The Asian Infrastructure Investment Bank: China’s Pet MDB

By Julia Marvin

In late 2013, President Xi Jinping announced his interest in founding the Asian Infrastructure Investment Bank (AIIB), a Chinese-led development bank that would address the large financing gap resulting from regional infrastructure demands. The Asian Development Bank (ADB) can only produce about $13 billion annually in new loans – just a fraction of the projected $8 trillion needed over the next decade in order to sustain growth. The AIIB, with its $50 billion initial capital endowment, intends to step in and help fill the gap.

Xi and Jim Kim

World Bank Group President Jim Yong Kim meeting with Chinese President Xi Jinping

Chinese Finance Minister Lou Jiwei touted the advantages of a Chinese-led investment bank, saying “Asia is in direct need of investment, especially in infrastructure, but ADB’s current capacity is really insufficient… By comparison, the China Development Bank has been doing commercial infrastructure loans and its business size is far bigger than the ADB and World Bank combined – and that happened in less than 20 years.” The AIIB would initially focus on re-vitalizing the Silk Road as well as general infrastructure needs in the region.

The AIIB is a manifestation of China’s desire to change the status quo of international lending. There is a stark political impetus for this move, especially given the context of the recent BRICS bank announcement.  The ADB and the World Bank are seen as OECD dominated institutions, and China has been one of the leaders in attempting to construct an alternative set of international structures.  China and other Middle Income Countries are eager to pursue the institutional bells and whistles of the developed world, but the type of lending and leadership these institutions will offer remains unclear.

The AIIB would operate primarily in infrastructure lending, eschewing the more traditional poverty reduction approach.  Some speculate the AIIB may prove attractive because it could offer loans without the conditionality attached to World Bank or ADB financing – zero interest, no demands for reform, and no humanitarian agenda. Given some of the allegations regarding the operations of “China Inc.” in Africa this is potentially troubling.

Questions aside, the AIIB is resolutely backed by China’s economic might, and has been building support and adding participants from around the world.  A non-exhaustive list of potential partners includes Nepal, Myanmar, Bangladesh, Vietnam, Cambodia, India, Malaysia, and Thailand.  China has also approached the U.S. and some of its key regional allies, including Japan, Australia, and South Korea.  China has been particularly eager to court South Korea; President Xi Jinping visited Seoul early this month, and China may be willing to place bank headquarters in either Seoul or Songdo to entice South Korean participation.

The ADB and the World Bank have expressed somewhat tepid support for the bank while promising future cooperation.  The U.S. has also been cautious in its statements regarding Chinese-led bank.  State Department spokeswomen Jen Psaki explained that “There’s a need for (an) additional public, private and multilateral development bank to support infrastructure development but we also believe any proposal for a new international development, financial institution should clearly explain how it will complement and add value to existing institutions.” China certainly views the formation of the AIIB in the context of its “peaceful rise”, but as Washington and Beijing jockey for influence in Asia, it could become a hot-button issue in US-Chinese relations.

Image courtesy of World Bank Flickr photostream

Julia Marvin is a researcher with the Project on Prosperity and Development.

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