The Strategist

The AIIB and the coming of age of China

03/17/2015 - 06:19

The coming of being of the Asian Infrastructure Investment Bank (AIIB) is a strategic move by China to outgrow of the US influence in the world economy. Having perceived the emerging realities Britain has decided to join the bank. Its decision to do so is likely to act as a signal for other G7 nations to follow suit.

Last week saw a rare public flare-up in the “Special relationship” that exists between the US & the UK. Although, this is not the first time that both countries have not been on the same page on a given issue, but they had typically been diplomatic about their differences. Rarely has their relation seen such a full blown public riff.  

The UK has announced that it would join a new multilateral financial institution called the Asian Infrastructure Investment Bank (AIIB), which is a Chinese Financial Institution, aimed at projecting its influence on the world stage.

Led by China, the AIIB, has the backing of 20 countries, and was formally launched in October last year. Australia, Japan, South Korea, along with the US and several other leading Western economies were invited to join the bank but had politely declined. The UK is the first, amongst the G7 countries, to join the bank. With a capital of $50 billion, it is one third the size of the Asian Development Bank (ADB) whose capital stands at $165 Billion.

The AIIB, is yet another Chinese effort to shape and project its image onto the world stage. Created in partnership with the banks of the BRIC countries such as Brazil, Russia, India and Africa, it is led by the Shanghai Co-operation Organization. The AIIB is essentially a yet-another recent example of China’s growing attempt to remodel multilateral institutions in the world.

Wary of the growing Chinese influence, the US has been lobbying hard in order to desist its allies in joining the AIIB. The Financial Times, quoted a government source from the Obama Administration, which essentially trashed the UK for its accommodating policies towards the Chinese Government, which they see as “a trend of constant accommodation of China, which is not the best way to engage a rising power.”

For example, British leaders kept their mouths shut during the pro-democracy protests in Hong Kong. David Cameron’s administration could have been a powerful, albeit symbolic, voice supporting democracy. Thus, the US view that the UK is accommodating China.

As for Britain, it is doing so, mostly because it perceives a growing shift in the global balance of power wherein it sees a dip in the US influence and the slow but steady rise of the Asian powerhouse. What is clear is that the UK is taking small but deliberate steps to re-align itself with this growing Chinese influence. And its partnering with the AIIB, is a step in that direction.

Although the US remains the world’s most powerful economy, China’s growing wealth and economic prosperity has enabled it to challenge the US dominance. However, since its economic influence had not yet resulted in the creation and formulation of an institution which could shape and influence the policies of other economies, such as the ones which have been created by the US – World Bank, Asian Development Bank and the International Monetary Fund – the AIIB plugs that gap.

The ADB and the World Bank is controlled and dominated by the US and Japan. Although China is a major capital contributor, its voting power is a miniscule 5.47% whereas the voting powers of the US and Japan are 15.6% & 15.7%, respectively.

In 2010, China had hammered out a deal with the US wherein it along with the developing economies, would have a larger say in the functioning of the IMF and the World Bank. However, with the US dragging its feet in implementing this deal, the creation of the AIIB and the BRICS bank is a foregone conclusion.