China expands Asian Infrastructure Investment Bank proposal

China expands Asian Infrastructure Investment Bank proposal

As border disputes heat up between China and its neighbors, the Chinese government kept up its push for a financial institution that would benefit the Asian countries at large. But will this whole plan play out as China expected?

Since October 2013, the Chinese government has been toying with the idea of establishing the Asian Infrastructure Investment Bank (AIIB), a multilateral bank that would facilitate interconnectivity among Asian countries. In June 2014, China further proposed increasing the bank’s registered capital from the previously planned $50 billion to $100 billion, the majority of which would come from China.

According to Chinese finance minister Lou Jiwei, AIIB “will bring benefits to all parties involved.” The validity of such statement cannot be proved yet, as the exact structure and function of AIIB is still in the dark. Hopefully, more information will be available for analysis this autumn, when a memo on setting up the bank is signed.

What can be said so far is that AIIB, once incorporated, will be specialized in financing economic infrastructure on commercial terms, rather than concessional lending and poverty reduction. By channeling the massive supply of savings into infrastructure construction, AIIB could ultimately help facilitate interregional trade in Asia.

There are two mainstream conspiracy theories in the marketplace regarding China’s AIIB plan. Many fear that the new bank is China’s way of challenging the US and Japan dominated Asian Development Bank (ADB). China only has 5.47% voting power at ADB, compared with a combined voting power of 26% between Japan and the US. A new bank financed mainly by China will give it more regional influence.

The other theory is that China could use AIIB to legitimize its economic expansion into its neighbors’ territories. Projects involving Chinese firms funded by AIIB would not be directly associated with the Chinese government, exempting it from some local criticisms.

But there remains huge demand for infrastructure funding in the region. The finance minister Lou Jiwei has been widely quoted by the media saying that ADB’s current capacity is far from meeting Asia’s need for infrastructure funding, and AIIB is not entirely in the same business as the poverty-reduction-oriented ADB.

And he has a point. It is estimated that Asia needs to invest $8 trillion in national infrastructure and $290 billion in regional infrastructure between 2010 and 2020 to sustain its growth. Moreover, Indonesia, Vietnam, India, Thailand, Pakistan, and the Philippines, as some samples from Asia, need foreign capital to finance their infrastructure sectors, ideally from countries with enough financial depth, such as China.

infrastructure financing

McKinsey’s research on the demand of financing in infrastructure

Nevertheless, the second theory, which foresees China’s use of AIIB as an excuse to advance the interest of its domestic firms, should be taken seriously. This could also become a deal breaker in future negotiations on AIIB’s incorporation. Participating countries, some of them China’s political rivals, would call that unfair. China has to find the balance between maximizing its own interest and winning approvals from other participating countries.

So far, 22 Asian countries, including several capital-rich Middle Eastern ones, have expressed their interest in China’s proposal. It would be good news for both investors and politicians if the AIIB plan takes off in autumn this year.

Categories: Asia Pacific, Finance

About Author

Roger Yu Du

Roger works for a strategic advisory group that provides services to investors focused on Asia. He holds a master’s in International Political Economy from the London School of Economics and received his BA in International Relations from Fudan University in China, with a focus on East Asian affairs.