Last October, just before the annual meeting of the Asia-Pacific Economic Co-operation (APEC) Forum in Bali, Indonesia, President Xi Jinping announced China’s proposal to establish an Asian Infrastructure Investment Bank (AIIB). Within a few months, China has held three rounds of talks with interested Asian countries, and is helping to circule a memo on setting up the bank. What is leading China and its Asian partners to join hands to work for creating this new Bank?
First, with the current Asian economy under mounting downward pressure, strong infrastructure spending will help to create demand，increase jobs and bring about a smoother and more effective production, circulation, and consumption environment for the overall economic operation. It will also contribute to an enhanced regional infrastructure connectivity，which will then facilitate regional economic cooperation and integration. Therefore, as the driver of sustainable growth and regional economic integration, infrastructure investment will empower economic expansion in Asia.
Second, Asia is now facing a dilemma of “a gap between great demand and severe capital supply,” especially in developing countries. On the one hand, the current infrastructure of Asian economies falls far short of meeting the needs for sustainable economic development. On the other hand, most Asian countries suffer from a capital bottleneck in infrastructure investment, which seriously restricts their infrastructure development and construction. The Asian Development Bank (ADB) estimates that developing countries need to invest US$8 trillion from 2010 to 2020, just to keep pace with expected infrastructure needs.
Third, what Asia lacks is not really capital, but the capability to channel it. There is a comparably massive accumulation of savings, which see China and ASEAN countries respectively controlling $US3.99 trillion and $US700 billion in reserves, not to mention other Asian countries. The supply of savings, much of which is generated in Asia, is more than adequate to begin to fill some of the demand for infrastructure. The capital bottleneck therefore does not refer to a capital shortage, but the lack of a practical financing platform and business mode, which are both essential to effectively turn the huge capital potential inside and outside Asia into investment in infrastructure.
Fourth, the World Bank and the ADB and other well-established institutions have the expertise to lend a lot more for infrastructure, but have prioritized more on poverty reduction and moved in a different direction. Net lending by multilateral development banks on commercial terms has been negative in five of the last ten years, including 2011 and 2012. The World Bank and the ADB are now focusing on concessional lending and knowledge sharing with low-income countries, leaving an important niche to be filled by a new financial institution.
And here comes the AIIB. As a financial catalyst of the region, it plans to start with $50 billion from governments and at least another $50 billion from financial institutions and private capital. Its mandate is to focus on financing in infrastructure development that helps Asia at both the national and regional levels. The AIIB, as a multilateral development institution, will be a highly professional and efficient platform of infrastructure financing. It will tap into the expertise of experienced MDBs to build the capacity to assess and implement projects successfully.
The AIIB is an open and inclusive platform that welcomes not just countries from Asia but others as well, including the United States and European countries in accordance with the principle of first Asian countries and then non-Asian countries.
In view of the huge financing gap in the infrastructure and differentiated mandates and priorities, the relationship between the AIIB and existing MDBs will be complementary and cooperative rather than substitutive and duplicative, As Lou Jiwei, China’s Minister of Finance said, China will promote cooperation between the AIIB and its counterparts so as to jointly advance the sustainable and stable development of Asian economies.
However, reportedly, the United States has applied pressure behind the scenes on South Korea to refrain from joining the AIIB. And Japan has expressed its reluctance to accept an invitation to be one of the founding members of the AIIB on the excuse that Tokyo is “not convinced” of the necessity of launching a new bank.
It seems that the United States and Japan view the AIIB as a threat, claiming that it would not only undermine the ADB but also marginalize American and Japanese influence in the region. The underlying assumption is simply a reflection of zero-sum mentality and obsession to dominate international financial organizations.
In fact, as mentioned previously, the demand for infrastructure finance in Asia is so huge that there is plenty of room for the AIIB and other MDBs to accommodate and cooperate with each other on deals across the region. And more new development banks can only add resources and help to place Asia in a better position to cope with current challenge of infrastructure finance.
In short, by initiating the AIIB, China demonstrates its willingness and capability to provide more public goods to the international community. Rather than a rivalry to challenge existing MDBs such as the World Bank and the ADB, the AIIB will be a partner to work together with its counterparts for economic development and prosperity in Asia.
Wu Zhenglong is a senior research fellow at the China Foundation for International Studies.