By Stuart Larkin, Institute of Southeast Asian Studies

Executive Summary

The Asian Infrastructure Investment Bank (AIIB) is one of two new China-led multilateral development banks launched during 2014, along with the US$ 40 billion Silk Road Fund. They join an existing array of institutions for China to export capital and together they signal a quantum step up in the country’s international financial expansion.

The Silk Road Economic Belt and the 21st Century Maritime Silk Road together envisage a comprehensive trans-Eurasian network of economic corridors and maritime trade routes (with the inferred market penetration), with the countries of Eurasia and the maritime Asia Pacific invited to join a “community of shared destiny”.

The AIIB’s purpose is to lead on implementing this “Belt and Road” vision, and become an instrument of “soft power” by providing “public goods” to address the region’s “funding gap” with its infrastructure loans. AIIB’s multilateral structure is for inclusiveness to help alleviate political opposition and fear of China’s rapid rise.

The AIIB plays a role in China’s domestic economic restructuring by exporting capital. The country needs to drain its domestic economy of surplus savings to improve returns on investment and raise the efficiency of resource allocation at home.

China’s US$ 4 trillion of foreign exchange reserves can be drawn on to finance infrastructure development for a return superior to those of US Treasury bonds. But the AIIB will also play a role in channelling Renminbi savings overseas by selling its own bonds in the home market as well as developing the offshore Renminbi market by securitizing its project loans.

Effective redress of regional (and global) infrastructure finance markets requires considerable managerial, technical and diplomatic skill. If successful, China will become a major player in global finance.

“China’s “Great Leap Outward”: The AIIB in Context” by Stuart Larkin, first appeared in ISEAS Perspective No.27, 2015. Reproduced here with the kind permission of the publisher, Institute of Southeast Asian Studies, Singapore http://bookshop.iseas.edu.sg