Korea bails out of Beijing’s infrastructure bank

China will set up the Asian Infrastructure Investment Bank (AIIB) next year, despite disapproval from Washington, and the 21 founding countries are poised to sign an agreement supporting the new financial institution this week.

But Korea, which initially said it supported the development bank, has bailed out of the plan, presumably under pressure from the Barack Obama administration. India, which has been vying for a spot among founding members, is taking its place.

This is the first case of Korea blatantly taking the U.S. side in an ongoing diplomatic dispute between Washington and Beijing. China aggressively courted Seoul to join the bank.

A source from the Chinese government told the JoongAng Ilbo yesterday, “At the general meeting for the launch of the AIIB on Oct. 24 in Beijing, the 21 founding member countries will officially sign a memorandum of understanding to establish the bank.”

The official added, “We requested Korea to join numerous times but have not heard a response, which is regrettable. However, there is still a lot of time left until the bank is officially launched at the end of next year, so we anticipate that [Korea] will definitely join.”

The AIIB is envisioned as a new financial institution to rival the World Bank and the Asian Development Bank, which are dominated by Western countries and Japan, with the aim to create a new financial order centered on China. It was announced by President Xi Jinping in October 2013.

Beijing plans to provide at least 50 percent of the capital needed for the new financial institution, estimated to be between $50 billion and $100 billion.

Washington has expressed concerns that China will use the bank for political purposes and Korea, a U.S. ally, might face problems if it joins. Analysts say Washington is also trying to contain the rising diplomatic and financial power of China.

One Korean diplomatic source said, “While Korea has been dropped from the list of founding members of the AIIB this time around, it is still in a deep dilemma on what sort of strategic choices it has to make as China challenges the U.S.-led international order.”

Aside from participation in the AIIB, Korea also is in a precarious position on a major security issue: the deployment of the Washington-led Terminal High-Altitude Area Defense on the Korean Peninsula, which Beijing strongly opposes. That issue has still not been resolved.

According to the Chinese government, the 20 other founding countries of the AIIB will include the 10 Association of Southeast Asian Nations - Indonesia, Malaysia, the Philippines, Singapore Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam - and India, Mongolia, Pakistan, Sri Lanka, Nepal, Kazakhstan, Uzbekistan, Kuwait, Oman and Qatar. Australia, another Washington ally, is not included on this list, though it has expressed interest in joining.

In a summit with President Park Geun-hye at the Blue House in July, Chinese President Xi encouraged Korea to participate in the bank amid other economic proposals, such as the establishment of an offshore financial center for the Chinese yuan and a Korea-China FTA.

Park responded that Korea will decide on joining the AIIB after further coordination with China, and since then, Seoul has expressed interest in being chosen as the host country of the AIIB headquarters.

Li Xiangyang, director of China’s state-run think tank the National Institute of International Strategy, said, “There needs to be more discussion amongst Asian nations in regards to AIIB’s governance structure and voting mechanism, and no final decision has been made. If Korea does subscribe, it will be a great boost for cooperation in Asia and economic security.”

On Tuesday, former Chinese State Councilor Tang Jiaxuan met with President Park at the Blue House accompanied by Jin Liqun, chairman of the China International Capital Corporation and a former vice minister of finance.

Jin, who spent five years as vice president of the Asian Development Bank from 2003 to 2008, is reportedly set to become the first head of the AIIB.

Park and Xi are scheduled to hold a summit next month in Beijing on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit.

Another diplomatic source in Beijing said, “China recently conveyed a flexible position to Korea, saying that the issue of the AIIB governance structure can be negotiated.”

The Saenuri Party’s spokeswoman Kwon Eun-hee said yesterday that the AIIB issue will be one of the issues expected to come up at the bilateral summit between Xi and Park.

“China is one of the key influential countries in regards to economic order, security and other important global issues,” she said. “It is also a country that can directly influence our country’s economic development or security.”

BY CHOI HYUNG-KYU, SARAH KIM [sarahkim@joongang.co.kr]