By Lexin Cai, SPP ’15

With an initial investment of $100 billion, the AIIB will be officially launched by the end of this year. China will contribute $29.78 billion of the bank’s capital base and gain 26.06% of the voting powers.[2] The AIIB is generally seen as a ‘China-led World Bank’ to compete with the traditional global economic system dominated by the United States.[3] Why does China want to create the AIIB and what are the potential impacts that it could have on the dynamics of global economic governance?

The official reason to establish the AIIB is to fund infrastructure development in Asia. There is a significant gap between Asia’s massive infrastructure needs and the available multilateral financing resources. A study conducted by the Asian Development Bank (ADB) in 2010 estimated a gap of $8.22 trillion for infrastructure investment in Asia during 2010-2020 (Table 1).[4] Of all the investment, 48.7% would be for electricity, 35.3% for transportation, 12.6% for tele-communications, and 3.4% for water and sanitation. Looking at different regions, East and Southeast Asia account for 66.6% of the total required investment.

Table 1. National Infrastructure Investment Needs in Asia, 2010–2020 (2008 US$ billion)

Source: Bhattacharyay Biswanath, 2010

This financial gap is larger than any single countries budget and exceeds the current resources held by an existing multilateral development bank. Prior to the AIIB, the World Bank and ADB were the two major MDBs in Asia. The World Bank has a capital base of $223.2 billion[5] and the ADB has $175.4 billion[6]. None of these MDBs are capable to meet Asia’s massive needs for infrastructure investment. Addressing this problem requires new mechanisms to attract investments for Asian infrastructure investment. With a capital base of $100 billion, the AIIB can partly help by appropriating Asia’s large savings, as well as international reserves, into infrastructure investment. Besides, the World Bank and the ADB have prioritized poverty alleviation, but the AIIB will focus on infrastructure investment to promote economic growth.

The AIIB serves important economic objectives for China. First of all, the AIIB is a key component of China’s “One Belt, One Road” strategy.[7] This strategy includes two routes to connect with Central Asia, South-east Asia, South Asia, Europe and Africa. China plans to acquire resources from Central Asia and Africa and encourage Chinese firms to “go out” to trade with or invest in other countries. The AIIB is meant to fund infrastructure construction along “One Belt, One Road.” Furthermore, the AIIB is an effort to internationalize the Chinese currency, yuan. However, which currency will be used for settlement in the AIIB is unknown and the yuan is far from a global currency. China will still seek opportunities to promote a broader use of Chinese currency through AIIB.

There is no doubt that China’s establishment of AIIB has a political motive as well. With increasing economic power, China has been frustrated by some rules and practices in the international organizations dominated by the United States and Western countries. For instance, China has a voting share of 3.81% in the International Monetary Fund (IMF)[8], 5.45% in the ADB[9] and 2.21%-5.45% in the World Bank[10] separately, despite China’s GDP accounts for 12.2% of the world GDP (Table 2)[11]. The United Kingdom and France each hold a 4.29% share in the IMF, however they are around one-third of China, economically speaking. Japan has the largest voting share in the ADB, 12.85%, which is twice that of China. The existing international economic governance system is unwilling to give China a fair voting share in line with its economic power. It’s not surprising that China strategically chose to launch and lead a multilateral organization in Asia.

Table 2. Voting powers in multilateral institutions

Note: International Monetary Fund (IMF), Asian Development Bank (ADB), World Bank, International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), International Development Association (IDA), Multilateral Investment Guarantee Agency (MIGA)

Source: IMF, ADB & World Bank

China’s establishment of the AIIB is an effort to advocate a greater role in the international order. On the one hand, countries involved in the AIIB can benefit from infrastructure development, but on the other hand tensions are clearly on the rise between China and the United States in Asia. The United States considers the AIIB as a threat to the U.S.-led global financial order. America’s key European allies, including United Kingdom, France and Germany, joined the China-led AIIB, which is viewed as a U.S. loss. The China-led AIIB may pose some challenges to U.S.’s influence in Asia, but it is important to keep in mind that the goal of the AIIB is pretty limited and the capital base is relatively small. The AIIB views itself as a complement and supplement to existing multilateral organizations. Cooperation and competition between various multilateral institutions will benefit Asia and the world as a whole.

  [1] “Prospective Founding Members.” Asian Infrastructure Investment Bank (AIIB).  Accessed June 25, 2015. http://www.aiibank.org/.