Analyzing the Establishment of and Responses to the Asian Infrastructure Investment Bank

Madhura Balasubramaniam, Integrated Masters in Development Studies, IIT Madras.

The Asian Infrastructure Investment Bank (AIIB) is a multilateral initiative announced by the Chinese President Xi Jinping to enable ‘economic integration in Asia’ and ‘cooperate with existing multilateral development banks’.[1] The startup capital of US$50 billion dollars was increased to US$100 billion. Beijing is the headquarters of the Bank and is headed by Jin Liqun, a former Vice President of the ADB.[2] The formal opening ceremony of the Bank was held on 16 January 2016.

Motivations behind the AIIB

One can identify three broad economic and foreign policy imperatives that have led to the establishment of the AIIB namely the need to mediate the gap in infrastructure investment in the East Asian region, the need to address inadequate representation of non-Western economies in international financial institutions and the need to address China’s vast surplus capital. Each of these concerns also intersects with the core concerns of Chinese foreign policy in terms of playing an increasingly significant role in the international system.

First, there is an estimated need for US$8 trillion per annum worth of investment in the East Asian region in key infrastructure sectors like transport, communication and energy frameworks till 2020 to sustain economic growth.[3] The capital base of the Asian Development Bank (ADB) is around US$160 billion dollars and that of World Bank’s is around US$223 billion dollars.[4] Therefore, the AIIB becomes significant wherein its initial capital of US$100 billion would serve to bridge the gap in investment. As proposed, the AIIB would initially invest in five major areas namely ‘energy, transportation, rural development, urban development and logistics’[5].

Second, China’s decision to establish the AIIB as well the decision of many developing countries to join the bank as founding members reflects a degree of dissatisfaction with the representation for non-Western economies in international institutions like the IMF and World Bank. Despite being the world’s second-largest economy, China holds only a 4% and 5% voting share in the IMF and World Bank respectively while the US holds 18% and 16% along with veto power in the IMF. The establishment of the AIIB can be attributed to the ‘glacial pace of global economic governance reform’[6].

Third, there is an internal imbalance of savings and consumption in the Chinese economy. This has led to a ‘savings glut’ resulting in poor resource allocation and low returns on investment wherein ‘RMB 5 of investment produces RMB 1 of GDP growth.’[7] China also has a large trade surplus estimated at US$137 billion in the second quarter of 2015.[8] Further, overcapacity of construction material is a significant issue with China said to have roughly 300 million tones of surplus steel output capacity as of 2013. Therefore, the AIIB is significant in that it would enable the draining of the domestic surplus as well as the overcapacity in construction material allowing for better allocation of resources and higher returns on investment.  This would also provide a boost to global aggregate demand by financing infrastructure projects that convert a global accumulation of savings to productive investment.

Regional Response to the AIIB

The structure of the AIIB, in that 17 out of 20 seats on the board of the AIIB have been reserved for Asian states (Asian states hold 75% of the shares) and the fact that the bank is based in Beijing serves to establish the bank’s focus on Asia.

Despite having signed the AOA in October 2014, in May 2015, Philippines decided to hold off its decision to join the AIIB asserting that the agreement signed in 2014 was non-binding. This call for caution is attributed to the lack of transparency in bilateral projects with China like the North Rail Project and the National Broadband Network. The Philippines finally submitted a bid on 31 December 2015, reflecting the complexity of the decision to submit a membership bid informed by economic and political considerations.

Vietnam too has signed up to be a founding member of the AIIB. Highlighting the need for infrastructure investment, the governor of the State Bank of Vietnam argued that the AIIB would be a means for mobilizing capital for the purpose and that Vietnam’s membership reflects its willingness to participate and maintain a ‘partnership in economy, trade and investment with China.’[9]

India joined the AIIB as a founding member and is the second-largest shareholder after China. India has massive infrastructure requirements estimated to the tune of US$1 trillion for the next five years. In this context, the AIIB could act as a new avenue for financing in order to fulfill infrastructure needs. Participation in the AIIB is also an extension of the growing trade and economic cooperation between India and China.[10]

Japan’s response to the AIIB and its decision to not become a founding member reflects Tokyo’s concerns about the impact that its decision might have on its relationship with the US. There are also concerns of losses that Japanese companies might incur as a result of ‘failure to participate’ or as late entrants into the AIIB. The Japanese Foreign Minister has argued that if Tokyo’s conditions, including the establishment of a strong governance system, are met, Japan might consider joining the AIIB at some future date.

It is significant to note that Philippines, Vietnam, India and Japan are embroiled in territorial disputes with China. The manner in which these emergent concerns in the region complicate the functioning of the AIIB and whether opportunities to negotiate some of these concerns emerge in the process bears watching.


AIIB and Core Chinese Foreign Policy Concerns

Cross-Strait Relations

Taiwan submitted an application to be a founding member in March 2015 but the AIIB rejected Taiwan’s application in April, saying that it would be welcome to ‘join under an appropriate name.’[11]  Nomenclature is a significant issue in Cross-Strait relations, guided by the One China Principle. Taiwan has earlier made compromises in this regard in order to participate in international organizations like the ADB and WTO. In this context, the Taiwanese Legislative Speaker stated that the bottom line for Taiwan would be Chinese Taipei and that Taiwan would adopt the same in its application as an ordinary member. He stressed on dignity and equality as principles that would guide Taiwan’s participation in the AIIB.

The decision to reject Taiwan’s application is a cause of concern with regard to how the AIIB is perceived within the region. Despite assurances from China that it would not dominate operations of the AIIB, the rejection seems to suggest otherwise. Therefore, in the light of a seemingly unilateral decision on the part of China, concerns regarding whether Chinese political interests would influence and guide the functioning of the bank emerged. Further, clause 3 of article 3 of the AOA regarding the membership of applicants who are not responsible for the conduct of their international relations adds to this concern. A statement released by the Mainland Affairs Council stated that Taiwan would not participate in the AIIB if China insists that Taiwan adhere to this article.

It is significant to note that at the historic summit between Xi Jinping and Ma Ying-jeou that took place in Singapore in November 2015, Xi is said to have ‘welcomed Taiwan to join the AIIB in an appropriate way’.[12] Following the meeting, a Taiwan’s Minister of Finance stated that Xi’s invitation provided a sign that ‘the mainland understands Taiwan’s bottom line’[13] and announced Taiwan’s intention to submit another application (as an ordinary member) in 2016.

US and China

The response of the US to the AIIB has been significant in that it declined to join the AIIB and also lobbied against the Bank. This has been dubbed by some as a strategic blunder in that by refusing to participate in the AIIB, the US has lost an opportunity not only for voting rights in the bank but also for ‘continued economic influence in the region’.[14] The caution issued by a US official against the constant accommodation of China on account of the UK’s decision to join the AIIB has also been critiqued.

The official arguments of the US with regard to the AIIB are based on concerns regarding the challenge that the AIIB would pose to the existing financial framework and strict adherence to environmental and social safeguards. Further, there are concerns that China might use the AIIB in order to gain greater leverage in the region by ‘offering economic carrots in exchange for political concessions’.[15] Given that the US has often criticized Beijing for being a free rider and called upon China to assume greater responsibility in the international system, the decision to not support the AIIB seems contradictory. It is significant to note that during Xi’s US visit in September 2015, a truce was declared in this regard as reflected in the joint statement released by the White House. While the AIIB was not explicitly mentioned in the statement, the introduction stated that ‘international financial architecture has evolved over time to meet the changing scale, scope, and diversity of challenges and to include new institutions as they incorporate its core principles of high standards and good governance’[16] and acknowledged China’s role in financing infrastructure and development. This reflects a nuanced change in the American position. This might serve to mitigate some of the political costs incurred by the US.


The AIIB reflects growing Chinese participation in and shaping of the international financial system that both brings economic gains to the region and also portrays China as a responsible player in the international arena. The regional responses reflect the challenge for each country, where the decision to participate in the AIIB is guided by economic and political considerations, and by bilateral relations with China. Southeast Asian countries are wary about the significant challenge from China, while the UK’s decision to join the AIIB perhaps serves to illustrate both the ‘weakening of the trans-Atlantic alliance’[17]as well as a growing engagement with China that has economic and political benefits. Thus, multiple factors influence and inform the decision of these countries to participate in the AIIB.

Finally, it would be significant to explore the AIIB in the broader context of the ‘one belt, one road’ initiative in order to explore whether the initiative is a reflection of China’s ‘economic statecraft’ or of China as a responsible global player. These issues gain in significance, with AIIB now at the point of operational takeoff.












[10]The countries have already signed a five year long trade pact (The Five Year Trade and Economic Development Plan) that attempts to promote trade relations and trade imbalance between the two countries. Further, the two countries have also been involved in talks regarding the Regional Comprehensive Economic Partnership.







One thought on “Analyzing the Establishment of and Responses to the Asian Infrastructure Investment Bank

  1. Thanks for this blog post regarding the Asian infrastructure investment bank; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

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