Caught between the US and China, South Korea joins the AIIB

Caught between the US and China, South Korea joins the AIIB

According to a recent report by the Asian Development Bank (ADB), Asia will need to invest about $8 trillion in overall national infrastructure between 2010 and 2020. South Korea’s involvement is an important step toward developing sustainable infrastructure development under the banner of the Asian Infrastructure Investment Bank (AIIB).

Meeting tomorrow’s deadline for membership entry with time to spare, South Korea’s Ministry of Strategy and Finance announced on March 27 that South Korea would join the China-led AIIB as one of the founding members.

The decision has been a difficult one for South Korea as the country is torn between the US and China, highlighted by the controversial deployment of Terminal High-Altitude Area Defense (THAAD) as part of the US missile defense system.

However, financial markets welcomed the announcement and showed gains as the stock prices of South Korea’s iron and steel producers rose over the projection of higher demand for their products when the bank becomes operational by the end of this year.

South Korea’s membership could benefit the new bank

South Korea’s infrastructure industries are expected to play a significant role in the development projects. Because the bank will finance diverse sectors in key areas including telecommunications, energy, and transportation, South Korea’s development experience is seen as crucial to the development of Asian infrastructure as well as the loan and debt management of the bank.

In early March, Britain made an announcement that it will join AIIB and swayed other major economies in Europe including France, Germany, Italy and Switzerland to join as founding members.

China was able to maneuver the membership of key European countries by agreeing to give up veto power and stating a commitment to improving efficiency in governance. The IMF and World Bank have been widely criticized for the United States’ veto power over important decisions without having the majority share.

European countries’ involvement gives South Korea, Japan and Australia more leverage despite the United States’ vocal opposition. The three countries have been compelled to join the new bank to avoid being sidelined in the major steps towards forming a new Asian regional community.

Initially, China’s plan was to provide $50 billion of the $100 billion capital in total and claim 50% share of the voting rights. However, a South Korean official recently said China’s voting power would most likely to be far less than 50% as more major players will be contributing to the bank.

The guiding principle of the governance structure has been that countries’ shareholdings be determined according to their respective size of GDP.

According to this calculation, China will have about a “mid range of 30%” and South Korea will end up with 5%, or about 4th largest share of voting rights. Even so, China will unquestionably have a major influence in the bank’s operations and also reap most of the benefit.

Although funding could concentrate in the Silk Road Belt because of China’s trade with other parts of the world, building infrastructure means greater social overhead capital not just for the regional but also for the global economy.

European participation and co-financing with the ADB and the World Bank can assist managing the new bank by sharing their experience in the development field. Most importantly, access to more public financing of infrastructure through investment in Asia will create more trade opportunities.

Categories: Asia Pacific, Finance

About Author

Yoon-Je Chung

Yoon-Je Chung is a specialist in East Asian affairs with experience at the Korea Chair of Center for Strategic and International Studies (CSIS). He is currently based in Seoul and is pursuing an MA at the Yonsei Graduate School of International Studies. He received his BA in Political Science and Economics from New York University.