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AIIB – the Beginning of Economic Challenge to the U.S.

Jul 14 , 2015
  • Sajjad Ashraf

    Adjunct Professor, National University of Singapore

The formal launch of China led Asian Infrastructure Investment Bank (AIIB) in Beijing on 29 June 2015 may be perceived as the beginning of the Chinese century. Four out of five permanent members of the Security Council have joined, eighteen out of thirty-four OECD are in, and all of ASEAN has joined. Additionally, five out of six GCC states are in and six out of eight South Asian states have joined. By enlisting major European economies despite U.S. persuasions, China dealt a blow to the U.S. dominant status in the world and increases China’s heft in the international economic arena.

Essentially, China, India, Russia and Germany are the four biggest contributors in the Bank with initial capitalization of US$50 billion, to be raised to $100 billion later. With 26.06 voting rights, China will have enough to exercise its will over Bank’s operations. But a diverse group of countries that have signed up will keep China in check. India reportedly gets the second spot in leadership.

With agreement on IMF reforms stalled in the U.S. Congress since 2010, China is frustrated by the inability of the existing financial order to accommodate its ability and ambitions. 

By 2050, Asia will have eleven countries amongst top twenty-five in the world in GDP (PPP) terms. Asia is thus thirsty for infrastructure funding. The Asian Development Bank (ADB) in a 2010 report estimated that Asia would need US$8 trillion for infrastructure development in the coming decade. The World Bank (WB) and the ADB neither have capacity nor will to meet this demand. China’s $4 trillion in reserves and its political will come in handy for Asia.


After unsuccessful U.S. opposition, publically chiding its allies on joining the AIIB, the U.S. and Japan will find their ability to influence Asia further curtailed. China’s success in getting more countries on board than pundits predicted cracks the U.S. leadership of the international financial system. When Australia – which Secretary of State John Kerry personally pleaded to stay out, became the first country to sign the Articles of Agreement, former U.S. Secretary for Treasury, Larry Summers said: “United States lost its role as the underwriter of the global economic system.” With US$700 million, Australia is the fifth largest contributor to the AIIB.

In one-way, the AIIB is a part fulfillment of China’s dream of national rejuvenation. Washington-led organizations like the WB and IMF are no longer reflective of the true economic balance of power in the world. China now has the capacity and willingness to contribute. And yet, (missing subject) is frustrated by the gridlock in the U.S. political process.

The new bank, seen as the competitor to the WB and the ADB, is the first big Chinese attempt to shoulder more responsibilities amongst the developing world even though there are skeptics who question China’s benign declarations. China assures that the Bank will be managed under best practices and dismisses any apprehension though possessing the largest number of votes. “AIIB is a bank, not a political organization or political alliance,” said Jin Liqun, the man widely tipped to be the first head of the Bank.

Like China, India too believes the Bretton woods arrangement is unfair. No wonder that India was amongst the first countries to embrace the AIIB idea. But skeptics question if India actually wants Washington’s domination replaced by the Beijing’s, especially when both neighbors have border disputes to settle and are jockeying for influence in the Indian Ocean. How China and India cooperate and relate to each other, will determine the effectiveness of the new Bank.

India joining the AIIB provides credibility to the Bank and more than compensates for the damage from the U.S. absence, if any. With fifty-seven countries showing up for the launch, many fence-sitters will join in time. India’s influence in decision-making will be protected by number of shares and the second spot in the administration.

India’s dilapidated infrastructure is the biggest impediment in its economic growth. Modi’s ‘Make in India’ is heavily dependent upon rolling out China style roads, ports, airports, and power. To meet these costs India needs to rely on institutions like AIIB regardless of underlying power politics.

With the fifth largest coal reserves, India’s ambitious plans to set up coal fired electricity generation plants have gone awry since 2013 when the U.S. and the WB severely restricted investments in coal fired power generation. In short, India needs outside help to fill its gap in infrastructure financing and joining the AIIB comes in at an appropriate time.

Working with India on infrastructure financing presents China with an excellent opportunity for strengthening and deepening relations between the two. It demonstrates that India and China are prepared to work together for the betterment of the Asian continent. India may have its reservations over China’s One Belt, One Road (OBOR) strategy but when the Bank will approve projects with India’s acquiescence, India becomes a partner.

While it is assuring that India is teaming up with China on the economic front it is ideas like the U.S.-India Joint Strategic Vision for the Asia-Pacific and the Indian Ocean Region signed during President Obama’s India visit in January 2015 that cast doubts on India’s real priorities in the geo-politics of the region. Similarly, the Chinese pursuit of possible naval presence in the Indian Ocean through port constructions in Myanmar, Sri Lanka and Pakistan makes Indian strategic planners wary of Chinese intentions.

It is a challenge to both China and India, and they owe it to Asia, that they will not force a choice on the continental states. Their interests coincide and there is enough space for the two to pursue them. It may even mean giving space to the other at times. After all, the cost of military preparedness or escalation is bound to be heavier than any concession either one makes.

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