The AIIB's Membership Represents a Diplomatic Victory for China

May 5, 2015International Organizationsby Deena Zaidi

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The AIIB membership is impressive, and growing.

With the number of founding members reaching 57, Asian Infrastructure Investment Bank (AIIB), is surely a diplomatic success for China. This is not the first bank initiated by the country. The development bank for Shanghai Cooperation Organization (SCO) groups China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan (with Azerbaijan and Armenia in talks to join) has been talk and has been in talks since 2009.

China even pledged $8 billion for the new proposed bank but talks still remain on hold as Russia has similar goals with Eurasian Economic Union (EEU). China would be investing the lion’s share to get the SCO development bank up and running since contribution will be as per GDP of the member countries. In July, the BRICS (Brazil, Russia, India, China and South Africa) agreed to set up ‘New Development Bank (NDB)’ to be based in Shanghai by 2016. China and other emerging economies of BRICS have time and again expressed dissatisfaction with the world’s leading international organizations like International Monetary Fund (IMF) and The World Bank. With formation of AIIB and NDB, China is hoping to rely less on international institutions, which are dominated by developed countries. Currently, US and 15 developed nations hold around 52% of the voting power at IMF. However, China’s official reason for creating the new bank is different - to meet Asia’s massive infrastructure-funding space.

China’s Voting Rights in International Organizations

One of the biggest complaints China had in the past was regarding its voting rights in the international institutions, which remains stalled for years in the US Congress. At present, even though China accounts for 12% of the world GDP, its voting share still remains a small fraction in the Bretton Woods institutions.  2010, World Bank had announced increased voting rights for China, which remains pending.

China currently holds:

* International Bank for Reconstruction and Development (IBRD)

  1. China - 4.85%
  2. US – 16.21%
  3. Japan – 7.51

* International Monetary Fund (IMF)

  1. China - 3.81%
  2. US - 16.75%
  3. Japan – 6.23%

* Asian Development Bank (ADB) (percent of total subscribed capital as of 31st Dec, 2013)

  1. China – 6.5%
  2. US – 15.6%
  3. Japan – 15.7%

 * International Finance Institution (IFC)

  1. China – 2.35%
  2. US – 21.49%
  3. Japan – 6.16%

The emerging economy of China has offered to forego its veto power in AIIB. This is to prove in a way that it does not want to influence the functioning of the bank, as opined by the US. US had previously warned Europe and Japan that the Beijing-led development bank would only be catering to the needs of the Chinese markets. It also feared that Chinese interests, corruption and influences could drive the institution. Forming the Asian Infrastructure Investment Bank is another way to establish more Chinese power across the region. However, following the no-veto power by China, European countries like U.K, France, Germany and Italy decided to support China in their AIIB endeavor.

Though US and Japan are reluctant about AIIB, a look at the member countries joining AIIB can be a bit confusing. The list of prospective founding members of AIIB includes United Kingdom and Australia, two of the strongest allies of US. Australia has said that joining AIIB will not affect its ties with US. Australian Treasurer, Joe Hockey explained, "The United States understands that this is a bank that's going to be operating in our region. It's going to be using contractors in our region. We want Australian contractors involved, we want work for Australians out of this bank." UK, on the other hand, believes that the decision to be a founding member of AIIB is in ‘UK’s national interest’.

Through the creation of AIIB, China has opened its closed doors to many countries. In committing to contribute up to 50% of the AIIB capital, it will be taking the lead in assisting the development of other Asian countries. There will be a lot of rising challenges in the development of the bank but this could be a great opportunity for China to prove itself as a global leader. China already is a big lender in the region and with its latest establishments of the bank and strong ties with emerging markets; it could be a strong leader in the Asia-Pacific Region. The bank is also forming two critical connections - one being the Silk Road Economic Belt which is connecting China to Europe and the other 21st Century Maritime Silk Road linking China to South East Asia, Middle East and Europe. 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, through the development of infrastructure around the region.

Conclusively, AIIB has received massive support from countries that even China didn’t expect would support. Having said that, an immediate comparison to the likes of IMF and World Bank is not entirely fair since it’s too early to tell.  AIIB could be a welcome change for the region in the long run, provided AIIB abides by its core procurement principles that are based on economy, efficiency, fit for purpose, fairness, transparency and integrity in the long run. But if the hidden agenda of China’s new bank is to give competition to the likes of World Bank and IMF, then the whole point of leading the bank for infrastructure development is purposeless. Just as US leads World Bank, Europe leads IMF, China will be leading AIIB which probably won’t mean much to the member countries joining it.

Will China-Led Bank (AIIB) Test The Shift of Economic Powers? is republished with permission from the Financial Keyhole