The Growing Influence of China in Asia

August 4, 2015Chinaby Deena Zaidi

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China is in the NDB and AIIB.

The world’s second largest economy, China made headlines when it became a part of two new banks in the Asia-Pacific region. The two new banks are a five member initiated BRICS-bank called ‘New Development Bank’ (NDB) and Beijing-led bank called ‘Asian Infrastructure Investment Bank (AIIB). A look at the purpose of these banks (see table below) can make one wonder if they share a common goal – infrastructure development in Asia-Pacific region. But the structure and number of members in these two banks reflect otherwise.

About The New Development Bank

BRICS account for almost half of the world’s population and one-fifth of global economic output and clearly represent a large section of the developing economies. While the paid-in reserves will be in each country’s currency, the loans will be made in US dollars. For enabling trade in local currencies, the bank will have to enable currency swaps amongst the central banks of the country members. 

It will encourage finance and development across the region by funding infrastructure and sustainable development through loans, guarantees, credits and equity investments. The five-member bank of BRICS is open to any sovereign member of United Nations. But many academicians have shunned the idea of BRICS being successful in the long run. Andrew Karolyi, a professor at Cornell University said that isolation of countries in rich/poor categories could be unhealthy for the countries as well as the investors. His study showed that only a handful of emerging markets ranked higher than some developed countries. (Business Insider 2015)

About Asian Infrastructure Investment Bank (AIIB)

With the number of founding members reaching 57, Asian Infrastructure Investment Bank (AIIB), is surely a diplomatic success for China. China’s stake in the AIIB is US$ 29.78 billion – (approximately 30.34%) making it the biggest shareholder in addition to the veto power. But the emerging economy of China has offered to forego its veto power in day-to-day activities. This is to ascertain other member countries that it does not want to influence the functioning of the bank, as opined by the US. Unlike the New Development Bank initiated by BRICS, AIIB consists of NATO allies of the US, like France, Germany, and the United Kingdom that are also members of G-7. US had previously warned Europe and Japan that the Beijing-led development bank would only be catering to the needs of the Chinese markets. It also feared that Chinese interests, corruption and influences could drive the institution. The belief was that forming AIIB is another way to establish more Chinese power across the region with lower lending standards than international institutions of IMF and the World Bank. The absent countries from the AIIB list are the United States and Japan.

China had been facing underrepresentation in international organizations like the IMF and World Bank. One of its biggest complaints was regarding its voting rights in the international institutions, which remains stalled for years in the US Congress. At present, even though China accounts for 12% of the world GDP, its voting share still remains a small fraction in the Bretton Woods institutions (in IMF: 3.81% and in International Bank for Reconstruction and Development: 4.85%). In 2010, World Bank had announced increased voting rights for China, which remains pending. The bank has welcomed the West to take part in the affairs of Asia but only on Asia’s terms. AIIB has clearly pointed out in its charter that 70 percent of its capital should come from Asia. AIIB is also forming two critical connections – one being the Silk Road Economic Belt which is connecting China to Europe and the other 21st Century Maritime Silk Road linking China to Southeast Asia, Middle East and Europe.

Comparison of NDB and AIIB to other international organizations

Currently, US and 15 developed nations hold around 52% of the voting power at IMF. While many argue that the bank is an alternative to the US dominated World Bank and IMF, China’s official reason for creating the new bank is different – to meet Asia’s massive infrastructure-funding space. Comparison of NDB and AIIB to already existing international institutions might be unrealistic since they are in different phases and the amount of members differs largely. While AIIB and NDB have 57 and 5 members, respectively and are practically in their launching phases, IMF has 188 countries with an already established sovereign structure since 1945. The World Bank Group has five organizations owned by the governments of member nations.

While IMF and World Bank are aimed to support project funding all across the globe, NDB and AIIB focus mainly in the Asian region. Both the banks could contribute significantly to the development of the Asian region in the long run but for that to happen China would need to be very nondiscriminatory and balanced in its intentions and implementation.

 

Asian Infrastructure Investment Bank

New Development Bank

Member Countries

57 member countries including BRICS members

(As of April 15, 2015)

Brazil, Russia, India, China and South Africa (BRICS)

Headquarter

Beijing

Shanghai

Financial Structure

$100 billion

Initial subscribed capital of US$ 50 billion and an initial authorized capital of US$ 100 billion.

Purpose

Development of infrastructure and other productive sectors in Asia

Funding infrastructure projects in BRICS countries.

Shareholding Pattern

Regional members: majority shareholders; Non-regional members: smaller equity shares

Equal shareholding pattern but no shareholding restrictions on BRICS Bank loans.

Purpose

AIIB’s approach will be "lean, clean and green", with a focus on efficiency, sustainability and transparency.

Mobilize resources for infrastructure and sustainable development projects in BRICS

 

References:

Business Today. 2015. Why one Cornell professor wants you to get over the 'BRICs'. 15 May.

CNBC. 2015. Is AIIB the answer to Asia’s infrastructure needs? 25 June.

Financial Keyhole. 2015. Will China-Led Bank (AIIB) test the shift of economic powers? 4 May.

Foreign Affairs. 2015. Out of the Bretton Woods: How the AIIB is Different. 27 July.

Japan Times. 2015. AIIB and global governance. 30 April.

Russia and India Report. 2015. BRICS set to create new financial architecture. 22 June.

Russia Today. 2015. China ratifies the creation of BRICS bank. 2 July.

The Diplomat. 2015. Why US allies are happy to join China’s AIIB? 30 June.

The Economist. 2014. Why China is creating a new "World Bank" for Asia. 11 November.

The Wall Street Journal. 2015. How China Plans to Run AIIB: Leaner, With Veto. 8 June.