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China and the Asian Infrastructure Investment Bank: Toward a Beijing Consensus?

The desire to create a new multilateral institution could indicate that China feels its influence in existing development banks does not reflect the strength of its economy or its contributions to those institutions.

July 24, 2014
Charles Perla, Yue Zhang

At the annual meeting of the Asian Development Bank (ADB) in May, Chinese Finance Minister Jiwei Lou proposed the creation of a new Asian Infrastructure Investment Bank (AIIB) by the end of this year. With an anticipated operating capital of $50 billion — half of which would come from China — the AIIB would be roughly one third the size of the ADB with the potential to grow larger over the next few years. If China succeeds in founding this development bank, it will be better positioned to promote its approach to development and influence other institutions in the region. 

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Although President Xi indicated that the new AIIB would work alongside existing multilateral development banks to jointly promote development in Asia, it is unclear whether countries like Japan, the United States, or India will ultimately join the organization. This has prompted many pundits and analysts to speculate on China’s unspoken motives for founding the development bank.

The desire to create a new multilateral institution could indicate that China feels its influence in existing development banks does not reflect the strength of its economy or its contributions to those institutions. Despite providing a substantial amount of capital to the ADB, for example, China holds only 5.5 percent of ADB’s stock compared with Japan (15.7%) and the United States (15.6%).

Alternatively, Beijing may have gained sufficient confidence in its model for delivering development finance that it is ready to consolidate those practices into a single organization. Proposing a new development bank suggests that China is skeptical that the BRICS Development Bank – long discussed as an alternative for countries frustrated with Western dominated development institutions – will provide Beijing with the policy influence it desires. 

A boom to Asia’s economic prospects?

Limited infrastructure has become a major obstacle to growth in Thailand, India, Cambodia, Indonesia, Myanmar, and many other developing countries in Asia. Analysts estimate that Asian economies will invest $8 trillion in infrastructure development over the next decade, creating robust demand for lending from development institutions.

China is poised to help the region address this challenge by becoming the largest funder of a new infrastructure-focused development bank. If the AIIB adopts China’s development financing model – characterized by an accelerated loan application process with fewer monitoring and reporting conditions to fund shovel-ready projects – it could capture a large portion of the market for infrastructure lending. Moreover, China’s decoupling of development financing from non-economic issues such as performance against governance indicators will make the AIIB the donor of choice for countries like Myanmar or Bhutan.

Competitor or collaborator?

Some stakeholders in established development banks like the ADB and the World Bank are threatened by the prospect of a new multilateral development finance institution that could fuel competition for top talent and clients. This may put pressure on existing development banks to funnel more money toward infrastructure lending or offer loans at more concessional rates.

Others, like ADB president Takehiko Nakao, see the arrival of a new development bank as inevitable, given the growing demand for infrastructure investment relative to supply. The niche focus of AIIB on infrastructure may, in fact, encourage other development banks to finance programs in which they have the most institutional experience.

Chinese Minister of Finance Jiwei Lou has embraced the idea of complementary roles for major development banks, saying, “compared to the aim of reducing poverty of ADB and World Bank, AIIB is focusing on the development of infrastructure and they can complement each other.” World Bank President Jim Yong Kim has also stated that the World Bank welcomes AIIB and that the two institutions will be cooperation partners.

Will the birth of an Asian Infrastructure Investment Bank provide momentum toward a “Beijing Consensus”? It is too soon to tell, but it is certain that the international community is watching with interest to see how this will shape the landscape for development in Asia.

Yue Zhang works with AidData's Tracking Under-Reported Financial Flows team and Charles Perla is a Research Associate with AidData focusing on Chinese development finance in Africa.