Four Facts about ‘China’s World Bank’

It’s the talk of finance ministries around the world: China’s newly minted regional development lender — the Asian Infrastructure Investment Bank (AIIB).

Some economists see the AIIB as a rival to institutions such as the World Bank and International Monetary Fund which, although run through the auspices of the United Nations, are seen by critics as fully under the sway of the U.S. and other Western powers. And of course, there’s also already an Asia Development Bank (ADB), based in Manila and likewise run by the U.N., though here too some governments see it as largely led by Japan and the U.S.

In fact, many commentators say the AIIB is less about anything wrong with the ADB or the World Bank and more about China’s efforts to increase its voice in global development and financial governance, and even to reshape the financial world order itself.

With Tuesday marking the deadline for nations wishing to join as “founding members” of the new multinational lender, here are the four things you need know about the AIIB:

What’s the AIIB for?

Officially established in Beijing in October 2014, the AIIB’s goals involve boosting regional financial cooperation and funding infrastructure projects in Asia — everything from roads and airports to telecom towers and low-income housing.

But on a deeper level, economists note that the establishment of the AIIB follows longstanding criticism by China of existing organizations such as the World Bank and ADB, which it sees as offering only limited roles for emerging economies.

And while the AIIB has “Asia” in its name, the ambitions are worldwide, and founding members now include nations from Europe and Africa.

Who is involved?

Ahead of Tuesday’s founding-member deadline, more than 40 countries had reportedly joined the AIIB, with the notable exceptions of the U.S. and Japan.

Initially, the interest wasn’t overwhelming. At the ceremony last year creating the bank, the 21 nations in attendance included India, Thailand and Singapore, but mostly a lot of smaller, poorer Asian countries such as Laos, Nepal, Uzbekistan and Cambodia.

But starting early this year, several major economies jumped on board, particularly in March, when a series of large European states said they would join the AIIB. At this point, membership includes the U.K., France, Germany, Italy, Switzerland, Brazil, Australia, South Korea and Russia, though the final list has yet to be announced. There’s also been a strong response from the Middle East, with Saudi Arabia, Oman, Qatar and Egypt reportedly among the signatories.

The big holdout is the U.S. In explaining Washington’s decision to stay on the sidelines, State Department spokeswoman Jen Psaki said that although U.S. officials “welcome the idea of an infrastructure bank for Asia … we have concerns about the ambiguous nature of the AIIB proposal as it currently stands” and “strongly urge that [the AIIB] meet international standards of governance and transparency.”

Washington has since dialed back the rhetoric, with Treasury Secretary Jacob Lew quoted in Chinese media as saying Monday during a trip to Beijing that the U.S. was looking forward to cooperating with the AIIB.

And while Japan had originally sided with the U.S. in declining to join, a Financial Times report Monday quoted Japan’s ambassador to Beijing said the Japanese may join as well.

Where is the money coming from?

According to the October memorandum of understanding, the AIIB is targeted to start with authorized registered capital of $100 billion, half of which would be contributed by China.

While China’s outsized contribution would appear to give Beijing de-facto control over the new institution, Chinese Finance Minister Lou Jiwei has said his country is “not necessarily” seeking a 50% stake in the bank — rather, covering half of the initial capital is meant as a show of support, and China’s share in the AIIB would dilute as more nations join.

The AIIB hasn’t said how it would raise funds in the future, but a report by China’s state-run Economy & Nation Weekly late last year suggested interbank borrowing and sovereign-bond issuance by the members would be two possible ways.

How the AIIB fits into China’s big picture

The establishment of the AIIB coincides with China’s “New Silk Road” plan to boost trade and economic relations with the rest of Eurasia, as well as Africa, in part through the development of infrastructure around the region.

Inside China, the government has being spending heavily on infrastructure, and the AIIB will provide a platform for China to export its capital, labor and experience in infrastructure-building to emerging economies around Asia, according to Jin Canrong, deputy head of the international-relations school at Renmin University of China. This, of course, would be helpful to China’s economy.

Jin, whose remarks were quoted in the Southern Metropolis Daily over the weekend, also said the new bank fits well with China’s broader goals of projecting an image of a responsible world power, pushing forward the internationalization of the yuan USDCNY, -0.14% and increasing China’s input in the global financial system.

Source: MarketWatch