[Diplomacy] AIIB: Asian Infrastructure Investment Bank- purpose, structure, India’s interests- pro & anti arguments

1. Background
2. AIIB: Chinese interest
   1. #1: Make truckload of profit
   2. #2: help in Maritime Silk policy
   3. #3: Counter US-Japan dominated IMF+ADB
3. AIIB: Membership
   1. Who has not joined?
   2. AIIB Structure
   3. Shareholding and Voting Power
4. Pro Arguments: India will benefit because
   1. #1: something is better than nothing
   2. #2: we do have voting power
   3. #3: Africa will benefit
   4. #4: Competition = cheaper loans
5. Anti-Arguments: India won’t benefit bcoz:
   1. #1: America says so
   2. #2: bogus countries will benefit
   3. #3: China doesn’t listen to others
6. Mock Questions

Background

• ADB report: till 2020, every year, ASIA needs ~$800 billion for infra-structure investment.
• Asian Development bank (ADB) itself can’t lend more than $10 billion.
• Bretton woods organisations (IMF and World bank) not interested in lending such large fund to Asia alone.
• Therefore, 11th(!) Jinping came up with idea to setup “multilateral development bank” to lend money exclusively to Asia. (2013)

AIIB: Chinese interest

What are the real motives of China behind setting up Asian Infrastructure Investment Bank (AIIB)?

#1: Make truckload of profit

• China has a hugh forex reserve. Wants to make profit out it.
• AIIB’s total authorized Capital: $100 billion. Out of that, China willing to give 50% capital=> bank circulate loan money => bank earns interest=>China gets truckload of dividend for being largest shareholder.

#2: help in Maritime Silk policy

• AIIB will finance rail-road-ports infrastructure along the ancient silk route.
• Thus, it’ll help China’s maritime Silk policy.

#3: Counter US-Japan dominated IMF+ADB

• IMF not reforming its governance structure. The size of Chinese economy, same as USA. Yet Chinese voting power in IMF = 1/3rd of American voting power.
• In ADB, US+Japan =each has ~16% shareholding, while China has ~7%. Again China resents their domination. (*numbers from Business-standard report).
• Therefore, China wants to counter IMF+ADB’s hegemony (domination) via BRICS+AIIB.
• Countering IMF= will also help to popularize use of Chinese Yuan instead of US dollar.

AIIB: Membership

Asian Infrastructure Investment Bank (AIIB)

Asian Infrastructure Investment Bank (AIIB) has total 22 members= China + 21 others who signed MoU. Let’s count:

Who has not joined?

• Bhutan, Tajikistan, Kyrgyzstan – not part of the bank
• Initially Indonesia didnot attend MoU signing ceremony. But later it joined.
• South Korea, Australia did not attend MoU signing ceremony. Reports say, USA played behind the curtains to force them not to join this bank.

AIIB Structure

Notes:

• 2014, Oct: at present only MoU is signed. Bank is yet to begin operations.
• 2015: Article of association will be signed. Then structure-function and voting power will become clear.

Shareholding and Voting Power

Indian newspapers are giving different numbers. Therefore, I’m relying on Xinhua for ‘authentic’ information on this China-led bank:

• Authorized capital is 100 billion USD
• China willing to give 50% of that = 50 billion.
• But China said they don’t want to be ‘single majority shareholder’ and In future, they will gradually dilute Chinese shareholding when new members join.
• Shareholding to be decided on GDP adjusted for Purchasing Power parity (PPP).
• Accordingly, China largest and India second largest shareholder.

Pro Arguments: India will benefit because

#1: something is better than nothing

• 12th Five year plan says we need $1 trillion dollar investment in infrastructure.
• While Modi is relaxing FDI, promoting “Make in India”, striving for ease of doing business; Modi met Chinese, Japanese and American leaders to invest in India and so on.
• But still, $1 trillion is a huge amount, so whatever few billions dollars we get as ‘soft loan’ from AIIB, BRICS  bank or xyz other institution- is good.

#2: we do have voting power

• India will be the 2nd largest subscriber to AIIB.
• Besides we have good relations with other asian countries that are in AIIB but are not “best friends” of China.
• So collectively, we’ll have sufficient voting power in the board, to counter any moves hurting Indian interest.

#3: Africa will benefit

• Since AIIB will loan to Asian countries, it’ll slightly reduce world bank’s pressure to finance Asian projects. Then World bank can divert more funds to Africa.
• African development is also in India’s best interest because:
  • Indian exports will increase
  • Terror networks will weaken
  • Sea-piracy will decrease.

#4: Competition = cheaper loans

• ADB often accused of a “slow-moving bureaucracy”- gives loans too late and with too many strings attached.
• China brags that AIIB will have a clean, simplified and efficient bureaucracy.
• October 2014:  World Bank President Jim Yong Kim began internal restructuring, reducing staff salary and perks. It means things are not hunky dory with world bank (same going with Yahoo).
• The entry of AIIB will further increase the competition, catalyze the reforms in other Multilateral banks- perhaps they’ll reduce interest rates, EMIs and may even begin telemarketing for “Sovereign loans”!

Anti-Arguments: India won’t benefit bcoz:

#1: America says so

• AIIB’s objectives are ambiguous
• AIIB lacks transparency.

#2: bogus countries will benefit

• In past, China loaned to countries without good-governance or respect for human rights or functional democracy or environmental safety: Pakistan, Myanmar and many African autocracies to name a few.
• Using AIIB, China will try to legitimize such funding in the name of infrastructure development.
• Counter argument: in past even ADB loans to Cambodia and Laos have been misused, ethnic minorities were displaced for infra-projects. so, AIIB= villain, and ADB+World bank = saints, such sterotyping is wrong.

#3: China doesn’t listen to others

• 2014, July: South Korea proposed- we should setup AIIB Headquarter in Seoul or Songdo- to reduce the fears of US, Japan and Western powers.
• But Jinping rejected the idea and setup HQ in Beijing. This is one of the reasons why South Korea did not come to MoU signing.
• China may use the same strong-arm tactics in future as well e.g. AIIBS giving loan to project in PoK and India protests.

Mock Questions

CSAT MCQs:

1. twisting the facts to create 2TF, 3TF, even 5TF questions example: AIIB HQ is Seoul; Chairman is Jim Yong Kim, India is 3rd largest shareholder, Australia has joined, Laos is the only ASEAN country not to join and so on. Then you’ll be asked to find out the correct statements.
2. Interchanging facts between AIIB and BRICS bank to create more ‘true/false’ type questions.
3. Match the following: Bank vs HQ, Bank vs Chairman, Bank vs Members

Mains examination

Answer following 200 word each:
GS2: Important international institutions, structure, mandate.

1. Compare and contrast the structure and purpose of BRICS bank and AIIB.   [In 2013 mains, similar question on IMF vs world bank, was asked.]
2. Has India made a right choice by joining China-led AIIB? Justify your stand.  200 words.
3. Does India need AIIB?  (Similar one liner question asked in Mains 2009)

GS3: infrastructure / resource mobilization

1. Discuss the role and the importance of Multilateral Development banks for Infrastructure finance in India.

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