China & the Asian Infrastructure Investment Bank

Executive Summary

In the first of a two-part series on China’s bid to increase its heft in the international monetary system, we examine the country’s leading role in establishing the Asian Infrastructure Investment Bank (AIIB). Although the founding members of the AIIB are still in the process of developing the organization’s core philosophy and principles, its broadly stated mission is to fund infrastructure investment in the Asian region. While China may indeed have geopolitical motivations for establishing the AIIB, Asia’s growing role in the global economy suggests there may be other factors at play. Not only would the AIIB be used to finance new infrastructure investment in China and the broader Asian region, it would also be used to upgrade and maintain the existing infrastructure that has been built over the past few decades. Moreover, the AIIB could play a significant role in helping China internationalize the yuan, while also perhaps boosting growth at home, which has slowed markedly in recent years.

China’s Geopolitical Motives for Establishing the Bank

Some commentators have noted that China’s political motives are the driving force behind its establishment of the AIIB.2 China’s relatively meagre share of voting power at the World Bank and the Asian Development Bank (ADB) is likely a key source of this desire for increased geopolitical heft (Figure 1). Although China’s share of voting power is more or less in line with its share of subscribed capital in both of these organizations, it seems out of proportion with the country’s share of global population and output. Indeed, China is the second-largest economy in the world behind the United States and the country claims the largest share of global population (Figure 2). Meanwhile, Japan possesses greater voting power in both the World Bank and the ADB, despite lagging behind China in terms of GDP and falling well short of China in terms of population.

Japan’s outsized share of voting power in the ADB comes as no surprise, as it was created by Japan and is led by a Japanese president. China did not become a member of the ADB until 1986, 20 years after it was first established. China’s lower voting share in the World Bank is less easily explained, although Japan has been a member of the World Bank since 1952, while China only joined in 1980. In addition, in 2010, China’s voting share increased to 4.42 percent from 2.77 percent, while Japan’s voting share was pared back to 6.84 percent from 7.62 percent.

Moreover, given the number of countries involved and the planned capitalization of the AIIB, it may seem destined to be a competitor with organizations like the World Bank and the ADB. However, the AIIB states that its main focus is infrastructure development, while the World Bank and the ADB have broader goals, including ending extreme poverty and managing natural resources. Thus, the AIIB looks poised to be more of a complementary organization to these existing institutions rather than a direct competitor.