The idea to create an Asian-centric multilateral financial institution that focuses on the region’s energy, transport and infrastructure development was first mooted by the Chinese government in late 2013.

 

In less than two years, 50 member countries spread across South America, Africa, Europe, Asia and Oceania signed the articles of agreement to establish the Asian Infrastructure Investment Bank (AIIB). Inaugurated on June 29, the founding members of the AIIB include 16 of the 20 largest economies in the world (except United States, Japan, Canada and Mexico) and nine of the top 10 economies in the European Union (except Belgium).

 

The signing ceremony in Beijing witnessed the endorsement of the founding charter that lays out the banks’ governance structure, policy-making process, shareholding framework and initial capital. The AIIB is expected to start operating from its headquarters in the Chinese capital by year end with an initial capital base of US$100 billion. Since the bank is focused on Asia, 75% of the capital stock is reserved for the regional members, located within Asia and Oceania, as a reflection of their ownership. The capital stock is allocated to the members based on the share of their economic size within the regional and non-regional groupings.

 

China, the biggest economy in Asia, is set to be the largest shareholder by contributing US$29.7 billion for 30.34% of the bank’s shares. This is followed by India (8.52 %), Russia (6.66 %), Germany (4.57 %), and South Korea (3.81 %), Australia, France, Indonesia, Brazil, and the United Kingdom. The three largest shareholders will have permanent representation on the board of directors while 26.06% of the voting rights are assigned to China as the sum its Basic Votes, Share Votes and Founding Member Votes.

 

Out of the 50 countries in Asia, 33 of them have joined the AIIB as founding members. The majority of these countries are developing nations and it is a shared aspiration for them to expand their economy to their full potential. In order to do that, they have to first embark on building-up their infrastructure and these development projects often require massive funding. The Asian Development Bank (ADB) has projected that the region needs to invest around US$8 trillion on domestic infrastructure and US$260 billion on pan-Asian infrastructure to sustain its growth from 2010 to 2020. The improvement of infrastructure and regional connectivity would generate an additional US$13 trillion to the Asian economy.

 

However, the most pressing problem in building-up underdeveloped Asia is the lack of funding. The enormous need of infrastructure investment in the region could not be met by any exiting financial institutions as it goes far beyond their capacity. For example, the ADB can only furnish about US$13 billion of fresh funds in new lending every year. As a result, the region’s infrastructure financing is facing continuous and growing deficiency despite 48 years of hard work by the ADB. Also, financial cooperation in Asia has been heavily focused on disaster emergency support and poverty eradication instead of national development.

 

In view of this, the AIIB was founded to close the gap of investment deficit in Asia’s infrastructure. Its startup capitalisation of US$100 billion would instantly make it about two-third of ABD’s US$165 billion capital base. The establishment of the AIIB should not be seen as a challenge to the regional role of the ADB as development funding is not a zero-sum game. ADB’s current capacity is clearly insufficient to support Asia’s dire need of funds for infrastructure investment. The AIIB could work alongside the ADB and the World Bank in coordinating investment flows to the region and facilitating regional cooperation.

 

This is echoed by leaders from the World Bank and the ADB. “The AIIB will join us and other development banks in addressing the huge infrastructure needs that are critical to ending poverty, reducing inequalities, and boosting shared prosperity,” said the president of World Bank Group, Jim Yong Kim.

 

Takehiko Nakao, the president of the ADB stated, “ADB is committed to working closely and co-financing with AIIB to address the long infrastructure needs facing Asia by using our long experience and expertise in the region. ADB will continue sharing necessary information and look into specific projects that could benefit from co-financing.”

 

At the signing ceremony of the AIIB’ charter, China president Xi Jinping himself acknowledged the contribution of both banks in the country’s economic and social development in the past 30 years. "As China grows stronger, we are willing to make our due contribution to world development," Xi adds. China is more confident than ever to take on a bigger responsibility in fostering economic growth in Asia as it is now the largest economy in the region.

 

Asia’s economic outlook certainly looks bright with fresh new infrastructure development funding from the AIIB. While there are plenty of opportunities for foreign investors in the region, local knowledge is key wherever they plan to expand.