The Asian Infrastructure Investment Bank

Prospects for a China-led Institution

Yong Wang and Gregory ChinIn October 2013 China’s new political leadership announced its proposal to create a new Asian Infrastructure Investment Bank (AIIB).

While the international media have come to this story recently, authorities in Beijing have been mulling over China-led regional investment arrangements for Asia for at least five years.  They are aware of the global gap in infrastructure financing, and they recognise that this deficit has only increased since the 2008-09 US-UK financial crisis, especially for the developing world.  Yet such financing is seen by them as key to sustaining the steady growth which the so-called emerging economies and many developing countries have enjoyed over the past decade.  Indeed, Beijing is already intimately involved in efforts to create a BRICS-led development bank to also address infrastructure financing.

A joint study by the Asian Development Bank (ADB, Manila) and Asian Development Bank Institute (ADBI, Tokyo) estimates that, for Asia alone, the infrastructure finance gap is somewhere in the range of US$8 trillion for the next decade.

Some observers add that the focus of the multilateral development banks and the Western bilateral donors on pro-poor growth strategies and social development goals has meant that infrastructure development needs have not been met – and, what is more, will not be met – if current trends continue.  Chinese officials see the ‘value’ of giving resources and attention to pro-poor growth and social development.  However, they also note that more resources need to be given to infrastructure development, including the basic infrastructure needs of the poor and disadvantaged – such as clean water, electricity and sanitation.  China’s own development experience over the last decade tells the Chinese of the enormous value of investing in infrastructure.

Chinese officials are suggesting, rather diplomatically, that the new Chinese-led AIIB will not compete directly with the ADB.  But it’s not a secret that officials in Tokyo, at ADB headquarters in Manila and in Washington D.C. have been tracking the progress of the AIIB with interest and perhaps a measure of trepidation. The reality is that Japanese and American hesitation to reform the governance structure of the ADB has given Beijing added motivation to push ahead with a new regional investment bank.

The prospects are strong for this proposed Bank as Beijing has already committed the financing for the start-up budget of the new bank.  Whereas the launch of the BRICS bank was held up until the breakthrough on 14 July 2014 at the BRICS summit in Fortaleza, on the headquarters (Shanghai) and the first-round of senior appointments for the governance of the BRICS Bank the Chinese drivers of the AIIB project have, by contrast, mitigated the potential for such slowdowns by taking the outright lead on the initiative.  Beijing will proceed with the AIIB’s launch of the AIIB as soon as the potential (initial) recipients of loans and technical assistance from the new bank have signed on as bank members.

China first established a task force with the mission of preparing the launch of the new Asian regional bank in early 2014.  By the end of June it had already held three rounds of consultations with other Asian nations, specifically with the governments of those countries interested in joining as founding members.  Since March 2014, the Ministry of Finance, the lead Chinese ministry on the initiative, has been preparing a ‘Memorandum of Understanding on the Framework for the Asian Infrastructure Investment Bank’ for the partner finance ministers to sign.

According to a recent report by The Financial Times, 22 countries have lined up to sign the MOU, with the list including a number of nations in West Asia.  The report also suggested that the AIIB will start with a registered capital of US$100 billion, comparable immediately with the ADB’s US$165 billion, in which Japan and the United States are both the major financial contributors and the main holders of influence.

China’s finance minister Lou Jiwei states that the Chinese government will contribute the largest portion of the registered capital, based on the rationale that China is the largest holder of foreign exchange reserves both in the grouping and in the world.  China’s finance ministry has remarked that China has already offered ‘up to 50 per cent of the registered capital’ for the bank and suggests that this is a clear signal about China’s political determination to help establish the new bank.  However, attuned to potential criticism of Chinese domination of the new institution, finance officials emphasise that the large contribution by Beijing ‘does not necessarily mean that China will control the majority’ of the decision-making of the bank.

Strengthening further the prospects for the new bank is the fact that China brings significant experience in infrastructure financing, and indeed multilateral development banking in general, to the initiative.  Jin Liqun, former ADB Vice-President (and the former Chair of China Investment Corporation, Beijing’s sovereign wealth fund), has been helping to establish the bank.  He is advising on a range of key strategic and operational issues, including the key matter of how the AIIB can avoid outright confrontation and rivalry with the existing multilateral development banks, especially the ADB and the World Bank.

One way to mitigate this prospect is to include India and Japan in the Chinese diplomatic outreach for the new bank.  Chinese foreign minister Wang Yi is now reportedly in discussions with Delhi about possible inclusion in the membership.  India needs infrastructure finance and was of late a ‘blocker’ in BRICS bank negotiations.  Narendra Modi’s entry into office opens some new possibilities. Extending a hand to Tokyo may also open a channel for navigating the start-up of the new Chinese-led bank, for managing overlap with the ADB and, perhaps even more importantly, with helping to mend bilateral tensions more broadly.