C3S Paper No. 0105/ 2015
On April 25, 2015, Malaysia was provided a new funding for their infrastructure development from Asian Infrastructure Investment Bank (AIIB) which helps to promote the relationship between China and ASEAN countries for the economic growth in the region[i]. This development demands an insight of China’s relations with the World Bank and AIIB. What is the role of People’s Republic of China in World Bank and AIIB? What is the position of China in the World Bank? How did China initiate the AIIB? Why did China initiate AIIB? What are China’s needs from World Bank? What is the contribution of China towards the World Bank and AIIB? What are the challenges faced by China in the World Bank and AIIB?
Role of China in World Bank and AIIB
China is the “majority owner” of the AIIB and has de facto control. The Asian Infrastructure Investment Bank (AIIB) is an international financial institution proposed by the government of China. The AIIB established in October, 2014. The purpose of the multilateral development bank is to provide new finance channel for developing countries and support infrastructure and economic development in Asia.
AIIB is to spur much needed infrastructure development in Asia. Asia needs USD 8 trillion of infrastructure investment over the next two decades. To receive fund from AIIB, fewer political requirements are needed. Even though AIIB is a pro-Asian organization, China, as a majority owner of the bank, is focusing on all the developing countries in Latin America and Africa[ii].
Since China joined the World Bank in 1947, it has almost reached its Millennium Declaration Goal (MDG). China began its partnership with the bank in 1980’s. China was a recipient of support from the International Development Association (IDA), the bank’s fund for the poorest countries; China graduated from the IDA in 1999 and became a contributor in 2007. Even though it became a contributor, China still had some needs from World Bank and AIIB[iii]. Still AIIB is remains to be seem how AIIB will be different in its functioning from World Bank.
Background for the initiation of AIIB
In October 2013, when the Chinese president Xi Jimping and premier Li keqiang visited Southeast Asian countries and announced the AIIB initiative. The bank was imagined to “promote inter connectivity and economic integration in the region and cooperate with existing multilateral development banks. Bilateral, multilateral discussions and consultations embarked on core principles and key elements for the established of the AIIB was taking place. The three main negotiation meetings took place between the prospective founding members (PFM). On November 27-28, 2014, PFM was negotiating on the establishment of AIIB. The second meeting took place in Mumbai, India on 15-16 January, 2015 that launched the discussions of the proposed Articles of Agreement. The third chief negotiation meeting was held at Almaty in Kazakhstan on 30-31 March, 2015. The Articles of Agreement (AOA) would be finalized and open for signature by PFMs from June 2015.
Reasons for Chinese initiation of AIIB
China was the first country to propose an alternative financial solution for the investment and development projects in Asia. As a major world power, China was able to exert its influence over the fellow Asian and many non-Asian countries to be a part of the AIIB. Despite China being second largest global economy and the third largest share holder in the World Bank, its voting power is not as powerful as USA or Japan. China’s member percentage of IBRD votes is 4.85 percent and IDA votes 2.11 percent[iv].
When China’s percent of votes is compared to the US and Japan, it holds a very less voting rights. In the World Bank, the USA remains as a powerful member, upon influencing its policies. In terms of decision-making mechanism, in both the World Bank and IMF the US has a one-veto vote. China has give up its veto power in the new bank[v].
On the other hand, Japan leads the ADB, as its president. Thus both the USA and Japan remain as key powers in the World Bank, IMF and ADB. This inhibits a growing nation like China from achieving the desired progress. AIIB helps China to get principal economic opportunities. Another reason for the initiative is that the AIIB projects will provide employment opportunities for its member nations. The AIIB has planned to focus more on economics and less on politics. This is in open contrast with the current trends of the World Bank. However North Korea’s and Taiwan’s applications for Prospective Founding Member (PFM) were rejected by the Chinese government.
US official said that China may provide fund to the countries with dictatorships and ignore environmental issues and lend the money. The chances are high that the standards will be set high as most of the European countries are member of AIIB.
As on, April 15, 2015, 57 countries have now been approved as prospective founders of the AIIB[vi]. AIIB is regarded by some as a rival for the IMF, the World Bank and the Asian Development Bank (ADB), which are regarded as dominated by developed countries like the United States. It is said that China seeks to balance the dominance of the western led interests.
A map of the countries which have signed up for the list of prospective founding members of AIIB
China’s needs from World Bank
China’s GDP is USD 9.24 trillion as of 2013 and it is projected to be USD 16.15 billion in 2020. As borrower, China has 234 current loans in IBRD which is worth of USD 7.4 billion (March 31, 2015). As China evolves from a middle income to a high income country, the World Bank will help Beijing in its transition.
The World Bank plays a role of undertaking designing economic reforms, improving project management and addressing key blockages to growth. More recently, the Bank Group has emphasized environmental challenges. This new aspect is one key reason China may be pushing for the AIIB. This Country Partnership Strategy (CPS) for fiscal years (FYs) 2013-2016 is aligned with the challenges and priorities outlined in China’s 12th five-year plan. Consistent with China’s priorities, the CPS focuses on three main themes: green growth; inclusive development and mutually beneficial relations with the world.
Bank Group support to China is designed to play a catalytic role through innovation and demonstration. In addition, the Bank’s Group’s engagement with China helps China share its development experiences with the rest of the world.
Contribution of China towards World Bank and AIIB
Over the recent 32 years, China and the World Bank Group have forged a growing partnership. The Bank Group’s most valuable contribution in China remains its role in bringing and applying ideas, innovation, and knowledge. The Country Partnership Strategy (CPS) emphasizes knowledge sharing and cooperation through advice and analytical products and through investments at the provincial level that introduce and demonstrate new approaches.
The portfolio is concentrated in environment, transportation, urban development, rural development, energy, water resources management, and human development. Since FY 2006, paid in contributions to FIF’s by China is USD 91.9 million as of December 31, 2013 and paid in contributions to IBRD/IDA/IFC Trust funds by China is USD 2.8 million as of September 8, 2011.
The World Bank’s main aim is to end extreme poverty and promote shared prosperity that is on a clear note
The International Bank for Reconstruction and Development (IBRD) which lends to governments of middle-income and creditworthy low-income countries.
The International Development Association (IDA) provides interest-free loans — called credits — and grants to governments of the poorest countries.
Together, IBRD and IDA make up the World Bank[vii] where as on the other side China aims to structure the AIIB, as a modern-knowledge-based institution with focus on the development of infrastructure and other productive sectors in Asia, including energy and power, transportation and telecommunication, rural infrastructure and agriculture development, water supply and sanitation, environment, protection, urban development and logistics, etc[viii]. China has contributed USD 50 billion, which is 50 percent of the AIIB funds.
Is AIIB a threat for Bretton Woods?
The advanced countries like the U.S.A, which had veto power, are dominating the Bretton Woods. The developing countries such as China and India has questioned on changing the vote or seat in the Bretton Woods institutions. The Bretton Woods functions on the strategic and foreign policy which are objectives of G-7. It is groundless to pretend their lending operations and conditions are transparent. Pakistan being ally of U.S.A has continued to receive assistance from them.
In G-20, the developing countries had joined together and raised the issues. In 2010, it was agreed that, the shareholding will be adjusted to reflect the global economic realities, especially the shift of economic balance. Even after five years, the U.S.A has not shown any willingness to approve changes in vote or seat pattern in the institutions. This was held up the U.S.A Senate causing acute embarrassment to U.S.A government. There has been no forward movement. China seems to have decided to rely less on the Bretton Woods Institutions and start its own funding institution.
Many analysts have expressed the view that the AIIB will not be a threat to Bretton Woods. The U.S.A fears that whether the establishment of the AIIB will decline in its hegemonic role and in over time, it can reduce its role. The AIIB has also to be seen not in isolation but along with other funding agencies such Silk Road Fund, Maritime Silk Roads fund, etc. Perhaps, China has a strategic vision of bringing together all of Asia under its funding umbrella. It has also similar plans to projects in Central Asia. Apart from the strategic advantage, it helps China to diversify its foreign exchange reserves presently held substantially in U.S.A Treasuries and getting a low return[ix].
Challenges for China in World Bank and in AIIB
The biggest challenge faced by the Chinese regarding AIIB is that, this bank should not become similar to the USA-dominated World Bank. Many countries have a secret concern about the Chinese control over the AIIB. In the decades to come, the Asian countries will become more developed and healthy than most of the European and American countries. It will be critical for a financial institution like the AIIB to steer the growth and development of Asia. At that point of time, if the Chinese influence on AIIB is too widespread, then the other countries will be hesitant for transactions involving huge investments. Thus, the Chinese have to prove that harmonious growth and mutual development of all the countries are China’s key agendas at the AIIB.
Another challenge is that both the USA and Japan hesitate with the doctrine of a financial establishment that is out of their total control. They have fears over the fact that their close allies France, Germany, UK and South Korea are founding members of AIIB. AIIB thus faces lack of undiluted support from US and Japan.
Due to its concerns, USA started pressuring some of its closest allies not to join the AIIB. Yet many countries have chosen to go ahead. This demonstrates the frustration of many countries regarding USA’s domination on the other international financial institutions. AIIB is not the first multilateral institution that China has created, but this is the first time that China has proposed a global system that brings many of the countries together with a different and alternate political system. China has to change USA’s attitude which is a real challenge. This may affect China’s engagement towards the World Bank[x].
China’s status in World Bank and AIIB are distinct. China has different role and challenges to face in each institution. If the USA joins the AIIB, then both the banks can together try solving the problems from different perspectives. USA seems to be a aligning its policies based on Hedley Bull’s statement that, “People have friends but countries have only interests”. China declares that it is not seek to a hegemonic state. It accepts multilateralism in the international world order. This policy may have attracted many nations to join the AIIB. If China tries to use AIIB in tandem with the Silk road fund to continue or proceed along “One Belt and One Road” investment strategy, it could lead to conflicts of interests.
AIIB is a significant gift of China to the entire world, especially Asia. This long-planned initiative mirrors the growing influence of China. This project intends to play a key role on the world’s economic and financial affairs. But beyond political assertiveness, there stand major economic challenges (long term growth and financial integration) for Asia that AIIB could help tackle. At the current juncture, there is no reason to believe that AIIB could not be a successful enterprise. This initiative should be well received as it could eventually bring substantial benefits to the Asiatic region and to the world economy as well.
[i] “interview: Malaysian economist, AIIB to provide new infrastructure funding avenue, promote China-ASEAN connectivity”, Xinhua net, April 25, 2015, http://news.xinhuanet.com/english/2015-04/25/c_134183532.htm
[ii] Glenn Luk, “What do you think about the AIIB ( Asia Infrastructure Investment Bank)?”, Quora, http://www.quora.com/What-do-you-think-about-the-AIIB-Asian-Infrastructure-Investment-Bank
[iii] “China Overview, Result”, World Bank IBRD-IDA, accessed on may 4, 2015 http://www.worldbank.org/en/country/china/overview#3
[iv] “Data”, World Bank IBRD-IDA, accessed on may 5, 2015 http://data.worldbank.org/country/china
[v] Lingling Wei and Bob Davis, “China forgoes veto power at new bank to win key European nation’s support”, The Wall Street Journal, March 23, 2015,
http://www.wsj.com/articles/china-forgoes-veto-power-at-new-bank-to-win-key-european-nations-support-1427131055
[vi] “AIIB attracts nations from east, west”, Global Times, March 31, 2015, http://www.globaltimes.cn/content/914721.shtml
[vii] “History”, World Bank IBRD-IDA, accessed on March 30, 2015 http://www.worldbank.org/en/about/history
[viii] “Asia Infrastructure Investment Bank, About Us”, AIIB, accessed on May 6, 2015 http://www.aiibank.org/html/aboutus/AIIB/
[ix] “Interview: Kandaswami Subramanian” , May 6, 2015
[x] “Why the US and Japan question AIIB”, people’s daily online, April 27, 2015, http://en.people.cn/n/2015/0427/c98649-8884144.html
(S.Akshaya is an intern with Chennai Centre for China Studies. As a statutory requirement of her academic course in Stella Maris college, she is required to carry out research in a think tank on identified issues in China under the guidance of the members of C3S. The views expressed in this article however are of the author. Email id: pookisanny@gmail.com)
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