The genesis of AIIB and the role of China in promoting the global economy

In an endeavor to promote the global economy, China has come up with the idea of establishment the Asian Infrastructure Investment Bank (AIIB). And the response is overwhelming. As I write, 48 economies have already agreed to join the Bank. Negotiations are underway to expand its membership. In the latest move, Japan has indicated it will join the Bank while injecting a fund of USD 1.5 billion, while the USA has yet not confirmed whether or not it will join the bank.

The Asian Infrastructure Investment Bank (AIIB) was proposed by China. The purpose of the Bank is to provide financial assistance to infrastructure projects in the Southeast, Central and Southern Asian regions. Investment priority will be given to the projects related to the power plants, ports, oil and gas, telecommunication sector, construction of schools, hospitals, airports, roads and railway networks.

The Asian Infrastructure Investment Bank is expected to be officially functional by the end of 2015. The application deadline for the founding memberships has expired on 31 March and the list of the final nominees is likely to be announced on April 15.

Details on the structure, functions, shares and fees of the membership are yet to be clarified. Nevertheless, the AIIB will have a registered capital amount of USD 100 billion. Of this, half of the amount would come from China. Asian and Non-Asian member countries will provide the rest.

The establishment of the AIIB has triggered a new debate among experts. A majority of the analysts think that the creation of the Bank will bring many advantages to the region. According to the Asian Development Bank (ADB) estimates, Asia needs about 8 trillion US dollars in infrastructure investment from 2010 to 2020. Correspondingly, the World Bank report on BRICS countries indicated that the block requires about 1 trillion U.S. dollars each year in infrastructure projects. Currently, the funding capacity of existing institutions, including the IMF, World Bank and the Asian Development Bank (ADB) is inadequate. Hence, the creation of the AIIB makes much economic sense.

Another argument in favor of the AIIB is that the existing financial institutions have failed to provide required assistance when the global economy was in trouble. The 2007 financial crisis is one of the most cited examples. When the USA and other large economies experienced the crisis, the global financial institution resources were far from adequate for addressing the issue.

Many leaders of the world have expressed their opinion that the establishment of the AIIB will complement the existing financial institutions and it will bridge the gap between demand and supply. The IMF remarks “the AIIB is good news since it can help sustain Asian and global economic growth”.

What does the AIIB mean to China? Why does China want to establish a new institution and why is it willing to pay the mammoth amount of USD 50 billion in lieu of registered capital? The answer is simple.