The Asian Infrastructure Investment Bank (AIIB) is a new multilateral development lender, whose focus will be on providing financing for infrastructure projects in Asia. Founded by China, the AIIB has been joined as founding members by most regional governments as well as the UK and other EU member states including Italy, Germany and France. Indeed, 57 Nations were recently approved as founding members and World Bank President Christine Lagarde, formerly of Baker & McKenzie, has outlined her desire to work cooperatively with AIIB.
The US, alternatively, did not join the AIIB and lobbied other governments not to join. Japan did not join but South Korea, a regional US ally, did. The AIIB is regarded as a rival to other multilateral development banks like the Asian Development Bank, the IMF and the World Bank. Washington’s concern is that AIIB might be a conduit for China support of unfriendly governments and that it may not hold to the same standards of transparency and accountability as already similar existing institutions are seen to do.
Importantly, McKinsey & Company (@McKinsey) estimated in 2011 that Southeast Asia Infrastructure development would be worth $8 trillion (USD) during the course of this decade “to remedy historical under-investment and accommodate the explosion in demand.” A clearly profound opportunity for law firms seeking to serve the legal needs of those companies who might secure the work associated with this infrastructure boom.
Disagreement in the US on America’s involvement in AIIB
Former US Treasury Secretary Hank Paulson has argued it was a mistake not to join. However, the South China Morning Post recently argued that the creation of AIIB “is all about China’s hubris”. Whatever view you may take, it appears significantly likely that non-membership by the US will see US law firms and other professional advisors less apt to win work related to AIIB projects. Whereas many western firms have had close working relationships with the World Bank and other multilateral financial institutions, China appears to see this as their opportunity (among other political and economic motivations) to have their law firms take the lead on advisory services to AIIB contractors.
In preparing this post I sought the opinions of two close observers of the professional services market in Asia on their opinions about AIIB and its’ implications for professional services firms. Here’s what they had to say:
US opposition to AIIB will have “little effect on US law firms”
Paul Kossof, an Associate at TransAsia Lawyers and ChinaGoAbroad, explained that “the no-commitment stance taken by the United States has led to private sector concerns that US national policy will impact their participation in APAC infrastructure projects and other One Belt, One Road initiative projects.
However, I expect that US non-involvement in AIIB will have little effect on US law firms operating in APAC because:
- US firms only have limited presences in most of the countries where infrastructure projects will be (and farm out work to local counsel).
- AIIB would prefer working with local firms for a variety of reasons (rates being the most obvious).
- Large Chinese firms are moving into other APAC countries.
- The “one-stop shop” model that MNCs appreciate from Big Law will not be as attractive to AIIB and project shareholders.
Regardless of whether a project is funded by AIIB, US firms face a very competitive market. Clients in the region often cannot pay US rates, the quality of regional firms is gradually rising and US firms are weighed down by restrictions on foreign legal service providers.
As US allies that support AIIB will soon experience, AIIB-funded projects will bring additional obstacles (political, regulatory and economic) regardless of their commitment to AIIB.”
China “politicizes its commercial dealings”
Chris Devonshire-Ellis, Founder of Dezan Shira & Associates and Chairman of the firms International Board of Equity Partners & Directors observed:
“A point to recognize about the AIIB is that China tends to politicize its commercial dealings and sees commerce and politics as intrinsically tied together. The Japanese understand this well and have recently been at the forefront of Chinese political anger. Their decision not to join the AIIB is quite possibly shrewd – why join and financially support such an institution when membership is certain to be awkward? Why spend your national income in an institution that may not recognize your sovereign interests and may in fact become shareholder hostile?
Quite whether other members fully understand this is a moot point. China has punished EU nations in the past for everything from awarding Nobel prizes to recipients it does not approve of, to matters concerning Tibet. Given that China’s recent regional history in terms of dealing with disputes has been somewhat aggressive, it remains to be seen how members of the AIIB will feel about China as head of a bank spending their citizens money when disputes arise. The fact that they will can almost be written in stone as guaranteed. While nations may wish to be seen to curry favour with China by supporting the AIIB, it is uncertain what the underlying risks are. How will China manage the bank when it is in political disagreement with shareholders? Or if it wishes to use funds to develop infrastructure projects that may impact upon regional stability in the South China Sea? How investing nations will deal with these scenarios remains a large unknown, and therefore carries risk.”
The future is uncertain
As China Daily outlined: “Paulson writes in [his new] book Dealing with China: An Insider Unmasks the New Economic Superpower) that the two biggest powers in the world need to act in complementary ways, and that the nations’ challenges will be hard to solve if they work at “cross-purposes”. If the US attempts to weaken and exclude China, it will run the risk of creating China watchers’ worst-case scenarios into a “self-fulfilling reality”, he wrote.
Time will tell if this will happen, and whether US law firms will indeed be at a long-term disadvantage in Asia going forward now that the US has chosen to remain outside the tent on AIIB.