Japan’s AIIB Quandary
August 3, 2015
The Abe government’s reluctance to join the Chinese-led Asia Infrastructure Investment Bank has left Japan looking increasingly isolated as one country after another jumps on the AIIB bandwagon. Suwa Kazuyuki provides background on the initiative and analyzes its foreign-policy significance for China and for Japan.
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The Chinese-led Asia Infrastructure Investment Bank project has been a focus of keen interest these past few months. As Beijing’s March 31 deadline for founding-member applications came and went, Japan remained on the sidelines with its ally, the United States. The decision, though not unexpected, has triggered heated debate.
Much of the attention surrounding the AIIB has focused on the perception that the institution would pose a challenge to the region’s existing political and economic order. But more important is the AIIB’s role as a financing mechanism for Xi Jinping’s global “One Belt, One Road” initiative, an ambitious vision for linking Eurasia via two overlapping projects: the Silk Road Economic Belt and the 21st Century Maritime Silk Road. At a March 8 press conference during the spring 2015 session of the National People’s Congress, Foreign Minister Wang Yi made it clear that wholesale progress on the Belt and Road initiative would be the top priority for Chinese foreign policy in the coming year.
In this essay, I look at the role of the AIIB in the implementation of this initiative, the foreign-policy imperatives driving both, and the best way for Japan to respond.
Tracing the Belt and Road Initiative
Since taking office in March 2013, President Xi Jinping has released a raft of major new policies—the Belt and Road initiative being among them. Until recently, however, Xi had offered only tantalizing glimpses of this strategy in a series of separate statements. In late March, the vision finally took shape in its totality with the release of a policy document and a related speech delivered on the same day.
The policy document, dated March 28, is titled “Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st-Century Maritime Silk Road” (hereafter referred to as the Belt and Road Vision), and it outlines the initiative’s principles, mechanisms, and cooperative framework.  According to the Belt and Road Vision, the initiative will encompass the “Asian, European, and African continents and their adjacent seas” and will involve cooperation in virtually every area of economic activity, including infrastructure, trade and investment, and finance. It is a vast and ambitious vision, suggestive of a greater Eurasian economic community.
Also on March 28, Xi Jinping delivered a speech at the Boao Forum for Asia in which he presented the Belt and Road initiative, the Silk Road Fund, and the AIIB as components of a single package. He used the opportunity to announce the release of the Belt and Road Vision, while noting that the Silk Road Fund was already in operation and that preparations for the AIIB’s launch were proceeding apace.  Let us now take a closer look at the development of each of these initiatives.
The Belt and Road, which has become the top foreign-policy priority of the Xi Jinping regime, is a two-part initiative, as the name suggests. Xi Jinping introduced the first component, the Silk Road Economic Belt, in a speech delivered in Kazakhstan on September 7, 2013.  He first mentioned the second component, a new Maritime Silk Road, in an address to the Indonesian Parliament on October 3 that year.  The two subsequently appeared linked together in a resolution regarding “major issues for deepening reform” adopted by Third Plenary Session of the 18th Central Committee of the Communist Party of China on November 12, which called for efforts to “build a Silk Road Economic Belt and a Maritime Silk Road.”  (This was subsequently abbreviated to “One Belt, One Road,” or “Belt and Road.”)
Xi Jinping also made the first mention of the AIIB, the basic mechanism by which China hopes to finance the Belt and Road initiative. In talks with then President Susilo Bambang Yudhoyono of Indonesia on October 2, 2013, Xi proposed the establishment of an Asian Infrastructure Investment Bank to provide financial support for infrastructure construction in developing countries in the Asian region and thereby promote connectivity and economic integration. The AIIB, which will be headquartered in Beijing, is to be capitalized at $10 billion. The Chinese are aiming to have it up and running by the end of the year.
On November 4, 2014, at a meeting of the Central Leading Group on Finance and Economic Affairs, Xi Jinping broached the idea of the Silk Road Fund as a second funding mechanism for his Belt and Road initiative. On December 29, less than two months later, the fund officially launched operations with $40 billion contributed by China.
In addition to the AIIB and the Silk Road Fund, the Chinese government has also referred on several occasions to the role of a BRICS development bank. In a joint statement adopted on July15, 2014, at the Sixth BRICS Summit in Fortaleza, Brazil, the leaders of Brazil, Russia, India, China, and South Africa officially inaugurated such an institution under the name of the New Development Bank “with the purpose of mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies,” noting that the “BRICS, as well as other EMDCs, continue to face significant financing constraints to address infrastructure gaps and sustainable development needs.” Brazil’s involvement raises the possibility that the scope of the Belt and Road initiative could expand to encompass South America as well as Asia, Europe, and Africa. Such a sweeping vision implies a major shift not only in the regional power structure but in the world order as a whole. Although the initial proposal for the New Development Bank does not appear to have originated with Xi Jinping, the bank’s headquarters will nonetheless be located in Shanghai.
Xi’s Driving Principles
What is driving this ambitious Belt and Road initiative? In my view, it is the product of two basic concepts at the heart of Xi’s foreign policy.
The first of these is the new emphasis on “peripheral diplomacy,” that is, China’s relations with its closest neighbors. On October 24-25, 2013, the government held the first conference on peripheral diplomacy in the history of the People’s Republic of China. Chairing the conference was Xi Jinping, who called for “vigorous promotion of the principles of friendship, good faith, generosity, and tolerance in order to achieve the great revival of the Chinese people.” 
It is difficult to recognize those principles in China’s recent approach to territorial disputes in the region, including its bid to create a territorial fait accompli through the construction of heliports and other facilities on reclaimed land near disputed islands. As long as China continues to view itself as the center of things and its neighbors as “peripheral,” we are unlikely to witness any significant change in such behavior.
That said, only a few countries in the region are involved in serious territorial disputes with China: the Philippines and Vietnam (in the South China Sea), Japan (in the East China Sea), and India (along the border). Meanwhile, China’s wealth offers economic benefits that its neighbors—the aforementioned disputants included—can scarcely afford to ignore. In general, China’s behavior in the region carries with it an unmistakable suggestion of coercion as it dangles the carrot of economic cooperation while brandishing the stick of military might.
I would submit with some reservation (as it is still too early to be certain) that the second driving force behind the Belt and Road policy is a revival of the “peaceful rise” concept. The phrase “China’s peaceful rise” was coined in 2003 by Zheng Bijian, former vice-principal of the Central Party School and chief foreign policy advisor to President Hu Jintao during the early part of his regime. It was intended as a declaration to the outside world that China meant to use peaceful means to advance the power transition signaled by the nation’s growth and development, as explained by Waseda University Professor Satoshi Amako. 
However, no sooner had China’s leadership embraced the phrase than it began to worry that the term “rise” ( jueqi ) might fuel neighboring countries’ perception of a Chinese threat, and it quickly substituted the term “peaceful development.” Recently, however, there have been indications that jueqi is coming back into favor. For example, Qin Yaqing, president of China Foreign Affairs University, writes that “many countries within the international system want to be partners with China. This is because the international system is facing not only China’s rise but the collective rise of many of the world’s developing and emerging countries.”  Similarly, Zhao Lei has written that “China’s peaceful rise is the most important historical phenomenon of the twenty-first century and is likely to have a profound and multidimensional impact on the balance of power and the international order.” 
Three basic factors have nurtured China’s newly assertive, hardline foreign policy. One is a growing confidence in its economic power, as expressed in Xi Jinping’s statement, during the aforementioned BRICS summit, that “China was the biggest trading partner to 128 countries around the world in 2013.” This suggests that, to one degree or another, China controls the economic fate of about two-thirds of the world’s countries.
The second factor behind Beijing’s new posture is a strong conviction that China is transforming the international order and must continue to do so. In the piece previously cited, Qin Yaqing asserts that “China is already participating in international rule making and is leading the way in that process.” This confidence in China’s global role also finds expression in the formula “China needs the world, and the world needs China,” one of the current regime’s favorite diplomatic mantras.
The third driving force, particularly with respect to the idea of China’s “rise,” is a desire to appease the hardline nationalistic sentiment that has come to dominate public opinion. Unfortunately, this brand of populism is a difficult balancing act, as one false step in either direction can trigger either domestic outrage over the government’s “weakness” or widespread international alarm over a “Chinese threat.”
Japan on the Sidelines
Until this year, few nations apart from the developing countries of Asia had expressed interest in active participation in the AIIB, and the Japanese government seems to have proceeded on the assumption that this situation would continue. But the tide turned rapidly after March 12, when Britain announced its intent to sign on. There followed a surge of applications by key economic powers around the globe, including Germany (March 17), South Korea (March 26), Russia (March 28), and Brazil (also March 28). Taiwan also submitted an application, just hours before the March 31 deadline established by China. As of the end of March, about 50 countries and territories had applied for status as founding members.
Japan and the United States, meanwhile, doggedly refused to jump on the AIIB bandwagon, citing incompatibility with existing international financial institutions and lack of transparency in financing criteria and governance. Finance Minister Taro Aso suggested on March 20 that Japan might “join in talks to discuss the shares that different investors will hold,” provided its concerns were addressed, and US Secretary of the Treasury Jack Lew echoed this sentiment when he said on March 31 that “the US stands ready to welcome” the AIIB, provided that it “complement existing international financial institutions . . . and share the international community’s strong commitment to genuine multilateral decision making and ever-improving lending standards and safeguards.” In the end, however, both governments declined to add their names to the roster of founding members.
It is noteworthy, perhaps, that while the Belt and Road Vision emphasizes China’s commitment to “uphold the purposes and principles of the UN Charter” and to “enhance the role of multilateral cooperation mechanisms [and] make full use of existing mechanisms,” it includes neither the Asian Development Bank nor the World Bank in its list of existing multilateral mechanisms. Like Finance Minister Lou Jiwei’s assertion that “Western rules are not necessarily the best,”  this can be taken as a swipe at the international financial establishment in general and the United States in particular—which, as Beijing sees it, are hindering China from assuming its rightful role as the world’s second-largest economy.
Finance Minister Aso has complained that Beijing offered no answers to Tokyo’s questions regarding governance and financing standards. The most likely reason for this is that Beijing has no answers to give. China’s decision-making process is very different from Japan’s, and a great deal faster. In fact, it frequently proceeds too fast for careful preparation and planning. It has become standard operating procedure for Beijing to launch new initiatives with a maximum of fanfare and a minimum of planning and then deal with the consequences afterwards through course corrections. Indeed, this kind of flexibility is one of the keys to China’s extraordinary growth and development over the past few decades. I would venture a guess, therefore, that the roadmap holding the answers to Tokyo’s questions does not yet exist. It must also be kept in mind that both the Belt and Road initiative and the AIIB are pet projects of Xi Jinping, making it difficult for other officials to speak on their behalf.
Averting a Foreign-Policy Fiasco
Meanwhile, it has been suggested that the real reason the Japanese government allowed the deadline to pass without applying for founding-member status is that the Prime Minister’s Office had assumed from the outset that Japan would not participate and that the Foreign and Finance ministries had simply toed the line.  If this is the case, then the government has made a major foreign-policy blunder. Notwithstanding the issues that remain to be resolved in terms of coordination with existing frameworks and transparency of governance, I am convinced that participation in the AIIB could benefit Japanese foreign policy in a number of important ways.
First, it would be a big opportunity to mend fences with China. Despite some minor signs of progress, including brief bilateral meetings between Xi and Abe and a warm reception of a large delegation of Japanese lawmakers to Beijing, there is still virtually no indication of sustained or upgraded interaction at the highest levels of government. Yet at the local and grass-roots levels, the mood is very different. When I visited Beijing at the end of March, shortly after an unprecedented wave of Chinese tourists returned home laden with Japanese goods, a number of residents spoke to me at length about the grass-roots Japan craze spreading through China. In addition, a Beijing correspondent for a Japanese newspaper informed me that a number of top provincial leaders from the interior had met with Japanese embassy officials during the spring session of the National People’s Congress. Joining the AIIB would add considerable momentum to this upbeat trend. It might also give Tokyo some leverage when it comes to asking Beijing to tone down the rhetoric during its observation of the 70th anniversary of Japan’s defeat.
Second, participation could create a paradigm for Japan-China economic cooperation in Eurasia and throughout the world. This would almost certainly yield dividends in the form of a higher international profile, as well as economic gains. The participation of Britain, France, Germany, and other Group of Seven countries has made it less likely that China will exert unfair influence over the bank’s operations. By communicating with its fellow G7 nations, Japan can still have some say in the decision-making process, even though it may have lost the opportunity to participate directly in the drafting of governance rules or financing guidelines.
China, one must believe, is anxious to pass this critical test of its ability to function as a major power in the arena of international finance—an area in which it has continued to lag despite the rapid changes ushered in by “reform and opening.” Under the circumstances, the Chinese are likely to pay careful heed to the views of participants with greater experience, however unwelcome those opinions may be. Such a situation could provide fertile ground for diplomatic compromise.
To acknowledge the merits of China’s initiative while working from within to correct its course and maximize its benefits for Japan would be far more constructive than shouting criticism from the sidelines. On the other hand, a regional power struggle between the Asian Development Bank and the new AIIB would be the height of folly, and it is a battle Japan would almost certainly lose. Despite occasional problems and setbacks, China’s economic presence in the region is growing at a rate no other country can rival—a phenomenon I have witnessed firsthand during the course of several years of research in Indochina.
A third likely benefit of participation would be a thaw in relations with South Korea, which have reached a nadir over the comfort women issue. It goes without saying that Japan will need to consult with Washington closely before reaching a final decision on participation in the AIIB, and given that South Korea—which has already announced its intent to participate—is likewise an ally of the United States, the ideal would be for Tokyo, Seoul, and Washington to hammer out a coordinated policy toward China with regard to the AIIB. Such trilateral consultations would be an important step toward rebuilding ties between Japan and South Korea.
 “Full Text: Vision and Actions on Jointly Building Belt and Road,” Xinhua, March 28, 2015, http://news.xinhuanet.com/english/china/2015-03/28/c_134105858.htm .
 “Full Text of Chinese President’s Speech at Boao Forum for Asia,” Xinhua, March 28, 2015, http://news.xinhuanet.com/english/2015-03/29/c_134106145.htm .
 “President Xi Jinping Delivers Important Speech and Proposes to Build a Silk Road Economic Belt with Central Asian Countries,” Xinhua, September 7, 2013, http://www.fmprc.gov.cn/mfa_eng/topics_665678/xjpfwzysiesgjtfhshzzfh_665686/t1076334.shtml .
 “Xi in Call for Building of New ‘Maritime Silk Road,’” China Daily , October 4, 2013, http://usa.chinadaily.com.cn/china/2013-10/04/content_17008940.htm .
 “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform,” China.org.cn, January 16, 2014, http://www.china.org.cn/china/third_plenary_session/2014-01/16/content_31212602_7.htm .
 See Kazuyuki Suwa, “New Directions for Chinese Diplomacy?” Views on China, February 16, 2015, https://www.tkfd.or.jp/en/research/detail.php?id=308 .
 Satoshi Amako, “Chugoku no taito to taigai senryaku,” in Satoshi Amako, ed., Bocho suru Chugoku taigai senryaku (Tokyo: Keiso Shobo, 2010), p. 10.
 See “Ajia Toshi Gin no shogeki 2: ‘G7 no sanka zettai nai,’” Nihon Keizei Shimbun , April 15, 2015, and “Ajia Toshi Gin Doku sanka no shogeki,” Asahi Shimbun , April 12, 2015.