China’s Asian Infrastructure Bank needs borrowers...badly

Understanding China's deep need for overseas infrastructure export projects t can significantly strengthen the negotiating power ofAIIB borrowers. That's because China needs employment-generating overseas outward investment as much as AIIB borrowers need infrastructure make overs.

Faced with a slowing domestic economy already choking on wasteful infrastructure investment, China must 'keep pedaling' (ie to maintain momentum in its infrastructure industry) or fall off (suffer politically-destabilizing rising domestic unemployment in key infrastructure industries).

China's leaders knows this. It's economic orthodoxy at this point that China must re-orient her economy away from excess investment increasing wasteful domestic infrastructure and toward domestic consumption. But that transition won't happen overnight. Building overseas infrastructure buys time.

This levels the power relationship.

Using the bicycle analogy, the AIIB is the legs and China's infrastructure state champions like State Grid Corp. of China and China National Overseas Oil Company (CNOOC) are the wheels. Viewed this way, the AIIB is a domestic Chinese macroeconomic management tool, not a benevolent diplomatic gift to the world -- as China likes to portray.

Appreciating this fact can help AIIB borrowers get a better deal.

Consider the Philippines: in 2008, the country awarded a 25-year contract to State Grid to upgrade and operate the ramshackle Philippine electricity grid, which is vital national infrastructure.

The deal was symbiotic. State Grid got a key overseas demonstration project. The Philippines got to engage in overseas infrastructure investment where other global infrastructure companies were hesitant to tread.

By all accounts, the agreement has gone well. More lights now stay on for longer in the Philippines. Meanwhile,State Grid has used the contract as a showcase to win subsequent investments in South Australia, Italy, Brazil and elsewhere.

Happily, legitimate worries about State Grid being used as a stalking horse for progressive political Chinese domination of the Philippines have proved unfounded. Two things show this.

First, the Philippines has continued to be vocal in opposing Chinese encroachment in disputed areas the South China Sea. The Philippines is still pursuing a UN tribunal judgement over China's Nine-Dotted Line - a decision which is expected in coming months.

Separately, the Philippines last year sent home State Grid technicians and replaced them with Philippine workers. This after largely unsubstantiated concerns were aired of a security virus in the Philippine grid of unstated, but clearly inferential, origin.