Why China Supports NDB Membership Expansion

This is part of in a new collection of commentaries from the Emerging Global Governance (EGG) Project on the New Development Bank's evolution. Browse the series here. Zhu Jiejin argues that China’s leadership sees the NDB as a tool to counter its main source of global tension.

Unbeknownst to many observers, China strongly backs the expansion of the membership of the BRICS-led New Development Bank (NDB). Why does China back the expansion of the NDB membership? What are China’s main interests and motivations in backing the expansion? Very little is known about the internal politics in the NDB, the international power relations between the founding BRICS members as they play out in the Bank’s activities, and their clash of national interests. Most important is how the differences between the founding nations are addressed and overcome – or not resolved and continue to play out.

The founding members of the NDB, including China, tout the design for decision-making in the Bank, particularly ‘equal share/equal voice’ among the five original founding members, and also the operating and internal-governance norm that has emerged within the NDB, of decision-making by ‘consensus’ (rather than ‘majority rule’). The governments of the BRICS nations have pointed to these equality-based governance arrangements as distinguishing the NDB from the traditional International Financial Institutions with their weighted shares and voting schemes, particularly the World Bank, but also the International Monetary Fund. Some commentators have argued that the NDB can even be said to be more democratic than the longer-established MDBs, and that this is due to their ‘Southern partnership’ or developing country cooperation-based foundations.  

But after six-years into the life of the NDB, some of the downside implications of these ‘equality-based’ governance arrangements in the NDB have also emerged. China’s representatives are aware of the achievements which the NDB has made over the first six years, and how the progress has been partly due to the equality-based governance arrangements of the Bank. For example, having a capable Indian national, KV Kamath as the first president, and strong expert voices from the BRICS nations as the inaugural vice presidents and senior staff in the Bank, helped to establish the broader international legitimacy of the Bank in its initial stages, to ward off the potential for ‘Beijing capture,’ and to get NDB-supported projects launched in India, South Africa and Brazil rapidly. Nonetheless, China’s officials also increasingly believe that the downsides of the equality-based arrangements also becoming more apparent.

Here I assess the perspective of China’s representatives in the NDB, and the main findings are, first, that China’s officials have grown increasingly concerned about some of the governance arrangements in the NDB, and they are tracking the implications and consequences of the equality-based governance arrangements of the Bank from the standpoint of creating obstacles to the Bank’s smooth functioning, growth and development, and in relation to China’s complex and evolving national interests. To note, China’s national interests are not seen here as static or unchanging. Second, Chinese officials have come to see membership expansion in the NDB as one of the medium-term solutions for overcoming the obstacles and constraints that Chinese officials perceive as resulting from the NDB’s equality-based organizational arrangements.   

Below, we examine these two findings in detail, through two case studies that highlight how the governance arrangements of the NDB have accentuated or reinforced geopolitical conflict or tensions between China and other BRICS nations: on the one hand, with India, and on the other hand, with Russia. In both cases, Chinese officials have come to the view that, despite the best efforts of the NDB’s Boards members and the senior management of the NDB to try to insulate the Bank from the transmission of geopolitical tensions between the BRICS into the Bank, some of these tensions have seeped in, and have played out in the institutionalized terrain of the NDB, and in some cases continue to mar the Bank’s operations. Moreover, Chinese officials believe that this transmission of intra-BRICS tensions into the NDB happened because of the governance arrangements of the NDB.

As a result, despite the achievements to date, and although the NDB senior management did succeed in overcoming the inter-national tensions within the Bank in some instances, China has come to support NDB membership expansion as a medium-term mediation solution for helping to ward off the transmission of certain intra-BRICS geopolitical tensions into the NDB in the future. China’s short-term response to these tensions has been direct diplomatic negotiations on the problem at hand, and two-way concessions to try resolve the issues on the particular matter. But the view of the Chinese officials who directly interact with the NDB is that, by pursuing governance reforms in the Bank, specifically by adding more members to the NDB, it will help to dilute the tensions over the medium-term by diversifying the number of voices at the table for the decision-making processes beyond the original founding members. It is a strategy of mitigating conflict between the BRICS governments via further multilateralization, i.e., by expanding the scope of participants and representation within the NDB as a multilateral institution rather than by using unilateral power. 

India-China

One of the main foreign policy challenges that China has faced in the last decade is the deterioration of relations between China and India. In 2013, China launched the “One Belt, One Road” initiative (renamed the “Belt and Road Initiative” in English in 2017, or BRI), the China-led mega pan-regional development integration and infrastructure connectivity initiative across Asia, Europe, Africa, South America and the Caribbean, and other regions (Australia and New Zealand). However, the BRI raises geopolitical concerns for India, both over land and sea. In particular, the China-Pakistan Economic Corridor (CPEC), which goes from the new seaport in Gwadar, Pakistan on the Indian Ocean, through Pakistan to territory contested by India and Pakistan, as well as the string of seaports and connectivity along the Maritime Belt have both raised concerns in New Delhi.

The eruption of armed conflict in 2017 between India and China in the Doklam area of the China/India border also affected China’s planning of the BRICS summit that year, hosted in Xiamen in Fujian province in Southeast China. India’s Prime Minister Narendra Modi did not confirm his participation at the Xiamen Summit until in the late stages of the planning for the Summit. In 2020, conflict broke-out in the Galwan River Valley, this time causing serious injury and casualties on both sides. The Indian government’s stance toward China has hardened militarily, as it increased its role within the “Quad” Grouping, working in coordination with the United States, Japan and Australia, to counter China. There has also been much talk between India and Japan about working together to ‘protect against’ China’s growing influence within the Asian region.

The India-China tensions have spurred debate at the national-level in China, inside foreign affairs circles, about why China supports India through the NDB (and the AIIB) when the Indian government is hostile toward China’s main foreign policy goal, the Belt and Road Initiative. In fact, India has been the largest recipient of NDB loans (and AIIB loans) after the Bank was launched. The first president of the NDB, K.V. Kamath, is an Indian national. Some Chinese strategists and policymakers have argued that China should withdraw its support for India within the NDB (and AIIB). They challenge China’s backing of the NDB if the Bank does not support China’s major foreign policy priority, or works against it, such as on the BRI. Other Chinese policymakers and officials have had to blunt the pressure to confront India, including via the NDB (and AIIB), and to insulate the NDB, and to protect its multilateral operational autonomy. 

So far, the Chinese officials providing bureaucratic insulation for the NDB have been able to fend off the critics who want to pressure the Bank to serve China’s foreign policy aims. But every low point or crisis in the India-China relationship has become a risk for the NDB and its Chinese interlocuters to manage. The voices inside China’s policy circles calling for China to play a stronger role in directing the NDB grow louder with each episode. One can imagine that the first NDB president Kamath also faced pressure from Indian authorities to oppose or at least not allow the NDB to support the Belt and Road Initiative, and he had to find ways to navigate geopolitically, where possible.

These India-China geopolitical tensions related to the BRI, surfaced in 2017 within the NDB, when China hosted the first Belt and Road Forum for International Cooperation (BRF), the inaugural summit for China’s flagship foreign policy project. In preparation for the BRF, China’s government representatives asked the traditional Multilateral Development Banks (MDBs) and the newly established Multilateral Development Banks, including the NDB, to support the BRI by joining a newly created Multilateral Cooperation Center for Development Finance (MCDF) that would be created to provide multilateral support, know-how and advice on the BRI. For the NDB, this was a problem, because the Indian government was adamantly opposed to the NDB supporting the BRI, including the MCDF, and they opposed the MCDF. One reason that the NDB president conveyed about the hesitancy of some of the BRICS founding members to support the MCDF was that there were few details on the scheme, i.e. that China’s government officials did not spell out clearly what the commitments were beyond what was basically declaratory and symbolic. Before signing onto the agreement for an MCDF, they wanted to know what they were committing to deliver. After extended discussions at the Board of Directors level, the NDB President Kamath finally put the matter to a vote and the outcome was a 4 to 1 vote in favour of the NDB signing up for the MCDF. At this point, the ‘consensus’ decision-making norm was unilaterally invoked to try to oppose the majority position. In response, China stood up to secure the decision of the majority. This was the only time that China intervened in this way within the NDB to override the unilateral opposition from another BRICS nation, and on behalf of the other 4 nations. 

As a result, the NDB joined the group of MDBs that signed onto the initial agreement to establish the MCDF. However, in 2019, when the members of the MCDF issued their follow-up joint statement, the NDB was not part of the group of signatories. Chinese officials note that it has been difficult to bring the NDB around to supporting the BRI due to India’s strong resistance.

China’s representatives have chosen not to fight this battle directly or immediately. Instead, they have considered medium-term multilateral measures to deal with the issue, and for avoiding such unilateral oppositional scenarios in the future. It is observed here that NDB membership expansion is one of the means that China has supported for addressing the issue. This is the deeper meaning behind Chinese finance minister Liu Kun’s remarks in the NDB’s third board of governors’ meeting that China supports NDB in effectively aligning its strategies with major member countries and actively participating in significant global, regional, and sub-regional cooperation initiatives such as the BRI.

Interestingly, India had previously opposed expanding the membership of the NDB. But the new members that have been added in late 2021 were carefully selected by the BRICS governments and considered by New Delhi. India supported the addition of Bangladesh, a friendly neighbor of India; the UAE has close economic, financial and migration and employment ties with India; Egypt, a country with long historical ties with India, is also working on building more ties with India of economic growth, reconstruction, and stabilization. Uruguay, after the overthrow of military dictatorship, has developed diplomatic ties with India, and the two nations are working on fostering more economic and trade relations.    

The Russia Challenge

Another challenge for China and the BRICS founding members has been managing the secondary impact of Russia’s conflictual relations with the West since the annexation of Crimea in 2014 and the start of the war in Ukraine in 2022. Under US and NATO leadership, more than 40 countries, mostly advanced Western economies, have imposed a variety of sanctions on Russia by early 2022. The potential consequences of the sanctions have weighed on the NDB from the outset.  On the fund-raising side, the sanctions have raised challenges for the Bank in issuing bonds in international capital markets. On the lending side, the sanctions have made it more difficult for the NDB to invest in projects in Russia, as the sanctions have put restrictions on foreign currency use, i.e., US dollars, for financing projects in Russia.

There is no ready fix for the NDB in dealing with the Western sanctions on Russia, and yet China and the other BRICS members have had to figure out ways to respond to these constraints on the growth of the Bank, on both the fund-raising and lending and investment sides. One way to minimize or alleviate some of the effects of the sanctions on Russia on the growth and development of the NDB is by expanding the membership of the Bank, and thereby expanding the scope of the Bank’s operations and financing activity beyond the five original BRICS nations.

In 2022, with the Russia-Ukraine war and the unprecedented number of western sanctions on Russia, the NDB immediately issued a statement that it has put new transactions in Russia on hold due to the unfolding uncertainties and restrictions. Despite this preemptive move by the NDB, Fitch Ratings still revised the outlook on NDB’s long-term issuer default rating to ‘Negative’ from ‘Stable’ on March 17, 2022. Fitch stated that the negative outlook is primarily driven by the risk that in the context of Russia-Ukraine war, and that the presence and role of Russia as a large shareholder in NDB (19% of capital as of end-2021) warranted a downward revision of the assessment of the Bank’s business profile and operating environment. According to the NDB’s project webpage, 16 projects were approved in Russia for a total value of $4.8 billion, or about 16% of the $29.7 billion approved by NDB as of end-2021, posing downside risks to the bank’s credit risk profile and solvency. Russia has stated that it will make every effort to meet its NDB loan payments due to its commitment as a founder and ally to other members. However, all of the NDB’s members know that accessing foreign exchange may be difficult for Russia moving forward, due to the sanctions.

Even if Russia continues to meet its loan repayment obligations, the NDB will need to increase its loan buffers and will face pressure on its ratings. The major global credit rating agencies would likely penalize a MDB if it has a high concentration of its loan portfolio in Russia. Just as Fitch said, NDB’s main rating weakness is its loan concentration risk, with the bank’s top five exposures accounting for 85% of loans at end-2021. So for the NDB, loan diversification is essential, and member expansion is the necessary step to that end.

It is interesting that Russia had opposed membership expansion in the NDB, but as the sanctions on Russia have grown, Moscow has come to see adding more members to the NDB as an institutionalized channel for Russia to continue to maintain ties with the nations that are NDB members, and to ward off attempts by the US and NATO countries to isolate Russia diplomatically and through their use of the tools of economic warfare such as sanctions, embargos, and investment and financial bans.   

China’s support for membership expansion in the NDB is thus tied to China’s evolving multilateral strategy for minimizing geopolitical conflict within the NDB. There is one other element to the story of how Chinese officials have come to develop this multilateral strategy.  The Asian Infrastructure Investment Bank (AIIB) offers a useful counterpoint to the NDB. The Chinese officials that are responsible for the AIIB and the NDB have noticed that even though the two banks are multilateral and even though both receive backing from the Chinese government, the AIIB does not seem to be weighed down by the geopolitical conflict between its members as can be seen with the NDB. Chinese officials have honed-in on the differences in the governance structure and normative arrangements in the two banks. It has also not been lost on the Chinese officials that not only is China the largest shareholder in the AIIB, and that China has veto power over crucial decisions of the AIIB (and that the AIIB is headquartered in Beijing, and its first president is a former Chinese official); but equally significant that the AIIB has more than 100 members.

Chinese officials have also noted what has emerged as the consensus-based decision-making norm in the NDB among its five member states, which has actually come to mean unanimity – and that this norm seems to have become an obstacle at times to more efficient, majority-based decision-making.  Moreover, that the ‘norm’ has even been used by some members of the NDB to bring bilateral geopolitical conflict into the Bank. Ironically, in these scenarios, the NDB’s ‘equal’ decision-making structure and the norm of consensus-based decision-making can translate into any one of the BRICS governments having a de facto veto over major decisions within the NDB – unless the majority stands up to overrule the outlier.  It has also not been lost on Chinese officials that, in the AIIB, China has not had to stand up to overrule any particular outlier. Chinese officials have concluded that these differences between the NDB and the AIIB matter.

In summary, according to the Articles of Agreement, China could try to pursue changes in the formal governance arrangements of the NDB, such as the equal representational voice of the founding BRICS members, as well as address the informal decision-making norms that have emerged such as consensus-based decisions. China could try to propose measures to reallocate voting shares within the NDB, but Beijing realizes that such moves could harm its bilateral relations with key members in the BRICS grouping, specifically putting strain on its relations with India, and potentially with Russia also.  Such decisions are not made in a geostrategic vacuum for China’s leaders: Beijing’s paramount global strategic consideration is the worsening US-China strategic rivalry.  With this ‘principal contradiction’ in mind, to quote a famous former leader, China’s leadership sees the NDB as a tool to strengthen relations between the BRICS countries, to counter the main source of global tension for China.

Jiejin Zhu is Professor of International Relations at the School of International Relations and Public Affairs at Fudan University. Shanghai. His research interests are international institutions, global governance, international political economy, BRICS, G20 and the G7. He has published 4 books and over 50 articles in academic journals, including Global Policy, International Organisations Research Journal, and Pacific Review. He is currently researching China’s rise and changes in global governance, including the New Development Bank and Asian Infrastructure Investment Bank.

Image credit: Sun Chao