March 17, 2015

The Asian Infrastructure Investment Bank is seen as challenger to Washington-based World Bank

Germany, France and Italy followed the U.K.’s lead in applying to join a China-led international development bank, lending the weight of Europe’s largest economies to the project despite U.S. opposition.

Europe’s four top powers have now broken ranks with Washington in moving to become founding members of the Asian Infrastructure Investment Bank. The decision is expected to spur other U.S. allies to back the potential challenger to the World Bank and the Asian Development Bank, where Washington has significant influence.

It also comes as Obama administration officials warn that the U.S. is also losing clout through the world’s emergency lender, the International Monetary Fund.

Treasury Secretary Jacob Lew on Tuesday publicly aired growing tensions between the trans-Atlantic allies over the matter, criticizing European support for the China-led development bank and questioning the new institution’s anticorruption, labor and environmental standards.

“I hope that before the final commitments are made, anyone who would lend their name to this organization will make sure that the government is addressing [those issues],” Mr. Lew told lawmakers at a hearing on the international financial system.

Tuesday’s decision, announced by German Finance Minister Wolfgang Schäuble after a meeting with Chinese Vice Premier Ma Kai in Berlin, underscored the willingness of traditional U.S. allies to split with Washington on policy to curry favor in Beijing. The readiness of the U.K.—one of the U.S.’s closest allies—to defy Washington with its decision last week to join helped to clear the way for other Western economies to follow suit, a European diplomat said.

China launched the AIIB in October—one in a series of moves to boost its regional and global influence—and invited other countries to join as founding members by March 31. Endowed with an initial capitalization of $50 billion, the bank would have a mandate to finance infrastructure projects around the world.

While Beijing has said the bank will be open and inclusive—a promise repeated Tuesday—U.S. officials have cautioned allies against putting their imprimatur on an institution that could fall shy of Western standards. They worry about a new rival to the World Bank that might conduct itself by different standards amid already growing competition for development-project funding from the private sector. Officials have also expressed concern the bank could undercut U.S. influence through the World Bank and the Asian Development Bank.

Like the U.K., German officials said joining the China-led initiative while it is still being shaped would help ensure the development bank would operate under high lending and transparency standards. “We want to contribute our long-standing experience with international financial institutions to the creation of the new bank by setting high standards and helping the bank to get a high international reputation,” Mr. Schäuble said.

European officials also say that moving quickly to join the bank could benefit their economies. The British government has said it wanted to become the main European destination for Chinese investments, and China is Germany’s fourth-largest trading partner, accounting for 7% of Germany’s exports.

“This is basically about money,” said Ted Truman, a senior fellow at the Peterson Institute for International Economics and former assistant secretary of the U.S. Treasury. “The Europeans figure they can affect the changes from the inside, and still get some of the contracts.”

Like Brazil and India, China has been lobbying for years to gain greater sway over the IMF, whose largest shareholder is the U.S. But while all IMF member countries have backed greater influence for emerging economies, GOP lawmakers have so far blocked the move.

Mr. Lew said the delay in the IMF-governance overhauls is causing other countries, including allies, to question U.S. commitment to the IMF and other multilateral institutions that Washington founded 70 years ago.

U.S. approval of the IMF governance reforms will help persuade emerging economies “to remain anchored in the multilateral system that the U.S. helped design and continues to lead,” he told lawmakers.

China issued a restrained welcome to the latest European applicants for the bank. The finance ministry said in a brief statement that Beijing would seek the opinions of other participating countries before deciding on whether to admit the three European countries. In practice, however, the approval is expected to be perfunctory, according to diplomats and academics in Beijing who have followed China’s efforts to form the bank.

Beijing has been lobbying countries to join, saying that the bank would fill an immense need for infrastructure financing and that founders would have input in setting the bank’s standards for transparency and other governance issues. Oxford Economics and consultancy PwC forecast global infrastructure spending of nearly $78 trillion between 2014 and 2025, with nearly 60% of that in the Asia-Pacific region.

China has focused particular attention on drawing in key U.S. allies in the region—South Korea and Australia—both of which have also come under pressure from Washington. The South Korean foreign ministry said Tuesday the decision requires a “time-consuming” review by the finance ministry, suggesting Seoul might not meet the March 31 deadline. Australian officials have said the government would decide soon whether to join the AIIB.

Chinese commentators read the decision by the Western European countries as a victory for Beijing that hastens the waning of U.S. influence.

“The U.S.-dominated world order has begun to collapse,” Wang Dehua, a former reporter with the Chutian Metropolis Daily, wrote on his verified account on Weibo Corp.’s social-media service. “In the future, such a collapse will be like dominoes, quickly spreading tile by tile. Perhaps very soon, the U.S.-dominated world order will come to an end.”

China has sought to meet concerns by the U.S. and others that the development bank might become a Chinese foreign policy tool and contribute to indebtedness, waste and graft in borrowing countries.

“In designing its operation and governance structure, it will learn from the good practices of other multilateral development banks and avoid taking detours that these banks have made, so as to cut costs and increase efficiency,” Chinese Foreign Ministry spokesman Hong Lei told reporters Tuesday at a daily news briefing in Beijing.

A European official close to the preparatory talks about the AIIB said the bank would likely be officially launched by early summer this year, with the first project to be selected at the end of this year.

—Ian Talley contributed to this article.

Write to Andrea Thomas at andrea.thomas@wsj.com and Charles Hutzler at charles.hutzler@wsj.com

http://www.wsj.com/articles/germany-france-italy-to-join-china-backed-development-bank-1426597078