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Aman asked: How the operation of Asian Infrastructure Investment Bank (AIIB) by China differs from that of BRICS Bank? Why is China keen to develop such a bank in addition to BRICS Bank?

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  • Jagannath P. Panda replies:Operationally, both the AIIB and the New Development Bank (NDB) of the BRICS differ from each other in their structure and functionality. Both are yet to evolve as credible international banks. Their membership composition, areas of focus, structures, and operational and financing patterns make them different from each other.  

    The AIIB is a multilateral development institution that was formally established with the lead of China with world-wide membership. Headquartered in Beijing, it brings together both developed and developing economies together, while offering an additional platform as an infrastructure financing institution to the already existing global financial institutions such as the Asian Development Bank (ADB), the International Monetary Fund (IMF) and the World Bank. The AIIB, as per its Articles of Agreement (AoA), will “provide or facilitate financing to any member, or any agency, instrumentality or political subdivision thereof, or any entity or enterprise operating in the territory of a member, as well as to international or regional agencies or entities concerned with economic development of the Asia region.” Besides, the AIIB can also finance projects through “making loans, investing in equity capital of an enterprise, and obligating through primary and secondary guarantor.” The AIIB follows a structured mechanism with China possessing the largest voting rights including an effective veto power. The bank allows co-financing of projects with other leading financial institutions such as the ADB, World Bank and the European Bank for Reconstruction and Development (EBRD). The lending pattern within AIIB is in US dollars.

    On the other hand, the NDB of the BRICS is a multilateral financing institution of only the BRICS members, primarily facilitating the economic and social interests of emerging economies and developing countries. The NDB is known as a “21st century multilateral development bank”, created to enhance the role of the BRICS in helping emerging market and developing countries (EMDCs) grow globally. Headquartered in Shanghai, its main purpose is to offer an additional financial platform to the EMDCs to seek developmental funds, loans and financial assistance outside the scope of the existing regional and global financial institutions. NDB’s key areas of operation, as noted in its General Strategy 2017-2021, are clean energy, transport infrastructure, irrigation, sustainable urban development and economic cooperation among the member countries. The NDB functions more on a consultative mechanism among the BRICS members with all the member countries possessing equal rights. Unlike the AIIB, the NDB has started lending loans in Chinese Yuan.

    Beijing exhibits a leadership role through the AIIB in Asia and beyond. Internally, the AIIB supports Beijing’s banking policy to finance overseas investment projects. In fact, through the AIIB, the Chinese companies get an international platform to globalise themselves. AIIB’s outbound investments help Beijing overcome domestic inefficiency. China has surplus capacity in key sectors like solar energy, cement, steel and construction. AIIB helps Beijing export these surplus volumes to generate revenue and further strengthen the overseas market share of the state-owned enterprises (SOEs). Internationally, Beijing’s efforts to establish the AIIB should not necessarily be seen in isolation from its global agenda of establishing China as the center of global economic and political decision-making.

    For more on the subject, please refer to my following publications:

    Jagannath P. Panda, “AIIB Chronicle: China’s Ambition Behind Infrastructure Investment”, IDSA Issue Brief, March 21, 2017.

    Jagannath P. Panda, “BRICS Development Bank: Figuring Out the Durban Bid”, IDSA Comment, March 08, 2013.

    Jagannath P. Panda, “BRICS and the China-India Construct: A New World Order In Making?”, IDSA Monograph Series 24, 2013.

    Posted on November 16, 2018