Donald Trump may be a challenge for AIIB and NDB

With the US president Donald Trump entering the stage, two new China-backed multilateral banks, the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) of Brics nations, may face a rough ride ahead, analysts say.

China has benefited in diplomatic and political terms because these two banks have been sponsored by Beijing and are based in the country.

“China has gained in terms of ‘soft power’ because it could bring several European powers on the table through AIIB. At present, a lot of European countries are concerned about what they see in the US. This might increase potential cooperation between China and the European countries,” says Julian Evans-Pritchard, the China economist for Capital Economics.

But the AIIB may itself face some negative pressure from the United States.

“Mr Trump has indicated he is not particularly keen on supporting multilateral banks including the World Bank,” says Stephen Blank, a senior fellow at the American Foreign Policy Institute.

Any pressure on the World Bank, which has played a key role in the initial successes of AIIB, would have an impact on its future, he says.

China’s hopes that the Trump administration will agree to join the AIIB, reversing the Obama administration’s decision to keep out of it despite the fact that most US allies including Canada, Australia, South Korea and Britain have joined up.

Mr Trump has not yet commented on the AIIB. But analysts are sceptical that he will let the US join and thus give the Beijing-based institution some added credibility.

“Under no circumstances will Mr Trump agree to join AIIB. The [AIIB chief Jin Liqun] obviously knows that and cleverly created a headline again highlighting how it is now the US that is isolating itself from the rest of the world,” Jacob Kirkegaard, an economist with the Peterson Institute of International Affairs, tells The National.

The AIIB has several challenges ahead. It has managed to primarily target projects that had already been vetted by the World Bank and the Asian Development Bank for lending. It will now be forced to carry out its own due diligence measuring financial viability of projects, amid political uncertainties, and the need for ensuring proper environmental and labour standards, which are not easy to enforce in many parts of Asia.

“The AIIB will find it very difficult to scale up its operations. There are significant political risks in many of the infrastructure projects,” Mr Evans-Pritchard says. “A lot of projects don’t make commercial sense. There is the risk of running protests in several countries where projects have been planned. There is a protest against an industrial zone in Sri Lanka, which is part of [China’s One Belt One Road] Obor programme,” he says.

He points out that some members of the AIIB, particularly those from Europe, do not share China’s geopolitical viewpoints and may be less enthusiastic to support projects along the One Belt, One Road programme. There is also the risk that the next round of elections could install protectionist governments in Europe, which may be less enthusiastic about funding projects in Asia and elsewhere, Mr Evans-Pritchard says.

Another challenge lies in the fact that China is going through an economic slowdown and its foreign currency reserves have slipped from US$4 trillion in 2014 to $3tn now.

"China's economic slowdown is leading to a recalibration in Beijing of the level of risk that Belt and Road projects should accept, but there are still political considerations in Obor projects that are not part of the equation for AIIB projects," Paul Haenle, the director of Carnegie Tainghua Centre of Global Policy, tells The National.

“Chinese banks will need to learn from their past mistakes, such as their experience with Venezuela last year,” he says, referring to Venezuela’s decision to engineer a default over $20 billion to $24bn in debts on $65bn of loans it had accepted since 2007 from Chinese state banks.

“We can’t expect the AIIB to finance commercially unviable investments in economic infrastructure, but the AIIB member nations’ firms and the banks and organisations it partners with can bring much needed experience and expertise to projects in the region,” he adds.

Whatever the future holds, the AIIB’s initial stellar performance will be tough to maintain.

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