How China’s Asian Infrastructure Investment Bank is going to recast global development finance politics..

Nice summary of what AIIB will do to politics around world development finance.

China’s success in securing 57 founding members for its new regional lending institution, the Asian Infrastructure Investment Bank (AIIB), signals the real limits of U.S. influence in the region in the post-Cold War era. As of the March 31 deadline for initial applications to join the AIIB, among major industrial powers only U.S. ally Japan, so far, has spurned Beijing’s plan.

Britain, Germany, France, Italy, Australia and South Korea are among the dozens of countries that have signaled their intention to be founding members of the new bank. China’s coup in economic diplomacy comes as negotiations for the U.S.-backed Trans-Pacific Partnership, or TPP, once again appear stalled, with little prospect for a consensus in coming months.

China’s plans call for setting the AIIB’s initial authorized capital at $100 billion, with China providing up to 50% of that amount. Subscribed capital is set at $50 billion. It is still too early to say if China’s new lending institution might supplant the International Monetary Fund (IMF) and World Bank as a major source of financing for infrastructure projects, analysts say. The outcome will depend partly on the ground rules, or “articles of association,” for the AIIB Charter.

What is certain is that the AIIB as envisaged so far dovetails with China’s own geopolitical and commercial interests in expanding its economic reach and trade networks in Southeast Asia, South Asia and Central Asia.

US was completely taken by the response and messed up its politics:

The consensus in the field of international finance and Asian diplomacy is that the U.S. strategy toward AIIB so far has failed. “I think China has played this quite ably and the U.S. played it about as badly as it possibly could,” says one former senior official of a multinational development bank, who declined to be named. Franklin Allen, a Wharton professor of finance agrees. “America just looks so silly because the U.S. asked other countries not to go in, but now all those countries except Japan are going in. It has been a very successful Chinese move,” Allen says. Allen is also a professor at Imperial College in London and head of its Brevan Howard Centre.

“America just looks so silly because the U.S. asked other countries not to go in but now all those countries except Japan are going in.”–Franklin Allen

China has been seeking for years to gain a bigger role in existing institutions such as the International Monetary Fund, the World Bank and the Asian Development Bank (ADB). China has only a 4.2% stake in the World Bank while the U.S. has a 15.8% stake and Japan has a 6.8% stake. The U.S. and Japan have 15.6% and 15.7% stakes, respectively, in the ADB, while China’s is just 6.5%.

Customarily, a Japanese official chairs the ADB — Japan’s central bank governor, Haruhiko Kuroda, was president of the ADB before returning to Tokyo, when he was succeeded by a finance ministry official, Takehiko Nakao. “It is kind of strange that China is so underrepresented at the IMF and World Bank,” Allen says. “It is not surprising that China is doing this.”

Since the U.S. has so far failed to win approval by Congress for IMF reforms, it was in no position to oppose the AIIB, says the former senior official of a multinational development bank. “U.S. government officials could have just asked the question, ‘What is China’s vision for the new bank and how would it be different from the ADB and World Bank?’ and then sat back and seen how things developed. But they attacked it instead, lobbied others not to join and, having failed to stop the Brits from joining, committed the original sin of whining to the world about their failure. It’s embarrassing.”

Apart from this global politics, what is interesting is renewal of global financial institutions. On one hand, experts are arguing that WB/IMF are no more needed as banks/markets provide much of finance. But on the other hand, we are seeing a resurgence of GFIs like Brics Bank and now AIIB. Also this Asian DFI is being promoted by all kinds of non-Asian countries clearly signals the shift in global politics led by China.

What is also interesting is to see the role BRICS bank will play when we have AIIB which is clearly getting a bigger push by China. China is also the largest shareholder in BRICS bank as well.

Fascinating display of history repeating itself. US/Europe used DFIs like WB/IMF to overpower others. Now China is using similar DFIs to show its growth in global political leadership..

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