conversation with the staff members, and lending projects, they can have in-depth discussion with the staff members. But if they are not resident within the headquarters, they are not privy to such in-depth discussion. The President and the executive officers of the bank will strongly influence the decision.

Third, as Professor Kawai said, on the lending project, the contents of the lending projects. What kind of lending is to be provided, what kind of lending is not to be allowed, the matters of principle, they are not clearly shown. Because of that, China would regard certain countries as friendly countries and lending will go mainly to those countries, or the projects which are closely related with China would receive lending only, so that's the suspicion. That is the question in the minds of many people. It may not turn out to be so, but there are some people who harbor this question that AIIB may turn to be that, so that's the third problem.

What about the fourth problem? China is still borrowing from the World Bank and ADB. While they are borrowing, at AIIB they will turn to the lending side, which can be problematic.

As for the fifth problem, as Professor Kawai mentioned, World Bank and ADB, together with them, will they do co-lending, or will they compete against them? So what kind of cooperative relationship will they make or will they not make? The AIIB is going to pick up risky projects where ADB decides not to invest, is that the case?

There was a mention about the best practice. In the case of development banks, best practices are usually considered, consideration to environmental issues, consideration for the resident's welfare, so they are implemented as best practice. But in the case of China, very clearly they are saying that there is no such thing as the best practice. If the best practices do exist then there should be no reform for the established development banks. That's their opinion, so we still have some questions about their position.

I will summarize what I said. These are the concerns we still have. As Japan, we didn't participate in the negotiation, we didn't raise our hand as a PMF; there was nothing that we could have avoided. In the future, we may take part, we shouldn't close any avenue. But if we decide to take part, those questions and doubts that I mentioned should be all cleared. On these points, from outside, we should always present our views and opinions about those issues. That is all. Thank you very much.

【Takita】Thank you very much. Professor Ito's presentation, again, in the beginning, as he said, Nikkei's Keizai Kyoshitsu column, he has contributed his article to that column, so please refer to that at your leisure.

Now, I would like to invite next speaker. America and China, their views will be shared by the next speakers. First, Ms. Yun Sun is going to speak. Ms. Yun Sun. Pacific Forum CSIS, regarding AIIB, she has written a position paper in that Bretton Woods framework, and China's challenge to the Bretton Woods framework so called external implication aspect is mentioned, but in addition to that, regarding AIIB, China's internal issues, internal challenges with regard to organization building. Now, without further ado, I would like to invite Ms. Yun Sun.

【Sun】 Thank you very much for the invitation from SPF to be here today and share my research findings. Earlier this year, I was able to participate in the SPF-USA research project on AIIB from the American, Chinese, and Japanese perspective. I had the opportunity to visit China and do my field research. I would like to say, there has been abundant research on China's motivation to start AIIB and how the institution challenges the international system. I am hoping now to focus on those motivations today.

We all know why China initiated AIIB, and we all know what the implication for the international system is. But for me, after witnessing China's positions, or the changes, or the evolution of China's positions on the AIIB, the more intriguing question now to me is how successful China has been so far in achieving those goals that China originally wanted. If we look at China's evolving positions on AIIB and its adaptations, I would like to argue that AIIB perhaps provides us with a good example of how China's behaviors can be influenced and can be shaped by the collective efforts of the international community.

To begin with, people might be interested to know that AIIB today, as we see from the AOA, is very different from the AIIB that China had originally envisioned. This is reflected in a series of issues including the membership, the capital contribution, the veto power, the linkage between AIIB and China's own agendas, as well as AIIB's governance and standard issues. For example, first of all, China's position on the AIIB membership, especially on the non-regional members, has undergone a significant shift. In the early stage, China had not planned for non-Asian countries to join the bank at all. As late as March 6th of this year, the Chinese Finance Minister, Lou Jiwei, was still making public statement that the founding membership of AIIB is open to countries from the region first. Applications from countries outside the region are not considered for now. The statement was made 6 days before UK submitted its application to become a founding member, raising suspicion that China was not prepared for the submission at all. The enthusiasm demonstrated by European countries to join the AIIB was a nice and welcoming surprise for China. Beijing rapidly adapted its position to welcome regions from outside the region, countries from outside the region, especially the European countries as well as African and Latin American countries to join AIIB as PFMs, prospective founding members. Beijing dropped the focus on regionality and replaced it with the distribution of capital shares between regional and non-regional members in exchange for enhanced international support.

Secondly, another significant change in China's approach to the bank is the nature of AIIB as MDB, multilateral development bank, which is very different from the popular perceptions in China that the bank would either be China's another aid agency or a commercial investment bank with a policy portfolio. The aid argument earlier was that in China given the majority of the bank's members, would be less developed Asian countries, and China needed to make such a large contribution, the AIIB would essentially just be another channel for China to finance the infrastructure developing nation. On the other hand, financiers and the finance ministry officials had an opposing view that AIIB would be market oriented, would be profit-seeking commercial bank, and the China did not fund the bank to lose money, but to make a profit, so that coincides with Ito-sensei's argument on the investment bank. But the final configuration of AIIB avoids both extremes and reflects a midway approach. As stipulated by the AOA, the AIIB will be a new MDB with China playing a large but not dominant role. In the view of many Chinese analysts, this differentiates the AIIB from both commercial investment bank and the policy bank. But AIIB will be what they call a quasi-commercial bank, meaning that its investment must generate returns.

Simple as it sounds, the need to generate returns raised a key question regarding how the bank will balance funding infrastructure projects with practical, commercial considerations. Infrastructure development in Asia is known for its long funding cycles, low interest rates, and potential for waste and corruption. If AIIB is to grant loans that other banks reject for a good reason, then the bank would assume major risks. Especially in less developed Asian countries with volatile domestic economies and unstable governance, how the recipient country will repay the loans is a major question for any bank, including the AIIB. Through the negotiation process, China has been forced to face this inherent conflict between funding potentially loss-making projects and seeking profits in the process. Multiple conferences dedicated to this issue were held in Beijing in the first half of 2015. Most of the Chinese analysts agree on the risks in the Asian infrastructure market and the need for AIIB to avoid them in its operation. In search for a solution, a consensus emerged among experts that China needed to abandon the earlier unrealistic high hopes for funding all types of infrastructure projects, well generating high returns. On this issue, perhaps the most representative position was made by an official from the academy of macroeconomics in research in the National Development and Reform Commission, NDRC. The statement is "the operation of the AIIB will not seek high returns, but rather to break even or earn a minimum profit".

The conflict between profits and ambitions has two important implications. First of all, the scope of projects that AIIB can support will be more limited than what was implied by China's earlier ambitions claimed to fill the funding gap in the Asian infrastructure market. Second, the loans provided by the AIIB will be not as generous as borrowing countries originally expected in order for the bank to invest responsibly and to earn that minimal profit. Indeed, some of the Chinese finance officials have commented that AIIB will have to strictly follow the high standards despite the high demand, and that those standards will be more similar to the standards of ADB than anything else.

Despite the criticism on China's veto power, it actually has improved greatly from the earlier version. When the MOU was first signed in October 2014, China planned to contribute 50% of the bank's capital, which money in China assumed automatically will translate into absolute veto power for any issue that requires a simple majority. However, as more countries became prospective founding members, two things happened; one, China scaled back its capital share to about 30%. Secondly, a more sophisticated formula for voting rights was adopted that combines voting shares based on capital shares, basic voting rights and founding member voting rights. The formula grants China 26% of the voting rights as a bank. As AOA stipulates, China will have the veto power on such issues that require a supermajority vote. Those issues include the composition of the Board, the choice and the power of the President, the size and the share of stocks, as well as major operational and financial policies. We don't know whether the specific funding decisions will require a supermajority vote as of now, but that is the possibility. This reflects a determination on China's part to retain control on key aspects of the bank.

Although the veto power annoyed many people, it is in fact not as threatening as it appears. Here is why. Issues such as the acceptance of new members do not require a supermajority, so China cannot veto them. Having a veto power to block things that China doesn't want is very different from a power to make things happen, to make things that China wants to happen. Furthermore, how often China will exercise the veto power remains to be seen, because it is highly unlikely that any of the mentioned critical issues, the rest of the members of the AIIB is going to have a unanimous position, opposing China's position, therefore necessitated Beijing to use the veto. Given China's advantaged position within the bank and many other channels at China's disposal to influence its decision-making, Beijing may not need to use the veto at all. Meanwhile, there is a general consensus among analysts and officials in China that China must be particularly cautious in exercising the unilateral veto, because China has been trying to promote the bank as a multilateral institution rather than China's own policy bank. Exercising veto power would inevitably undercut those efforts as bringing in force the international suspicion and criticisms of China. It's better to say that bank will not be free from China's special influence and special status. But international scrutiny and international pressure combined with China's concern for reputation and desire to gain recognition have had a strong impact on China's actions.

What is more important, of course, is the extent to which China will use the AIIB to advance its own national interest such as export promotion or 1B1R. On this, only future operations of the AIIB can answer the question. But there has been a major debate I can share with you in the Chinese policy community, over the extent to which the China should explore the AIIB to pursue Beijing's economic agendas. In one encouraging sign, one of China's most controversial goals in launching the AIIB, which is promoting export to absorb China's excess capacity has gradually faded away, disappeared from Chinese government statements, and media reports, as well as analysis by government analysts. Promoting exports of Chinese goods to absorb excess capacity runs the risks of encouraging antidumping complaints, undermines Xi Jinping's economic restructuring campaign, and more importantly for China, undermines AIIB's legitimacy and credibility. With more than 50 founding members, it would be difficult and problematic for the AIIB to favor Chinese exports. Indeed, this is a position that the Chinese ministry of finance and the AIIB preparatory group have been repeatedly making the statements to this effect.

The issue of upholding standards and regulations governing the AIIB making practical decisions has been another conflict that Beijing had to address in light of the international criticism. China has vowed that AIIB will deliver funding more efficiently and effectively, but the Chinese was also made to realize that high quality rules are required for a variety of practical reasons such as good decision-making, the credit rating, and the bank's credibility. The level of commitment to the governance issue in AOA is unprecedented for China's experience. China has promised for the AIIB to be what they call lean, clean, and green. The AOA made money pledges to the international best practice on a variety of issues. Yes, indeed I agree that the wording is at best broad and vague, but I think the commitment demonstrated by the Chinese officials and Chinese government on this issue deserves at least some recognition. The bank's actual practice and operations will be the true arbiter of AIIB's performance in these areas. However, through the process, the education by the international community and the suspicion voiced by the international community played a main role in shaping both China's behaviors and the rules of the bank.

We might ask why China adapted to the changes or why China adopted these new positions on AIIB. The key reason for China's adaptation and acceptance of AIIB, which is very different from its earlier design, is the role of the international community. The pivoting event was the joining of the AIIB by the leading European economies in late March. Upon joining the bank, the PFMs, including developed country members, were able to use their collective bargaining power to negotiate, to guide, and to shape the bank's AOA from within, and enmeshed China in a network of international norms and standards. China adapted its expectations and positions to meet this changing reality. That flexibility and that possibility by itself, I would say, is a positive development. The suspicions and oppositions by countries such as US and Japan also played a very important role in bringing in China's selfish ambitions and making China try it extremely carefully on advocating for its own agendas.

We can still perceive AIIB as a case of China's offensive to challenge the existing international system. However, from the case, we can perhaps also learn that the existing system also has the power to balance, influence, and shape their challenge to track China's revolutionary ambitions, and to make China play by the rules. If that is how we can shape China's future behaviors in the international system, then perhaps there are more important lessons that we can draw from the AIIB. Of course, the AIIB game is only beginning, a lot of the devils of the AOA lies in the details, yet such details are simply not going to be available for now. The essential questions around AIIB are all embedded in the bank's presumed Chinese identity and how China might use it as China's policy instrument. Observers will pay special attention to these details as they are determined over such issues as China's exercise of the veto, AIIB projects links to China's export promotion and broader policy agenda, the bank's governance practice and compliance policies as fundraising models and the loans it makes.

China has completed the first stage of AIIB's establishment, but many important challenges lie ahead. Ultimately, the bank will be judged by its actual performance rather than anything else. Thank you very much.

【Takita】Thank you very much. AIIB's initiative in the process of realization of the bank that China's initiative and ambition has changed quite dramatically, that was very interesting.

I would like to invite the next speaker, Dr. Phillip Lipscy. Dr. Lipscy has written an article about AIIB in the authoritative foreign affairs magazine. Please let me invite Dr. Lipscy.

【Lipscy】I have been working for some time on a book that examines how countries bargained over the international architecture of institutions, and one method that's commonly used is to propose new institution, so the AIIB is very much a topic that I have been interested in.

Let me start by describing what is fairly characterized as a controversial development institution. Here are some quotes. "The AIIB is like a state, and the AIIB President is like its emperor." "All projects require Chinese support; otherwise, they do not even proceed to the Board of Directors for approval." "The AIIB can serve as a foreign policy tool in pursuit of Chinese diplomatic interest." So as you can see, it's a very controversial, contentious institution. Actually, these are all statements about the Asian Development Bank and Japan. The first one is from a former ADB Director General, who said, the ADB is like a state and the ADB President, who is always a Japanese national, is like its emperor. The second one is from the academic article that examined ADB lending, and it found that all projects require Japanese support; otherwise, they do not even proceed to the Board of Directors for approval. Finally, a 1993 piece by Yasutomo; he finds that the ADB "can serve as a foreign policy tool in pursuit of Japanese diplomatic interests." If you replace the country name and the institution name, it's a little bit interesting how your image of the institution can change a little bit.

But one question here is, isn't the AIIB extreme? Here is one example of common criticism of the AIIB; there are many, but here is one from Sankei Shimbun. "Chinese domination of AIIB: it's going to control veto power, as well as the headquarters, as well as the President." So maybe China is being too assertive in controlling this institution. But, of course, if we look at the World Bank, the current President, as well as all Presidents of the World Bank since its establishment, have been United States citizens. Here is a Google Map of the World Bank headquarters. The White House is right here, and that's the World Bank right there. Here is the official World Bank country profile, this is on the World Bank's website of the United States, the red underlined parts says United States is the only World Bank shareholder that retains veto power over changes in the Bank's structure, and therefore the United States plays a unique role in influencing and shaping the institution. So, this is considered a good thing according to the World Bank's official website. What's important to think about before we criticize the AIIB is to think about what is the international status quo across many of these issues. So, we don't want to criticize things that we ourselves are also responsible for. It's important to keep things in perspective. Is it really fair to criticize China and the AIIB for doing things that the United States and Japan have also done over several decades?

Okay. So why is the AIIB so controversial if in many respects it seems similar to existing international institutions? I think there are three major reasons why there is controversy.

The first has to do with politicization. This is the idea that China will dominate the institution and essentially use it as a resource for pursuit of narrow Chinese interests.

The second one is about undercutting international standards, basically existing international development efforts are going to be made more difficult because China will lend according to lower - dubious standards on things like environment and human rights. I have things to say about these issues, but I think the other panelists have covered it in great detail.

So, I am going to focus on the third point, which is basically the idea that the AIIB is a threat to existing institutions. In particular, the AIIB may be an attempt by China to replace existing institutions like the IMF, the International Monetary Fund, the World Bank, and the ADB, and in a broader sense maybe perhaps displace the United States and Japan as a world leader. I think this is a major either explicit or implicit undercurrent in many of the debates surrounding the AIIB. So, I am going to focus on that third point.

I guess I am restating this a little bit. Is the AIIB a Chinese attempt to challenge the international order established by the United States since the end of World War II? One question we can ask is China fundamentally a revisionist power, is it a country that's seeking to change the existing order fundamentally? With respect to military issues, I think this is an ongoing debate and it's not clear, but with respect to the international architecture of institutions, I don't think this is very clear at all. Why? Since the end of World War II, a major foreign policy goal of China has been to gain recognition and legitimacy by first joining and then being recognized by major international institutions, and the context here was competition with the Republic of China, Taiwan, over who gets to be the sovereign representative of the entirety of China. For many years, China sought to be included in these international institutions, and in many ways in the 70s and thereafter China managed to secure a position in these institutions. Because of the way China entered these institutions, it actually has a very good position in many major international institutions, and emblematic of this is the fact that China is a permanent 5 member, for example, in the UN Security Council, something that Japan and Germany have been fighting for for a long time, but they have not been able to obtain that. This is because Taiwan initially was a P5 member, and China was swapped in. China had this very nice route into the international architecture that was not available to many countries.

If you look at Chinese propaganda on foreign policy, it tends to emphasize what I would characterize as a status quo orientation. So, its emphasis on defeating fascism, defense of the postwar order against Japanese militarism, so it's not really focused on overturning things that are not working for China for the most part. The IMF and development institutions like the World Bank are somewhat exceptional, because China is in fact underrepresented, but I would argue that it's not part of a broader pattern. If you look at international organizations as a whole, this is more of an exceptional case, where China is underrepresented and is seeking change, but I would not read into this particular policy issue, a broader foreign policy pattern where China is seeking to change everything.

There is another question. Will the AIIB replace the IMF, World Bank, and ADB? The IMF, which gets lumped into this grouping a lot, is a fundamentally different kind of institution, and that's important to remember; the AIIB is not seeking to address international balance of payments, difficulties or financial crises. In that respect, the BRICS bank, or the New Development Bank is more interesting, but that's a little bit of a side note. But, IMF, I would argue is largely irrelevant to this discussion. The World Bank and ADB, I would argue is potentially more interesting. But development lending and foreign aid is already an extremely competitive policy area, so this is something important to remember. There are over 29 bilateral aid agencies that distribute foreign aid, and at least 28 multilateral aid organizations, along with numerous private donors like the Gates Foundation that engage in international development activities. The AIIB will really be just one player in an extremely crowded field. The whole idea that the AIIB is going to somehow replace existing institutions is very wrongheaded because we already have so many institutions co-existing in this policy area to begin with.

We also need to remember what the nature of development aid is like. If the AIIB succeeds, that does not mean that the World Bank or ADB will fail, it's not what international relations scholars call a zero-sum game; if I win, you lose. It's not that kind of game. The broader benefits of economic development are extremely diffuse. So, if China manages to build infrastructure in Thailand and that makes moving goods from Thailand to China cheaper, that benefits China certainly, but that also benefits Apple that sources goods from China. It also benefits Japanese companies that engage in economic activity in these countries.

It's true that nearly targeted aid can be a problem. Again, this is also a problem in existing aid agencies. There are lots of academic studies that show that World Bank aid tends to be dominated by US interest and ADB aid tends to be dominated by Japanese interest. But China may very well use AIIB lending to do things that benefit China, but in development aid that's not such a big problem because if, for example, China builds infrastructure that leads to China, other aid agencies can come in, build infrastructure that leads to other places. It's not like if one thing is built, then you can't build the other thing. There is also plenty of demand for aid. Even if AIIB is very successful, it's highly unlikely that countries will say, well, we don't need the World Bank anymore, there are still going to be plenty of demand for international aid.

We should also think about the nature of multilateral international organizations, of which the AIIB is one. Multilateral international organizations are subject to the interests and influence of powerful states, but they also are constraint states, and this is perhaps the most important feature that is often neglected in debates about this. The GATT WTO is a great example. Before the GATT was created, US trade policy was very volatile. When democrats were in power, tariffs were lowered and the markets were open. When Republicans came into power, tariffs were increased, and trade stopped. The US went back and forth depending on which political party was in power. When the GATT was created, that benefited the United States because it opened global markets, but it also made life much easier for other countries besides the US because US policy became very stable, and it gave other countries influence over the United States. In a similar way, the AIIB will give other countries opportunities to constrain and shape Chinese economic policy. This is a great opportunity that we should keep in mind.

On the Chinese side, if China operates the AIIB in a proactive and considerate way, it would also create a great opportunity for China to reassure countries that are anxious about China's rise that China has good intentions, and that China intends to be cooperative and peaceful rather than aggressive.

Returning to this question about reshaping the world order, it's not just China, countries that become more powerful, bigger economies, bigger military almost always fight to seek influence and status in the international system. We can go back to pre-World War II, Japan after the Meiji Restoration, I am sure you are all familiar. Japan sought things like a modern military, colonies, spheres of influence, because those were the kinds of things that gave you status at the time, but Japan also sought things like acceptance of racial equality in the League of Nations, sought a position as a council member in the League of Nations. There are multiple ways that Japan sought international influence. What's changed since then in the Post World War II period is that the international system now offers much greater scope for peaceful ways for countries to achieve international status and influence, and this is because of things like an open world economy, the fact that international institutions have become much more important, and you can try to bargain for greater shares, or voting rights, or you can create your own institutions, and try to have them compete with each other; and there is also international law. Countries like Germany and Japan that in previous periods might have pursued a military option can become well respected influential members of the international community without having to build up their military capabilities.

The key thing to think about when we think about international relations and strategy with respect to the AIIB is if rising states cannot achieve their goals using peaceful methods that give them incentives to pursue less peaceful methods. The implications for this, for the US and Japan is, we should really think of the AIIB as one aspect of managing and responding to China's rise. One answer to the AIIB is we should resist everywhere. We should try to prevent China from attaining influence and status across the board regardless of which policy area it is. This type of policy response will make it more likely that China is going to pursue military needs because that is ultimately something that they don't have to rely on other countries, they can go it alone, and that will lead to an overturning or an attempted overturning of the international status quo. So a better answer from the perspective of the US and Japan is to try to encourage China to attain international status and prestige through peaceful constructive means, and to push back selectively on things that are the most troubling, things like military, use of military, aggressive acts against neighboring states, territorial disputes, those sorts of things. The punch line here is, do we prefer a world in which China seeks to establish its influence and international prestige by building multilateral development banks, or one in which it seeks to do so by building aircraft carriers? Because there really is a tradeoff, if you push too hard on both, the choice is going to tend to be on the side of military expansion.

What might a successful AIIB accomplish? This is the ideal scenario. It's going to contribute to accelerating economic development in Asia. Again, if well managed, it could constrain and improve Chinese economic foreign policy through the involvement of other states. It can give greater voice to China in global economic affairs without China having to resort to contestation and conflict. And it demonstrates, if China, again, behaves well with respect to the AIIB, that China can enhance its international influence and status without having to overturn fundamentally, the post war order that was established by the United States and its allies.

To conclude, my argument would be that the United States and Japan should participate in the AIIB because we can get bogged down in the details, but I think the most important policy issue at stake here is the symbolism, it's how does the US and how does Japan think about China's rights. The AIIB is an opportunity to shape China's future, it's also a way for the US and Japan to act strategically in order to encourage peaceful and mutually beneficial methods of exerting influence. It's a moment when the US and Japan can actually nudge China in a direction that benefits all of us rather than a direction that just benefits China. It's also an opportunity to improve the governance and operations of what is likely to become an important source of foreign development assistance. I think as other panelists have already argued, we should have joined at the beginning, inception of the institution. It's well established if you look at academic work on international organizations; the countries that are there at the beginning exercise much greater influence than countries that join later, and the AIIB is not an exception to that pattern. Joining now is definitely not a good idea compared to joining at the beginning, but since we can't join at the beginning anymore, I would argue that we should choose the second best option and join that. So, that's all I have. Thank you.

<Discussion>

【Takita】We had presentations by four speakers. Thank you for very insightful presentations. Most important problem for us is that we've got only 20 minutes remaining in our program, that's the greatest problem. For 10 minutes, we will have the discussion amongst the four panelists. I will give questions which will require only a quick answer, and after that we will open via discussion to the audience. I am very sorry, but can you make your response to my question very quickly?

Well, then first of all, my question to Professor Kawai. Japan, whether we join AIIB, it's a practical question, whether Japan joins. What will be the conditions of our joining in AIIB, what will be the conditions?

【Kawai】Thank you. From Dr. Lipscy, there was a point made. After all, Japan should have participated in the negotiation; we should have said what we had to say. Consequently, if our points were not accepted then, we didn't have to sign the AOA. But as we speak now, at this point in time, is it advisable to join as soon as possible? Well, no, I don't subscribe to that view at this point in time, I can't be as optimistic as Dr. Lipscy.

AIIB is established and the China manages that institution, then necessarily China will have to resort to peaceful action. Well, I think it is a daring hypothesis to say that. After all, AIIB would be properly managed, and then it becomes a useful institution, positive to Asia, and that is something that Japan can support. Unless we have good evidence about that or certainty about that, Japan or the United States will feel very difficult to join because AIIB as of now is going to be used only for Chinese advantage, there is still this option remaining, so we have to ascertain that.

I did a little calculation. Japan joins, then what will happen? If Japan joins, the Chinese share will be around 25%, capital share, and then voting right share will be 21% or so for China, 21% or 22%. If Japan joins, and good thing about that is to eliminate veto power from China, that is positive, that is indeed positive. There will be some impact if Japan joins. But Japanese voting rights share would be about 9%; it will be shy of 10%. China has 21%, 22%; Japan 9% in terms of voting share, so Japan's power compared with the China is small; however, we are able to eliminate veto power of China. But still more than 60%, the Asian, less developed countries, would be controlling the voting rights in that institution. Then, China - if she wants to do things that she wants to do, then Russia and Iran are members to this institution. Under these circumstances, when Japan says something, it is very difficult to expect that what Japan says go through the decision-making process. Even US joins, Chinese voting right share is not influenced because US is non-regional member. Within the grouping of non-regional, if I do a little calculation, the US participation will not be able to suppress China. But once US joins, US can raise a lot of voice; within ADB, it happened, up until 5, 6, 7 years ago, US directors had very tough opinions; they had very stern opinions about the operations of ADB. If the US joins AIIB, it can become very tough and stringent. But when the voting takes place, the US will be defeated, I think that is the possible case.

【Takita】Okay. Thank you. Professor Kawai just now had sort of refutation against Dr. Lipscy's comment, so I'd like to have your response, Dr. Lipscy, and what will be the standpoint of the United States, can you clarify the US standpoint? But you see, the closing time is 5 o'clock.

【Lipscy】 Yeah, I would say a few things. I would argue that joining the AIIB would not necessarily make China peaceful. I think the AIIB could very well be used for narrow political ends as many worry about. Of course, that wouldn't necessarily serve Chinese interests. The major caveat to that point is that existing development institutions are very much politicized as well, and so it becomes an issue of relative politicization, and I think there it would be very difficult to criticize the AIIB on the grounds that it's not all that different from what researchers have found about existing international institutions.

On the issue of US policy, I think Congress is a very important question, not only in regards to the AIIB but also in regards to the IMF and World Bank. This has been a contentious issue in the United States for many years. This is not the first time IMF or the Bretton Woods Institutions Reform has become bogged down in Congress, and in particular on the republican side, there is deep-seated skepticism towards international institutions more generally, which is very difficult to overcome. But if you look at the history, generally speaking, it takes time, but if the executive branch is willing to invest sufficient political capital, things do move. And even despite all that's been said about policy paralysis in the current United States government, if you look at things like TPP Fast Track and the Iran nuclear Negotiations, if the President is very serious about an issue, Congress is not necessarily an impediment. Ultimately, I think it's really an issue of policy prioritization on behalf of the United States President.

【Takita】Thank you very much. US Congress is an interesting point of view. Now, I will turn to Professor Ito. Concretely, AIIB, where and what should be reformed, can you make some supplementary and complementary comments to your presentation?

【Ito】The first point. The Board of Director in-residence, this is something that I cannot concede, I cannot yield. By creating the Board in-residence, the concerns as other people have mentioned would be eradicated. Institutions will be used for Chinese own purpose, at least the transparency would be maintained and all kinds of opinions would be expressed, so the Board of Directors in-residence in very important. Also, the veto power is held by China. This is something that I am very concerned about. Professor Kawai mentioned that the Japan joins and veto power could be eliminated. If that was the case, that is one significant thing. The veto power doesn't have to be implemented, exercised, it's the same thing with the IMF and World Bank, the US does not exercise veto power necessarily, it just sort of flickers, it just shows the possibility of exercising veto power. Veto power doesn't have to be exercised, but yet influential power can be implemented. Probably, China learned that, and without resorting to veto power, I think China would like to continue to have veto power in order to exercise influence.

Mr. Kawai has the first-hand experience. In the case of ADB, I am sure that ADB is not dictated by Japan, Japan does not have a dictatorship over it because there is the presence of the US which keeps Japan in check. Therefore, Japan has not operated ADB in its own way. So, the US is joint number one contributor to the bank. In the case of AIIB, what I said in the beginning, there are regional members and non-regional members, that kind of distinction and framework has been established in the beginning, so even if America joins the AIIB, it cannot exert influence much, that is the difference.

【Takita】Thank you very much. Next I want to invite Ms. Yun Sun.

Actually, AIIB, the initial initiative in the process of negotiations, I think it was very interesting that Ms. Yun said that there has been a lot of change that has been made during the negotiation process. However, in the interest of - I have to omit that. Now, I want to ask a question in relation to the national interest of China, "One Belt, One Road (1B1R)" initiative. As is often said, the relationship between the AIIB and "One Belt, One Road" concept, in what way AIIB fits in China's "One Belt, One Road" initiative?

【Sun】 Thank you very much for the question. I think the position that I can see from the Chinese side is that "One Belt, One Road" and AIIB do not have to be mutually exclusive. In other words, whether a project should get funding from AIIB should not be depending on whether this project belongs to the 1B1R initiative of China. Essentially, the funding decision by AIIB should be made based on merits and based on whether the projects will be in compliance with the bank's governance regulations. If some of the projects under 1B1R fits the category and fits the portfolio, for AIIB to reject the projects simply because it's part of 1B1R seems unreasonable to me.

Also, another point that I want to make is if some of the projects under 1B1R are indeed problematic, China does not have to resort to AIIB to fund it. China has plenty of other channels to fund those projects such as the China Export-Import Bank, the CDB, or even the latest Silk Road fund. What's the point of submitting a problematic project under 1B1R to AIIB to solicit international criticism, that does not seem to be a reasonable or rationale choice for China either. Thank you.

<Q and A>

【Takita】Thank you very much. Now, listening to the four presentations - we have finished the presentations and remarks by the panelists. I would like to open up the floor for the question. But I have to apologize, it's already 5 to 5, so we cannot entertain so many questions. Please raise your hand and please ask brief questions. Yes, that person. Please wait until the microphone comes to your place.

【Audience member】 This is not kind of question but more of a comment. Regarding the AIIB issue, there are a lot of discussions and debate in hearing Japan as I've observed, and I've already seen a kind of drastic, dramatic change from kind of - there was an opinion that Japan should join to influence China. If you do not join the game, how can you influence China? This is a kind of more objective. But recently the atmosphere has changed; again, simply because the Japanese government has already made the decision not to join, at least in the near future. So, overwhelmingly, all the reports and news and those so called 'experts' have their voices to safeguard the issue of that. So, it's very interesting.

But if you come down to the real issue behind this, the choice of Japan facing this AIIB to join or not is basically whether Japan can accept China's rise from the bottom from your heart. Ultimately, it's a kind of mentality how Japan perceives China. If you perceive China as a competitor or adversary, a partner for zero-sum game, that is really the big issue, and I don't think Japan can make any decision on assumption for that. Thank you.

【Takita】 Any other questions? Yes, the lady in front.

【Audience member】 Thank you very much for your presentations. "AIIB, a pathway forward for Japan," that was the title. I want to know more about it from the British perspective. I think one of the triggers was pulled by Britain deciding to join the AIIB, maybe UK wanted to make a reform from within. China's share ratio and also voting ratio has been decided, and these European countries joining the bank, is it really possible for European countries to make a reform from within? Professor Kawai, please?

【Kawai】With regard to the first person's comment, unfortunately, China in Southeast Asia in the East Asia Sea, it is making assertion and ignoring international laws. I think that kind of action is making a negative impact. If China wants to rise in a peaceful way, if that's the case, I think we are willing to accept and it is, of course, natural for other countries to accept; however, that is not the case actually.

Now, with regard to the UK, joining the institution and exerting influence from within, I think that is the intention on the part of the UK; however, in addition to that, the UK is more interested in economic advantages, economic benefits or profit. For example, renminbi service to be provided in London. Such economic motivation seems to me is higher in the case of the UK.

【Takita】Actually, Moderator shouldn't speak up, but I have a quick comment in addition to Professor Kawai's comment. G7 summit was held in Elmau, and then G7 leaders had the discussion, and there was a strong criticism against UK's position, so I heard it's just a piece of information that I got. Now, time has come, but if possible, maybe we can entertain one more question. Last question. Is there one?

【Audience member】 Yes, last point. Professor Ito said about one point. China is still borrowing from existing MDBs, and yet the China is going to join in the new institution as a creditor, so I would like to solicit Ms. Yun Sun's comment about this sort of dichotomy.

【Sun】 Sure. It's fascinating because China is still borrowing money, so how can you lend money to other countries? I have had interesting conversations with Chinese officials on this point, and their response or their perception is, poor countries can lend money from rich, but poor countries can also lend money to each other, so there is no international regulation against that particular behavior.

【Takita】Thank you very much. It's very simple and straightforward. From two gentlemen over there - well, Dr. Lipscy, do you have any additional comments you want to add? There are no further comments. I think the topic we handle today is very hot, and also we are very fortunate that the audience members are very punctual, very cooperative.

[End of lecture]

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