The China-led Asian Infrastructure Investment Bank (AIIB) officially opened for business on 16 January after a sufficient number of countries formally approved the bank’s Articles so it could formally be declared a legal entity.

Chinese President Xi Jinping said the AIIB launch was an ‘historical moment’ and China’s Finance Minister, Lou Jiwei, said it marked the reform of the global economic governance system.  An article by Teymoor Babili in Al Jazeera claimed the AIIB would reshape the economic and trading status in Asia.

The establishment of the AIIB is significant, but not because it will soon dominate infrastructure financing in Asia; indeed it plans to lend only US$1.5 billion this year. Rather, its importance lies in the fact that it shows China is increasing its imprint on the global economic order.

When China first proposed the AIIB, it was viewed by some as a challenge to US international economic leadership and the western dominated multilateral development banks (MDBs).

Framing the AIIB in terms of rivalry between the US and China makes a compelling narrative. And the AIIB was a diplomatic disaster for the US when it failed to convince some key allies not to join the bank. But China did not propose the AIIB to challenge the role and significance of the US. It was the ham-fisted US response that turned the issue into a question of US influence.

It is also misleading to view the AIIB as largely the result of China’s dissatisfaction with the slow progress of governance reform in the existing MDBs. China is  underrepresented in these banks, it wants a bigger say and is disillusioned with the slow pace of reform. But even if there had been faster progress in reforming the MDBs, China would still have established the AIIB.

It is directly in China’s interests to have a multilateral body focused on Asia’s infrastructure needs. The AIIB has to be seen in the context of President Xi’s signature foreign economic policy; the One Belt, One Road initiative. It is no coincidence that the AIIB was simultaneously announced with One Belt, One Road. Advancing the connectivity between Asia and Europe involves investing in the infrastructure of many countries in Asia,

Viewed in isolation, committing resources to a multilateral bank could be seen to limit China’s freedom to finance infrastructure projects in Asia. But multilateralising financing decisions can insulate China from the political tension and push-back that can come from bilateral financing. Countries may be more accepting to financing from a multilateral institution, even if it led by China, than directly from China. Moreover a high quality multilateral bank will be positive for China’s image in the region.

The irony is that while a large part of the initial reaction to the AIIB was a concern that it would not meet the governance standards of existing MDBs, it is very much in China’s interest to ensure the AIIB truly is a multilateral and not a Chinese dominated institution.

Progress so far in establishing the AIIB has been sound and China deserves credit. The Articles largely mirror those of the other MDBs and the first AIIB President, Jin Liqun, has indicated that the AIIB will be a 'sibling' and not a rival to the other MDBs. It is important that the AIIB meets the standards of the MDBs, particularly in terms of environmental and social safeguards, but this does not mean it has to be a replica of the other banks. AIIB members should use the opportunity provided by the  creation of a new bank to demonstrate how the efficiency of the existing MDBs can be improved.

The AIIB President is  wisely taking a cautious approach to establishing the bank. It will be under intense international scrutiny and all the credit China has gained will be lost if there is any suggestion that the concerns of those who opposed it were being realised and it was a China dominated body. The AIIB President has appropriately indicated that in its establishment phase the bank will draw on the expertise of the existing MDBs and focus on co-financing arrangements. He has also said the need to attain a high credit rating and issue dollar denominated bonds will initially constrain the AIIB’s leverage ratio and project selection. This is appropriate.

But this conservative approach may mean the AIIB does not expand as fast as China may have hoped.  China will have to resist the temptation to seek a dominant influence over a bank it created and is by far the largest shareholder in. 

The success of an MDB depends on the quality, rather than the quantity of its lending. Even with a capital base of $US100 billion, the AIIB can only hope to make a small contribution to meeting Asia’s vast infrastructure needs through direct lending. If the AIIB wants to have a sizeable impact, it should focus on helping countries access private financing. This will involve helping countries enhance their infrastructure project selection and preparation as well as improving their investment environments. The AIIB could make a significant contribution by specialising in accumulating expertise and sharing experience in complex infrastructure investments.

It is important to ensure that the AIIB is a success. If China demonstrates that it can successfully establish and lead a multilateral bank, this may encourage China to take further multilateral initiatives. This would not only be in China’s interest, it would benefit the global economy.

Image courtesy of Flickr user Asian Development Bank