AIIB Infrastructure Financing and its Impact on Investment Flows to Developing Countries

Mr. Naoyuki Haraoka's picture

The Asian Infrastructure Investment Bank (AIIB), a newly created Chinese-led regional development bank, is now attracting global attention from governments, businesses, and analysts and seems to be at the center of the debate on global governance; that is, whether it should be US- or China-led in the future. The US and Japan have opted not to join this bank since its governance and objectives remain unclear and, in particular, because it is uncertain how the AIIB will cooperate (or compete) with the existing international financial institutions such as the Asian Development Bank (ADB) and the World Bank.

To illustrate, China’s proposal has not yet clarified either the kinds of infrastructure projects that the AIIB will target or the characteristics of the loans that it will extend. The World Bank and the ADB usually finance projects with low profitability and a high social need and extend loans at a low interest rate and over a long period. In practice, this means they generally provide economic aid rather than private finance. Is the AIIB, in contrast, meant to act as a complement to these institutions by financing business projects with higher returns such as those in the telecommunications or tourism fields? If so, the AIIB could offer favorable financial options for multinational corporation investment projects in Asian developing countries. Or, is China trying to take advantage of the AIIB to serve its own national interests such as turning its currency into another key global currency by tapping its enormous foreign currency reserves to fund AIIB projects? The US and Japan, if they find it necessary to participate in this discussion among the founding members, should do so as actively as possible and should not hesitate to join the AIIB to prevent China from using it to serve its own narrow national interests.