China’s AIIB – The Facts To Know

April 8, 2015 Posted by China Briefing Reading Time: 5 minutes

March 31 2015 was the deadline for countries to join the Asia Infrastructure Investment Bank. This cut-off date was met with a rush of last minute applications from countries around the world.

The Asian Infrastructure Investment Bank (AIIB) was first proposed when Xi Jinping and Li Keqiang visited Southeast Asian countries in October 2013. The AIIB will finance infrastructure projects throughout Asia, such as roads, railways and ports.

By October 2014, 22 Asian states had signed a Memorandum of Understanding to establish the AIIB. The bank is to be headquartered in Beijing and is widely seen as China’s answer to the Japanese-led Asian Development Bank and the American-dominated World Bank.

The Chinese government had long been dissatisfied with Japanese and American reluctance to grant it a larger say in existing international financial institutions. For instance, China contributed 12.6 percent to global GDP, with 23 percent by the US and 6.7 percent by Japan. However, Japan is the majority shareholder of the Asian Development Bank with 15.7 percent of shares, followed by the US with 15.6 percent. China only holds 5.5 percent. The same situation occurs with in the World Bank. The institution is led by the US with 16 percent of shares, followed by Japan with 8.9 percent, and China merely holding 5.8 percent. At the same time, the US is unwilling to give China a bigger say in the IMF.

New Development Bank

It should therefore come as no surprise that China is now moving to establish its own international and multilateral institutions. On July 15, 2014 China founded the New Development Bank, another multilateral financial institution with the 5 BRICS countries (Brazil, Russia, India, China and South Africa) as member states. The New Development Bank is to be headquartered in Shanghai and like the AIIB, will focus on infrastructure projects. It will also feature a regional headquarters for African projects, based in South Africa.

One Road, One Belt

As said, the aim of the AIIB is to finance infrastructure projects throughout Asia. It is a practical application of Xi Jinping’s One Road, One Belt vision, in which he intends to recreate the historic Silk Road that connected China to the Mediterranean, the Middle East and Western Europe, passing through Central Asia.

Improved infrastructure will create new and strengthen existing trade routes throughout the region. The projects will stimulate growth in the countries along the proposed New Silk Road, so that combined with better connectivity; these regions will become markets for Chinese goods. In the short term, the projects themselves are an appealing investment alternative for the Chinese government. With the US and EU economies weakening, China feels the need to diversify its investments.

In addition, the enhanced engagement with the region that the AIIB investments will entail will enable China to improve its relations with the countries in the region.

Membership

The chart below shows the countries who have been approved as Founding Members, as well as those who have submitted their application within the deadline. The United States, Canada and Japan have decided not to join. North Korea’s application was turned down.

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Capitalization

Both the AIIB and the New Development Bank will have an initial capital of US$ 50 billion and both are planned to increase to US$ 100 billion. With a combined capital of US$200 billion, the two institutions could quickly develop into serious competitors of both the Asian Development Bank (subscribed capital of US$ 165 billion) and the World Bank (subscribed capital of US$223 billion).

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Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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