The Geopolitics of the AIIB’s $5 Billion Investment Pledge to Vietnam

The Asian Infrastructure Investment Bank (AIIB) recently announced it was willing to provide $5 billion in concessional financing for a range of transport infrastructure projects in Vietnam. According to AIIB President and Chairman of the Board Jin Liqun, as quoted in the Hanoi Times, these projects include a “North-South high-speed railway, three railways connecting Vietnam to China, Central Asia, and Europe, and urban metro lines in Hanoi and Ho Chi Minh City.”

The AIIB is a multilateral development bank headquartered in Beijing whose primary financial backer is China. The bank was conceived of as a kind of counterweight to other multilateral lenders like the Asian Development Bank, where China has less voting power and influence than geopolitical rivals such as Japan and the United States.

If the $5 billion figure is realized, it would represent a substantial investment in Vietnam’s national infrastructure and a massive scaling up of the AIIB’s current financial ties in the country, which to date have totaled $233 million in relatively modest projects like pandemic preparedness. Vietnam has ambitious plans for upgrading its national transportation infrastructure, and will need external financing to pay for it all. The figure it threw out a few years ago was $65 billion to build a network of high-speed and conventional rail, airports, and highways by 2030.

So what does this pledge actually mean? It’s basically a sign that the AIIB wants to be a key development partner and help Vietnam achieve its infrastructure goals, which at the very least will require billions of dollars. Until a more concrete investment plan materializes, however, the pledge remains mostly about signaling the AIIB’s intentions (and Vietnam’s receptiveness to the idea) but it doesn’t mean all that much in practical terms just yet.

The signal it sends is nevertheless important because it means that the AIIB, and by extension China, is willing and able to finance big infrastructure projects in Vietnam. Not only that, but it is willing to do so at concessional, rather than market, rates. Vietnam’s openness to this idea is noteworthy as the country has been wary of relying on China for strategic infrastructure. For instance, Vietnam has been reluctant to use Chinese firms to build its telecom networks on the basis of national security concerns.

Given some of the areas the AIIB intends to target, this announcement can also be read as a subtler message to China’s geopolitical competitors in the region, especially Japan and the United States. Japan has been an active development partner in Vietnam for many years, financing the construction of the long-delayed Ho Chi Minh City Metro Line 1, as well as several airport expansions. Japan would likely be in the running for constructing any high-speed rail lines in the country.

It’s interesting that AIIB President Jin specifically mentioned urban transit in Ho Chi Minh City and the North-South high-speed rail line as projects to be funded under this $5 billion investment commitment, because these are areas where we might expect Japan to also be involved. China Railway Engineering Corporation already built the first leg the Hanoi Metro, so expanding into Ho Chi Minh City’s urban transit system as well as key national rail projects would represent a considerably expanded footprint in Vietnam’s physical transport networks, potentially at the expense of Japanese investment.

The other thing to note is that the announcement pointedly states the entire $5 billion will be lent at concessional rates, meaning below the market rate. This stands in contrast to other big foreign-led infrastructure initiatives such as the Just Energy Transition Partnership (JETP) being organized by the United States, Japan, and their European allies. Vietnam’s JETP is a $15 billion fund earmarked for investment in clean energy and the plan is for the money to be split evenly between concessional and market rate lending.

A big sticking point with Vietnam’s JETP, as well as a similar fund in Indonesia, is about the terms of the financing and that the programs don’t actually contain enough grants and concessional loans. Vietnam does not want to be loaded up with market rate debt in the process of building infrastructure, so the AIIB signaling that the entire $5 billion will be at concessional rates has some added significance when read in this context.

Does that mean this pledge should be interpreted exclusively through the lens of geopolitics and Great Power competition? No. There’s more going on than that. But it does underscore the extent to which rapidly growing economies in the region, like Vietnam and Indonesia, have choices when it comes to who they partner with and how they finance and build infrastructure. This is something any country looking to expand its strategic footprint in the region should probably keep in mind.