On 29 June 2015, delegates from 57 countries gathered at Beijing’s Great Hall of the People to witness the signing of the articles of agreement for the Asian Infrastructure Investment Bank (AIIB).

The launch of the AIIB is being hailed as a diplomatic and strategic success for China as it marks Beijing’s most ambitious foray into soft diplomacy. This Chinese-led multilateral development bank (MDB) will rival institutions such as the American-led World Bank and the Japanese-led Asian Development Bank (ADB).

The AIIB initiative is designed to improve infrastructure throughout Asia and should be seen as part of the wider “One Belt, One Road” initiative, China’s broader regional infrastructure plan intended to expand China’s rail, road and maritime transport links with the rest of Asia, Middle Eastern and European countries along the historic Silk Road.

China’s President Xi Jinping announced the creation of the bank just before the APEC meeting in Bali in October 2013. The AIIB will focus on the development of infrastructure and other productive sectors in Asia, including energy and power, transportation and telecommunications, rural infrastructure and agriculture development, water supply and sanitation, environmental protection, urban development and logistics.

Out of the 57 nations present at the ceremony, 50 signed the agreement, while the remaining seven - Denmark, Kuwait, Malaysia, Philippines, Holland, South Africa and Thailand – held out waiting for sufficient public support to back this explicitly Chinese project. These countries have until 31 December 2015 to sign the AIIB’s Articles of Association, and until 31 December 2016 to complete their own internal legal procedures to ratify, accept or approve of the Articles. When at least ten countries with subscriptions totaling at least 50% of AIIB’s total capital allocation have completed these procedures, the Articles will enter into force under Article 59.

  1. Reasons for China’s proposal to establish a new development bank

China’s official answer for establishing the AIIB is that Asia has a massive infrastructure funding gap. The ADB estimates that Asia faces an infrastructure funding shortfall of US$8 trillion between 2010 and 2020. Existing institutions cannot hope to fill this gap. ADB has a capital base of just over US$160 billion and the World Bank has US$223 billion. Moreover, while ADB and the World Bank fund a diverse range of products, the AIIB will focus only on infrastructure.

Behind the scenes, the AIIB is seen as a response to the slowdown in China’s domestic economy. China is looking at a mechanism for developing infrastructure and energy projects outside China that will provide Chinese companies with a means to maintain high employment. Employment of Chinese companies in these multilaterally funded projects would boost China’s gross national product.

Most importantly, the AIIB will increase China’s political influence in Asia. China will be the most influential member of the AIIB and it is likely to win friends among the developing countries in the regions it is looking to do business in by my making investment available to finance the pet projects of these countries’ leaders.

  1. Relationship with other multilateral donors

The AIIB will boost China’s influence in Asia at the expense of the US and Japan, who have long projected soft power through the World Bank and ADB respectively.

China’s decision to fund a new multilateral bank rather than give more money to existing ones reflects its exasperation with the slow pace of global economic governance reform. Reforms to give China a little more say at the International Monetary Fund have been delayed for years, and although China is the biggest economy in Asia, the ADB is dominated by Japan; Japan’s voting share is more than twice China’s and the bank’s president has always been Japanese. China is impatient for change and has taken matters into its own hands.

  1. Membership and capital structure

The AIIB will begin with authorized capital of $50bn (£31.8bn), to be raised eventually to $100bn, which will be divided into shares that have a value of $100,000. The total voting power of AIIB shall consist of share votes, basic votes, and in the case of founding members, Founding Member votes. The number of the share votes of each member will be equal to the number of shares of the capital stock of the bank held by that member.

China will hold a 30.34% stake making it the largest shareholder of the bank with a 26.06% voting share, effectively giving it veto power over major decisions. India will have the second-largest share in the bank, followed by Russia, Germany and South Korea based on their capital subscriptions. Australia, the first country to sign the Articles, is set to be the AIIB’s sixth largest stakeholder.

China’s ministry has stated that 75% of shares in the bank will be allocated to Asian members and 25% to non-Asian members. It added that the initial stakes and voting rights of China and other founding members would be gradually diluted as other members joined. After getting board approval, the AIIB can increase its legal share capital by issuing additional shares to non-Asian countries provided that Asian countries always control at least 70% of the votes. Any weakening for support for the AIIB from Asian countries is likely to lead to China acquiring greater influence within the bank because of the 70% rule.

  1. Governance arrangements

Good governance of the AIIB would help to ensure that infrastructure projects maximize their humanitarian impact and are carried out efficiently. It would also prove to the international community that the AIIB is able to work effectively alongside the World Bank and ADB.

According to the AIIB agreement and its report, the bank will set up three layers of management: the Board of Governors, Board of Directors, and executive officers. The Board of Governors is the supreme decision-making body which is vested with the full powers of the bank. The Board of Directors, selected by the Board of Governors, is responsible for the direction of the general operations of the bank. The bank shall also elect a president from Asia whose terms of office shall be five years and may be reelected once. The President will conduct the current business of the Bank under the direction of the Board of Directors. The President will be Chairman of the Board of Directors but will have no vote, except a casting vote in cases there is an equal division of votes on the Board

As stipulated in the agreement, more than three quarters of the members of the Board would have to vote to approve major operational and financial policies, delegate authority to the President under Bank policies, and to delegate the Board’s authority to take decisions on operation matters to a committee of the Board or anyone else.

China has insisted that AIIB will be rigorous in adopting the best practices of institutions like the World Bank and the ADB. This should involve articulating the roles and objectives of the AIIB, preparing clear operating principles and guidelines to achieve these objectives, outlining the roles and responsibilities of management and staff, and having robust oversight and accountability mechanisms.  However, there is always the danger that multilateral institutions will see each other as rivals, given their role in protecting the power of their dominant founding member, and will seek to undermine each other’s policy goals in an effort to win business.

A researcher at Tsinghua University’s Center for China in the World Economy told the Global Times: “China will not dominate the AIIB, since China has criticized the US dominance of the World Bank. China will not do a similar thing; the AIIB will give more weight to the opinions and benefits of developing countries.”

  1. Transparency of the AIIB

While AIIB Chief Jin Liqun has promised that the bank will be “lean, clean and green”, many multilateral institutions and developed countries are concerned with the AIIB’s lack of transparency and standards. Given that the bank will be placed under such a close microscope and there are European founding members such as Germany helping to oversee its governance, there is good reason to believe that the AIIB’s governance will be in line with western standards.

In addition, representatives agreed that the oversight mechanism to be established by the Board of Directors under Article 26(iv) would be designed in line with the principles of transparency, openness, independence and accountability, and would address such areas as audit, evaluation, fraud and corruption, project complaints and staff grievances, and reflects the Bank’s character as a multilateral financial institution focused on infrastructure development.

  1. Critics’ reaction

The United States and Japan, who have resisted joining the AIIB, have voiced concerns that the China-led bank may fail to live up to the environmental, labour and procurement standards that are essential to the mission of development lenders.

Some of China’s infrastructure projects remain controversial, including construction of the Three Gorges Dam, which has come under fire for its displacement of local residents, extremely negative impact on the environment and client, and adverse impact on water availability in surrounding area. Infrastructure companies have also been accused of corruption, funneling money away from construction of these projects. In recent years, local governments have been increasingly wasteful in building up so-called “ghost towns”, entire urban areas devoid of residents.

In 2010, according to an ADB compliance report, China effectively blocked an investigation into whether residents in the eastern Chinese city of Fuzhou were properly treated in an environmental project funded by the ADB. The project went ahead without ADB funding or the concerns being addressed.

There are also questions around how China will act when projects involve territorial disputes or touch on issues it considers politically sensitive. In 2009, China attempted to block an ADB flood project in India’s northern Arunachal Pradesh state, part of which China claims. When it failed to block the overall strategy, China criticized the ADB’s decision to go ahead in the face of the territorial dispute.

The decision by the United States and Japan not to join the AIIB could have negative geopolitical ramifications for both countries. It could mean that American and Japanese firms are locked out of bidding for AIIB-funded development projects.