Could the Asian Infrastructure Investment Bank (AIIB) fall victim of China’s South China Sea territorial aggressiveness?
The risk is there.
The AIIB has set itself an ambitious mid-year target to make its first loan.
That’s about the same time a UN arbitration tribunal in The Hague is expected to rule on the Philippines’ appeal against Chinese territorial claims in the South China Sea.
The two are linked.
Should China reject arbitration in recognized international forums for dispute resolution in the South China Sea — claiming it will only to adhere to favorable decisions — it risks blowback.
Given such a precedent, AIIB borrowers could then borrow and renege on repayment of AIIB loans — citing China’s claimed right to ‘cherry pick’ multilateralism.
Given such risks to the AIIB’s success, South China Sea diplomacy in coming months will almost certainly set important precedents in regional relations.
The issue, however, is larger than the South China Sea.
For decades now, China’s been the recipient of international investment. During this period, China could write –– and capriciously change — rules.
In coming years, China’s increasingly will be on the other side of the equation as an external investor.
The reason: China’s multi-decade accumulation of a US$3 trillion Chinese reserve hoard has become economically destabilizing.
The AIIB was created to put this reserve hoard to work. The goal is to maintain employment levels in China’s now world-competitive state infrastructure champions.
These companies — most notably State Grid Corp of China and China National Overseas Oil Company (CNOOC) — are now among China’s largest employers of China’s working age population.
Without overseas contracts to replace
Given that China’s now overbuilt, these state infrastructure giants must either win overseas contracts or layoff workers, which could be politically destabilizing.
This is a huge shift for China. As it occurs, China’s attitude toward stable rules will change.
At present, China believes neighboring countries are an extension of China where rules are what the Communist Party says they are. China’s Nine-Dotted Line in the South China Sea is a manifestation of this.
China’s evidence for this retroactive fiction is based upon two things: unpsecified ‘indisputability’ that has existed ‘since ancient times.’
This must give pause to potential AIIB borrowers regarding the outcome of dispute resolution regarding AIIB loans.
For instance, could international infrastructure built by Chinese companies under AIIB loans in third countries be retroactively claimed as ‘indisputable Chinese territory’ since ‘ancient times?’
Any AIIB borrower due diligence would have to include consideration of the above risk.
Unconvinced? Consider the below:
China’s infrastructure state champions — like State Grid Corp. of China and China National Overseas Oil Company (CNOOC) — are experiencing blowback along these lines.
Take Vietnam and the Philippines. Both have clearly benefited from Chinese inward investment. But both also are pushing back against it. .
Take Vietnam. It now now trades electricity across its border with southern China. Vietnam’s also considered a potential route for the proposed $40 billion Kunming-Singapore Railway.
China and Vietnam also have agreements to cooperative manage fisheries and energy exploration in the Tonkin Gulf.
But at the same time, Chinia’s CNOOC has placed a huge oil and gas exploration rig in waters claimed by Vietnam off Danang, sparking anti Chinese riots.
In 2014, CNOOC embarassingly canceled an auction of offshore oil and gas leases for waters claimed by Vietnam. The reason was that international energy companies were skittish about bidding on concession in contested jurisdictions.
Chinese electricity infrastructure state champion State Grid also has suffered blowback — in the Philppines.
In 2008, State Grid won a pivotal contract to upgrade and operate the Philippine electricity grid under a 25 year contract.
Last year, the Philpppines expelled Chinese technicians working on the grid project and replaced them with Filipinos. The reason? Unsupported allegations of a computer virus in the grid.
The two cases underscore the kinds of internatinoal ‘social license’ and ‘local caprice’ risk China’s been able to disregard in enjoying more than three decades of rapid domestic economic growth in which rules were retroactively malleable.
In coming years, China will be compelled to invest overseas to relieve growing economic imbalances at home and keep its populace employed to maintain political stability.
Given this, it’s power to enforce loan repayment terms on stroppy host countries citing the sanctity of contracts it long considered discretionary offers alot of strategic gaming opportunities for borrowers.
This should moderate Chinese behavior and lead to a greater appreciation of compromise. In the South China Sea, Joint Development Areas offer an ideal way out of this problem. Look for progress along these lines in 2016.