AIIB, China's push for Asia-Pacific economic development

China's Strategy

As the second largest economy in the world, China has maintained a steady trade and development approach towards its regional neighbors. As a country with low per capita allocations of natural resources, China is dependent on its trade routes. For instance, the "One Belt and One Road" concept (OBOR) will diversify China's ability to receive resources and shipped goods, while it connects China to markets with massive natural resources, accounting for 63 percent of the world's population, a GDP of 2.1 trillion US dollars, but only 29 percent of the world's output. Essentially, this is a golden opportunity for a country like China that needs natural resources to make products and markets to sell them in.

China's New Playbook

China is in the midst of a massive retooling of its economy, as it seeks to avoid the "Middle Income Trap", which has stymied so many other emerging countries. The goals, as indicated by Chinese Premier Li Keqiang at the NPC and CPPCC meetings, are to deleverage the inefficient excess capacity of China's SOEs, make the finance and governance of its companies more market driven, accelerate the quality of its growth with more sustainable innovation and entrepreneurship, and clean up and streamline governance overall.

In short, while China's ultimate future will depend on its ability to compete with economies in Europe, North America and the rest of Asia, today it faces the process of managing the transition. Part of this involves utilizing the current production capability and assets which keep factories open and people working; another part involves strengthening the logistical and development infrastructure of its neighbors, so that they have a stable base to grow their economies and societies. This has been one of the main drivers pushing the series of international and regional infrastructure development initiatives introduced by China's leadership. These include the BRICS Bank, the "One Belt and One Road" initiative, the expansion of the Shanghai Cooperation Agreement into infrastructure, numerous signed and negotiated bilateral and multilateral trade agreements and the Asian Infrastructure Investment Bank (AIIB).

Historical Frustrations

The other part of the story is the frustration China has felt at being left out of the financial decision making process at the traditional international funding institutions, the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB). All three institutions were legacies, in one way or another, of Bretton Woods, which created the foundations of the post-World War II financial system, which put the US and the Dollar in leading positions.

Despite recommendations from within the IMF and World Bank, the US has steadfastly stalled any reforms which would provide a larger role for China. The other part of this equation, which does not fit the Chinese international development model, is the inclusion of political and economic requirements, beyond the simple repayment of funds. As China's policy emphasizes trade and development and non-interventionism, China tends to clash with the political and economic requirements that come with the loans from these institutions. The third issue is that these institutions have become very unwieldy, bureaucratic and politically dominated. The combination of these three factors has pushed China to think outside the box set up by Bretton Woods and look at developing financing mechanisms that fit China's desire for more sustainable regional and international development.