Heard of AIIB? It’s coming anyway

Although majority of the people on this site work in the private sector and don’t live in a system where the public sector has a big say in things, the rapidly ascending China has a very different system that worked arguably well for themselves. Many aspects of the economic system are dictated by government policies, and SOEs flex their muscles in the global market through inundating their cheap products everywhere in the world, making many of the incumbent firms uneasy about this development. Starting from the telecommunication parts to the solar panels, majority of the industries that the Chinese government eagerly wanted to grow as their new growth engine distorted the market and hurt many of the global firms’ profits.

This time, it wants to replicate its success enjoyed in the manufacturing sector on the financial sector.

While it is no new story that the Chinese government through its policy banking arm, China Development Bank, is making inroads into new regions such as Venezuela or Africa and providing long-term cheap financings to these “frontier markets,” it is now trying to take initiatives on the multilateral development front, which was previously performed by the system under the Bretton Woods.

The new multilateral bank the Chinese government is envisaging, which is known as the Asian Infrastructure Investment Bank, is set to be operational by this year. In an article, ft.com/intl/cms/s/0/b1012282-fba4-11e3-aa19-00144feab7de.html#axzz36zMxshHX">it says that the new bank’s initial registered capital is expected to be the tune of USD 100~150 billion, and that China’s stake will probably hover around half of the total. Already, many governments in the Asian region signed an MOU with China, and recently when Xi Jinping, the president of China, visited South Korea, they invited the staunch U.S. ally to participate as a member country. And more recently, it also invited its regional rival Japan to join the bank. It seems that the U.S., who is viewing this with a strong skepticism, does not want the Chinese to challenge the existing world banking system dominated by the advanced countries.

From a political perspective, I think it might be right to view this with extreme caution, but from an economic perspective, I see very little reasons against the case.

Currently, it is estimated that the emerging world needs 1 trillion dollars a year for infrastructure investments, but the current multilateral agency, Asian Development Bank, only lends out 10 billion dollars a year, making a huge gap between the actual needs.

Furthermore, investments in reviving the Silk Road, developing the SE Asian and Siberian region, and potentially a rehabilitated North Korea will come with tremendous economic benefits and growth that the world is starved for at the moment.

The obvious counterarguments that always swirl around when China is involved, such as disrespect of human rights, infringement of intellectual property, and myriad of other ethical issues involved in business practices, would hopefully be governed by other member countries.

Also, if most of the investments are done in areas that private investment firms are unwilling to invest in, it would not cause any frictions with the private sector as well.

So what are WSO’ers thoughts on this issue? Is this just a facade, disguising China’s attempt of having more clout on the region to counter the U.S., or is it something that have promising future benefits?