AIIB is primed to take a global role

Chinese workers at a road construction site in Pakistan. Liu Tian / Xinhua

The Asian Infrastructure Investment Bank has been in business for more than a year now, after a 15 month participatory process. Besides speculation regarding participation in the fund, it also might not be clear to somewhat the bank set out to do and to what extent it will become a viable competitor in the extant global economic and finance order.

Somehow, the establishment of the AIIB is juxtaposed with the China-led Belt and Road Initiative, with similarities in their emphasis on infrastructure investment and their involvement with a large number of countries, particularly in Asia and Europe. In this sense, the AIIB is somehow considered to be a part of China’s endeavor to go global and command increasing international influence.

Before one focuses on the potential geopolitical implications of the AIIB, it is probably worthwhile to focus on its economic and finance mission. Consistent with the message delivered in the G20 Summit in Hangzhou, Zhe jiang province, last autumn, there is increasing consensus that the global economy is gradually gravitating toward a low growth era, in which traditional monetary policy can no longer deliver the much-needed growth that it did during the past couple of decades.

Consequently, global leaders agree that countries should adopt more active fiscal policies to stimulate their respective economies. Given the lack of infrastructure in most developing countries and the lagging infrastructure in some developed economies, how to stimulate the economy through infrastructure investment, a recipe for China’s fast economic growth miracle so far, seems to be a trillion dollar solution for the global economy.

However, given the European debt crisis and the US fiscal cliff, both after the 2008 global financial crisis, funding for infrastructure by sovereign governments becomes ever less attainable. On the other hand, international organizations, such as the World Bank, International Finance Corp and the International Monetary Fund, are facing their own battle to reform their respective governance and investment philosophy, and they do not have the necessary resources to support another big wave of infrastructure investment.

The AIIB was probably conceived under this grand scheme of setting up a new and alternative financing vehicle through which investment in infrastructure projects, especially in Asian and developing countries, could become possible. The wide range of participation from not only Asian countries probably attests to the validity of the idea around the world.

More important, the broad representation by different countries on the bank’s board and senior management team dispels some concerns over whether the AIIB will become yet another investment arm of China’s international expansion. However, it should have become clear by now that the AIIB is totally different from China’s own international investment and financing powerhouses.

The State Administration of Foreign Exchange, which still boasts $3 trillion worth of research assets, as well as the China Investment Corp, the country’s sovereign wealth fund, the China Development Bank and the Export and Import Bank, all play an important role in China’s overseas investment and financing for many of the country’s overseas investment and acquisition projects. These institutions are all exclusively managed by Chinese nationals and under China’s own mandate, sometimes intentionally elusive from Western scrutiny.

With increasingly tight control over capital flow, even these national players are having a difficult time in deploying their capital overseas, which makes the AIIB and other international organizations led by China valuable complements to China’s domestic financial institutions.

The AIIB, on the other hand, has a very clear mandate for using international capital to finance investment in international infrastructure projects. Not only that, but the AIIB is also committed to adopting international best practices in its governance, management and risk management practices.

Furthermore, it has already employed and is in the process of employing even more people from all of the world, which again makes it an organization that is different from any other existing domestic player in China.

Of course, this is not to say that the AIIB does not have the long-term ambition of becoming another World Bank or Asian Development Bank one day, or of playing a greater role in the international economic and finance arena. With China’s sustainable economic growth and increasing wealth, it is only natural and expected that China would have increasing influence in global matters, through economic and political channels, with the help of international organizations.

That said, given the AIIB’s size, current stage of development and China’s own economic transformation, it will take a while before the AIIB can become a very impactful player in the new global economical and finance order.

One should not forget how much time, effort and negotiation it has taken the World Bank and Asian Development Bank to reach their current stages of operation and, even for them, it has become increasingly challenging to find financially viable and economically instrumental projects in the ever changing world economy.

The author is deputy director of the National Institute of Financial Research at Tsinghua University.