China’s Infrastructure Investment Bank

Asian Infrastructure Investment Bank (AIIB) has been much in news ever since China showed interest in forming a bank that focused on infrastructure projects in the Asian region. Established in 2014, the Asian lending institution has a target of $100 billion in registered capital with China having most of its initial $50bn in capital. With many European nations supporting the new bank, the US is raising concerns over the bank citing issues related to the bank’s standards of governance and environmental and social safeguards.

Asian Infrastructure Investment Bank (AIIB) has been much in news ever since China showed interest in forming a bank that focused on infrastructure projects in the Asian region. Established in 2014, the Asian lending institution has a target of $100 billion in registered capital with China having most of its initial $50bn in capital. With many European nations supporting the new bank, the US is raising concerns over the bank citing issues related to the bank’s standards of governance and environmental and social safeguards.

The Beijing-based bank is to be the rival bank for World Bank, IMF and Asian Development Bank. Analysts have observed that Chinese government seemed dissatisfied with the vast western influences of developed economies, which could have been a reason for its slow growth and relaxed reforms and governance. Even though the US holds less than 20% of voting shares in IMF, it has a considerable influence on many decisions. This has been point of criticism for many other countries too. The new bank will be adopting a policy that will not let any single country dictate decision-making at the new bank.

At present, Asian Infrastructure Investment Bank (AIIB) has more than 30 members with Switzerland and Luxembourg signing an application on 20 March and 19 March 2015, respectively. Candidacy confirmation of countries will be by the end of March 2015. March 2015 saw many European countries like France, Italy, Germany, Switzerland, Luxembourg and UK showing interest in the AIIB. Britain was the first major Western country to apply to become an AIIB member, despite sharp criticisms from the US.

Many international financial institutions that are potential rivals of the bank seem to be supporting the Infrastructure Investment Bank. The International Monetary Fund chief, Christine Lagarde has said that the IMF would be “delighted” to extend co-operation to the China-led Asian Infrastructure Investment Bank (AIIB). In 2014, World Bank Group President Jim Yong Kim had welcomed the bank saying there was a “massive need” for new investment in this area. With such acceptance worldwide, China could play a bigger role in contributing to the global growth and governance. Even though the deadline to join China in this endeavor is March 31, other countries can still join after the deadline as common members, according to Chinese Finance Minister Lou Jiwei. In an interview with the Japanese economic daily Nikkei, ADB chief Takehiko Nakao expressed ADB’s interest to work with the AIIB once it is established.

But, while there seems to be a lot of optimism regarding the Asian Infrastructure Investment Bank, not everyone is happy with the formation of the bank. According to the US, the bank might fail to keep up with the high standards of creditworthiness and transparency. It also fears Chinese interest, corruption and influences will drive the institution. The US is of the opinion that forming the Asian Infrastructure Investment Bank is a way to establish more Chinese power across the region. While the US is clear on its stand on AIIB, Australia has shown inclination towards becoming a member of the infrastructure bank.

Japan seems a bit hesitant in supporting the bank citing similar issues like that of the US. Last week, Japan’s Finance Minister Taro Aso cleared Japan’s stand and said that participation in the Chinese-led was only possible if the bank was more transparent with strong governance practice similar to those like the World Bank. Though Japan seems unsure, it does seem likely that due to the increasing infrastructure opportunities in the developing nations across Asia, it could change its plans. Like US, Japan seems concerned about China lending heavily and recklessly to Asian countries. This should concern nations that chose to be founding members, given that Asia comprises of many poor nations (e.g. Bangladesh, Cambodia, and Pakistan) that may not have the capacity to repay large loan sums. Lack of governance and standards in the bank’s structural system could further ruin the situation in the future. But another school of thought is of the opinion that the creation of AIIB could bring about positive changes across Asia. Lack of adequate infrastructure across Asia has been a huge problem and developing it across the region could contribute to the global growth.

Besides this the emerging market group, BRICS (Brazil, Russia, India, China and South Africa) are also forming a $100-billion development bank to contribute towards global development. Countries from across the three continents already enjoy 42 percent of the world population and 27 percent of the global GDP, which is huge global market.

While the end of March will be a decisive factor of the founding members in the bank, it seems clear that there is a huge shift in consensus supporting the bank. While the US is critical of the underlying intentions of the China-led bank, it could mean a welcome change for countries that need an infrastructure boost. It will be interesting to see how the US will hold its stand despite the leaders of World Bank, IMF and ADB supporting the new China-led bank.