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US urges allies to think twice before joining China-led bank

Tomohiro Ohsumi | Bloomberg | Getty Images

The United States urged countries on Tuesday to think twice about signing up to a new China-led Asian development bank that Washington sees as a rival to the World Bank after Germany, France and Italy followed Britain in saying they would join.

The concerted move by U.S. allies to participate in Beijing's flagship economic outreach project is a diplomatic blow to the United States and its efforts to counter the fast-growing economic and diplomatic influence of China.

Europe's participation reflects the eagerness to partner with China's fast-growing economy, the world's second largest, and comes amid prickly trade negotiations between Brussels and Washington.

European Union and Asian governments are frustrated that the U.S. Congress has held up a reform of voting rights in the International Monetary Fund that would give China and other emerging powers more say in global economic governance.

Washington has questioned whether the new bank, the Asian Infrastructure Investment Bank (AIIB), will have high standards of governance and environmental and social safeguards.

"I hope before the final commitments are made anyone who lends their name to this organization will make sure that the governance is appropriate," U.S. Treasury Secretary Jack Lew told U.S. lawmakers.

Lew warned the Republican-dominated Congress that China and other rising powers were challenging American leadership in global financial institutions, and he urged lawmakers to swiftly ratify stalled reform of the IMF.

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German Finance Minister Wolfgang Schaeuble announced at a joint news conference with visiting Chinese Vice Premier Ma Kai that Germany, Europe's biggest economy and a major trade partner of Beijing, would be a founding member of the AIIB.

In a joint statement, the foreign and finance ministers of Germany, France and Italy said they would work to ensure the new institution "follows the best standards and practices in terms of governance, safeguards, debt and procurement policies."

Luxembourg's Finance Ministry confirmed the country, a big financial center, has also applied to be a founding member of the $50 billion AIIB.

The AIIB was launched in Beijing last year to spur investment in Asia in transportation, energy, telecommunications and other infrastructure. It was seen as a rival to the Western-dominated World Bank and the Asian Development Bank. China has said it will use the best practices of those institutions.

A spokeswoman for the European Commission, the EU's executive arm, endorsed member states' participation in the AIIB as a way of tackling global investment needs and as an opportunity for EU companies.

The bank is seen as a means to spread Chinese "soft power" in the region, possibly at the expense of the United States, which is pursuing its own Asian strategy to strengthen its military and economic presence there.

The World Bank is traditionally run by a U.S. nominee and Washington also has the most influence at the IMF.

The adjustment of shares and voting rights in the IMF was brokered by Britain at a Group of 20 summit in 2010, and European countries ratified it long ago.

Lew told lawmakers that the U.S. delay was undermining its credibility and influence as countries question the United States' commitment to international institutions.

"It's not an accident that emerging economies are looking at other places because they are frustrated that, frankly, the United States has stalled a very mild and reasonable set of reforms in the IMF," Lew said.

"High watermark"

China said earlier this year a total of 26 countries had been included as AIIB founder members, mostly from Asia and the Middle East. It plans to finalize the articles of agreement by the end of the year.

China's state-owned Xinhua news agency said South Korea and Switzerland were also considering joining.

Chinese Foreign Ministry spokesman Hong Lei would not comment on which countries had applied, and repeated that the bank would be "open, inclusive, transparent and responsible."

Scott Morris, a former U.S. Treasury official who led U.S. engagement with the multilateral development banks during the first Obama administration, said Washington was paying the price for delay on IMF reform and for focusing on criticizing the AIIB instead of working harder to improve existing institutions.

"It's a clear sentiment among a pretty diverse group of countries: We would like to mobilize more capital for infrastructure through MDBs (multilaeral development banks)," said Morris, now with the Washington-based Center for Global Development.

"And the U.S. stands in the way of that and now finds itself increasingly isolated as a result."

A government official in India, which also has joined, said the members of the AIIB would meet in Almaty, Kazakhstan, on March 29-31 to discuss the articles of agreement.

China has said March 31 is the deadline for accepting founder-members into the organization.

Japan, Australia and South Korea remain notable regional absentees from the AIIB. Australian Prime Minister Tony Abbott said at the weekend he would make a final decision on membership soon.

South Korea has said it is still in discussions with China and other countries about possible participation.

Japan, China's main regional rival, has the biggest shareholding in the Asian Development Bank along with the United States. By convention, the Manila-based bank is headed by a Japanese.

Japan is unlikely to join the AIIB, but ADB head Takehiko Nakao told the Nikkei Asian Review that the two institutions were in discussions and could work together.

"We've begun sharing our experience and know-how," Nakao was quoted as saying. "Once the AIIB has actually been established, it's conceivable that we would cooperate."