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Significance of Establishing the AIIB

Feb 19 , 2016
  • Zhang Maorong

    Researcher, China Institutes of Contemporary International Relations

The Asian Infrastructure Investment Bank (AIIB) officially opened for business on Jan 16. The AIIB is a regional and multilateral financial institution that was initiated by China. The successful opening for business of the AIIB means that Asian infrastructure development has a new financing channel and also marks that China shoulders the responsibility of a big power and plays its leading role as it should.

The AIIB finances Asian infrastructure construction, which helps the economic development of the relatively backward Asian countries. At present, many Asian countries are either at the initial or acceleration stage of industrialization and urbanization. They have a great demand for the infrastructure of transportation, energy, communication,etc, but suffer a severe shortage of supply and are faced with the shortage of construction funds and the lack of technology and experience. Asian Development Bank estimates that the Asian region has a financing gap as high as $800 billion in infrastructure construction every year from 2010 to 2020. In view of this, the primacy of the AIIB is supporting infrastructure construction in the Asian region and that construction obviously has the effect of promoting the Asian economy.

A Chinese saying goes that you should build the road first before getting rich. The establishment and the smooth operation of the AIIB will be complementary to existing multilateral development banks, relieve the financing bottleneck faced by the Asian economies, speed up the Asian infrastructure construction and drive the economic development of the countries involved, thus boosting Asian and even the global economic growth.

The AIIB will benefit the European developed countries like Britain, France, Germany and Italy by broadening the investment channel and expanding foreign trade. Although the weak European economy will be hard to stimulate within a short time, Europe does not lack funds. Now, as a mature economy, Europe lacks a new economic growth point and has a low return on investment. Europe is eagerly looking for an investment opportunity of high return on its capital around the globe. Under the situation of the weak recovery of the world economy, as the most dynamic and high-potential region in the world, Asia is an important engine of world economic growth and has a large demand for infrastructure investment in particular. However, the existing international financial institutions such as IMF, the World Bank and the Asian Development Bank are neither willing nor able to heavily invest in Asian infrastructure construction. Besides, their conditions for investment keeps the developing countries away. Therefore, by joining the AIIB——an emerging multilateral development institution, European developed countries will clearly gain profits from their investment in the dynamic Asian region and build a closer economic and trade relations with Asia, exploring new markets for European products and service.

The AIIB is significant to China. First, it helps expand foreign trade and investment. The establishment of the AIIB will start a large number of Asian infrastructure construction programs. Chinese enterprises have a leading position in the infrastructure construction and will gain significant opportunities for development. Also, the AIIB’s investment in Asian countries will promote infrastructure construction and interconnection and intercommunication. That will help create a big Asian market, further release Asian economic development potential and stimulate the economic development of the countries within the region. In return, the overseas demand for Chinese commodities will increase and China’s economic and trade relations with other Asian countries will improve. The AIIB’s investment will push Chinese manufacturing standards to go global, bring overseas orders for Chinese manufacturing and digest high-quality excessive capacity. In addition, since the AIIB works as an international institution, when it invests in its member countries, Chinese enterprises can get better protection for its local investment, thus reducing the investment risk.

Second, the AIIB will spur the RMB internationalization. Now, the degree of RMB internationalization is far from enough and the AIIB can provide the RMB with a helpful international platform. As the AIIB opens the markets of the relevant countries through financing, enterprises from all countries including China will follow up. In this process, the relevant countries will accept the RMB in order to facilitate Chinese investment as Chinese enterprises can invest directly in RMB。Furthermore, although the AIIB mainly makes settlements in US dollars at its initial stage, it may gradually turn to the RMB and the US dollar at the same time in the future. However, it should be noted that a further RMB internationalization mostly depends on the prospect of Chinese economic reform and the pace of opening the financial market. At present, the RMB internationalization has got some achievements, but the US dollar will still be the leading currency in the world for a long time to come. The RMB internationalization still has a long way to go.

Third, the AIIB can help enhance China’s influence in setting the world economic and financial rules. Presently, the international financial institutions like IMF and the World Bank are all led by the US; other developed countries and the US dominate in setting the international economic and financial rules. Being the second-largest economy, China’s say in the world economy has not improved to match its status. The establishment and operation of the AIIB can be conducive to strengthening China’s influence in the world economic governance; meanwhile, China will further take part in setting the international economic and financial rules, creating a better environment for its economic development. What’s more, as an international financial institution, the AIIB will form a global “three-pillar” financial pattern together with the IMF and the World Bank. The three pillars will have mutual cooperation, mutual complementation and healthy competition. This will be beneficial to stabilizing the world financial order and effectively guard against economic and financial turmoil and risks.

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