| By Maesea McCalpin

After the Asian Infrastructure Investment Bank (AIIB) was first proposed by Chinese President Xi Jinping in 2013, a number of observers, including within Japan and the United States, questioned its underlying motivations. The intensity with which the bank was both attacked and defended in the period before it opened its doors has thrown a spotlight on debates that existed long before Xi’s 2013 announcement. Chief among them are fundamental questions about who should dictate the rules of global governance and what role multilateral development banks (MDBs) should play in carrying them out. The AIIB concluded its second annual meeting in Jeju Island, South Korea on June 16, yet many of those questions remain open.

Critics of the bank have cited several concerns. Some worry that the bank might fail to uphold international norms, such as those promoting good governance, human rights, and social and environmental safeguards, given China’s traditional doctrine of non-interference. Others have worried that China might try to use the bank to advance its own political and economic agenda, including the export of its excess industrial capacity. In the world of geopolitics, the bank has been painted as a rising challenger to traditional economic institutions such as the U.S.-backed World Bank and the Japan-backed Asian Development Bank and, by extension, as a challenge to pre-existing norms of international economic governance.

Defenders of the AIIB have pointed out that existing multilateral banks are far from perfect, either substantively or procedurally. The AIIB, in their view, represents an opportunity to experiment with more efficient institutional governance and lending practices. Economically, the bank has been justified on the grounds that Asia is facing a massive infrastructure financing gap estimated to exceed $1.7 trillion annually. Current MDBs have been described as sluggish and bureaucratic in responding to the massive needs of developing economies. Of course, the main challenge in filling Asia’s infrastructure gap is connecting “bankable” projects, ventures that deliver returns commensurate with their risks, with available financing.

Since its founding, the bank has changed in focus and composition. While the original vision for the bank focused solely on infrastructure investment, the version that exists today is explicitly intended to aid development. The bank has also become more inclusive in its governing structures than originally anticipated and now includes Western members such as the United Kingdom and Germany on its board of directors.

The AIIB has also branded itself as an institution that is lean, clean and green: committed to cutting long lending times, being tough on waste and corruption, and promoting environmentally sustainable projects. Early observers expressed concerns that the bank might cause more harm than good by downplaying environmental and social safeguards. After the bank’s environmental and social framework was announced in February of 2016, others lauded it for adopting standards similar to those of traditional MDBs such as the World Bank and even for being progressive compared to its contemporaries on some issues.

At the second annual meeting, the bank released its Energy Sector Strategy, renewing debates over the bank’s commitment to clean energy and its policies on lending for coal projects. The strategy commits to helping Asian economies reduce the carbon intensity of their energy supply and manage pollution while also acknowledging the critical role fossil fuels play in Asia’s economy. The strategy refrained from explicitly ruling out funding for non-renewable energy projects and left the door open to the possibility in the future, although no new coal projects are currently in the bank’s pipeline.

Even considering these developments it is still too early to judge the AIIB’s performance, in part because it has relied heavily on co-financing and collaboration with existing institutions. Existing banks have been eager to cooperate, with the World Bank, Asian Development Bank, and European Bank for Reconstruction and Development all signing memorandums of understanding to co-finance projects, collaborate on analysis, and participate in staff exchanges and information. In addition, both the President of the ADB and the President of the World Bank have openly endorsed the AIIB and denied any ongoing rivalry between them. In total, of the AIIB’s 16 financing initiatives to date, 12 have involved co-financing.

For all the attention the AIIB’s lending has attracted, it is only one piece in a larger set of developments taking place within Asia’s financial architecture. China is spending heavily on infrastructure across the region under the umbrella of its “Belt and Road” initiative, with investments from its Silk Road Fund, the China Development Bank, the Export-Import Bank of China, and other conduits having surpassed $50 billion. That is quickly approaching the $54.9 billion in total development funding to the region in 2016 from the Asian Development Bank and World Bank combined. In contrast, AIIB funding totals are anticipated to reach around $4 billion by the end of 2017, a modest amount relative to the Asian Development Bank’s record $31.5 billion and the World Bank’s $61 billion in total funding for 2016.

As the AIIB scales up, a key indicator will be whether China retains its veto. Currently, China holds a 26 percent voting share, which is just high enough to secure a de facto veto over supermajority decisions. Jin Liqun, the bank’s President and Chairman, has said that China’s veto power is likely to be lost gradually as new members join the bank.

But three mechanisms could preserve China’s voting share. First, the bank’s articles of agreement specify that each country’s voting power is decided in part by its subscription to the bank’s capital shares, 75 percent of which must be held by regional members at any given time. This limits the influence of new non-regional members. Second, China could use its veto to block raising the bank’s approved capital or raising the subscription amount of an existing member. Finally, the original 57 founding members receive an automatic boost to their vote percentage, reducing the voting power of new members relative to the original 57 founders.

None Prospective founding members signed the AIIB Articles of agreement prior to December 31, 2015 and will become founding members after fullfilling all other conditions of membership.

The G20 summit in July could shed light on the bank’s future as Japanese Prime Minister Shinzo Abe is set to meet with Chinese President Xi Jinping. Some senior officials have suggested that Japan could re-open discussions about membership in the bank as well as greater participation in the Belt and Road in an effort to improve bilateral ties. However, even if Abe wanted to pursue such a policy change, it would require the approval of Japan’s legislature to contribute the necessary funds. Even so, Japan’s partial warming to such a possibility is a strong indicator of how much the AIIB has evolved since it was first proposed in 2013. As that evolution continues, the bank’s performance will require further observation.

Maesea McCalpin is a Program Coordinator and Research Assistant for the Reconnecting Asia project at the Center for Strategic and International Studies.