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China’s Asian Infrastructure Bank Needs Borrowers, Badly...

China's economic ‘bicycle’ problem lies behind the creation of the Asian Infrastructure Investment Bank (AIIB).

China’s Asian Infrastructure Investment Bank is being used to channel China’s trade surpluses into overseas infrastructure projects for Chinese state champions like State Grid Corp. of China and China National Overseas Oil Company (CNOOC).

Knowing this can help borrowers strike a better deal.

After years of exporting to the world, China now must keep her economy moving amid a slowing global economy.  

The alternative could be political unrest among a Chinese populace choking on pollution. That's rendering hollow President Xi Jinping’s ‘Chinese Dream.’

Overseas infrastructure represents a crucial relief valve for the Chinese economy. Nothing wrong with that, of course. Done right, everyone benefits.

But appreciating China’s need for infrastructure export projects strengthens the negotiating power of AIIB borrowers. China needs employment-generating overseas outward investment as much as AIIB borrowers need infrastructure upgrades.

In other words, faced with a slowing domestic economy, China must either ‘keep pedaling’ (ie maintain economic momentum) or fall off (suffer politically-destabilizing rising unemployment).

China’s leaders knows this. It’s economic orthodoxy that China must reorient her economy away from excess investment and toward domestic consumption. But that transition can’t happen overnight. Building overseas infrastructure buys time.   

Knowing this levels the power relationship between borrowers and the AIIB.

Under the bicycle analogy, the AIIB are the legs while State Grid Corp. of China, China National Overseas Oil Company (CNOOC) and other infrastructure state champions are the wheels. Viewed this way, the AIIB is a domestic Chinese macroeconomic management tool, not a benevolent diplomatic gift to the world.

Appreciating this fact can help AIIB borrowers drive a better deal. Consider the Philippines, the 'mouse that roared.'
In 2008, the Philippines awarded a 25-year contract to State Grid to upgrade and operate the ramshackle Philippine electricity grid, which is vital national infrastructure.

The deal was symbiotic. State Grid got a key overseas demonstration project. The Philippines got domestic infrastructure investment where other global infrastructure companies were hesitant to tread.

By all accounts, the agreement'sgone well. More lights now stay on for longer in the Philippines. Meanwhile, State Grid has used the contract as a showcase to win subsequent investments in South Australia, Italy, Brazil and elsewhere.

To date, legitimate worries about State Grid being used as a stalking horse for progressive political Chinese domination of the Philippines have proved unfounded.

The Philippines has remained vocal in opposing Chinese encroachment in disputed areas the South China Sea. The Philippines is still pursuing a UN tribunal judgement over China’s Nine-Dotted Line. A decision is expected in coming months.

Last year, the Philippines sent home State Grid technicians and replaced them with Philippine workers. This occurred amid unsubstantiated concerns of a security virus in the Philippine grid -- with State Grid the unnamed, but clearly most likely, suspect.

Instead of responding with strident, threatening language regarding the expulsions, State Grid quietly accepted them with little more than a call for ‘procedural fairness.’ This showed an unmistakable strategy of not rocking the boat.

It also indicates that as State Grid and other Chinese infrastructure companies expand into international infrastructure markets, they realize they no longer occupy the home turf where capricious actions are the unchallengeable privilege of the home team.

Therefore, the devil’s bargain for China of gaining a solution to its ‘bicycle problem’ of maintaining domestic employment through export infrastructure may be a realization in China that it must play by other countries’ rules as part of its ‘Going Out’ export strategy.

Given this, AIIB borrowers can now apply a few pages from China’s own playbook.

These include limiting Chinese companies like State Grid and CNOOC to minority stakes with domestic joint venture partners, requiring leading-edge intellectual property transfer and requiring local staffing.

These have long been requirements for foreign companies operating in China.

In coming years, China can be an infrastructure engine for a greening global economy by providing needed new infrastructure to the world funded by, among others, the AIIB.

Done right, this can create a rising tide lifting all ships. It can bind China into a positive web of beneficial, trusting relationships.

The place to start down this path would be through  AIIB funding such Chinese ‘near abroad’ infrastructure projects such as the Trans-ASEAN Gas Pipeline (TAGP) and Trans-ASEAN Electricity Grid (TAEG). Both of these fit well into China’s concepts of a One Belt, One Road concept linking China to the world.

They also fit with other energy infastructure concepts for Asia such as Japan’s Masayoshi Son’s proposed East Asian Super Grid connecting northeast Asia and southeast Asia. Other projects include Grenatec’s Pan-Asian Energy Infrastructure. That involves connecting Australia to China, Japan and South Korea with gas pipelines, high voltage power lines and fiber optic cables.

Infrastructure like the above reduces the risk of territorial war in hot button places like the South China Sea through creating a deepening web of cooperative ventures focused on energy security. Joint Development Areas protected by multilateral patrols is an ideal example.

The strategy above meets all the criteria of Chinese President Xi Jinping’s ‘Three No’s:’

1. No interference in the internal affairs of other nations
2. Does not seek to increase the so called “sphere of influence”
3. Does not strive for hegemony or dominance

The AIIB can be a great force for political stability, economic growth and a greening economy in Asia.
The key lies in recognizing that China needs to make outward investment as much as her neighbors need inward investment. Doing things right solves a host of problems simultaneously

Grenatec is a research organization studying the viability of a Pan-Asian Energy Infrastructure (PAEI).
It would serve two billion people and one-third of the global economy
This commentary may be reprinted with attribution.

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By David Swartzentruber      

It is commonplace in journalism to write two types of articles at the transition point between the year that has passed and the New Year. As this writer qualifies as an “old hand” in observing Thailand with a track record dating back 14 years, it is time take a shot at what may unfold in Thailand in 2011.

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