China Likely to Wield Veto Over 57-Member Asian Infrastructure Investment Bank

China infrastructure bank veto
China's President Xi Jinping (front C) poses for photos with guests at the Asian Infrastructure Investment Bank launch ceremony at the Great Hall of the People in Beijing, October 24, 2014. Takaki Yajima/Pool/REUTERS

China is likely to retain a power of veto over its powerful new investment bank, a development likely to be viewed with suspicion by the United States.

The Asian Infrastructure Investment Bank (AIIB), which has 57 founding members including key U.S. allies such as the U.K. and Australia, will be based in Beijing and will focus on providing funding for infrastructure projects in developing Asian countries.

Beijing is providing almost $30 billion of the bank's $100 billion capital base, according to a report in the Wall Street Journal. This initial outlay gives China up to 30% of the voting share in decisions regarding structure, membership and capital increases.

This effectively means that China could veto prospective new members of the institution and will retain oversight regarding which projects to fund, according to the report.

However, Beijing has reportedly relinquished its veto power over day-to-day decisions, a decision which reportedly helped win over some founding members.

The U.S. led a vocal campaign to try and dissuade its allies from joining the institution, but was largely unsuccessful as a slew of allies rushed to sign up to become founding members of the bank before the 31 March deadline, with Japan being one of the few to abstain.

U.S. National Security Council spokesman Patrick Ventrell said that Washington had concerns about whether the AIIB would meet the "high standards" of governance and environmental and social safeguards exemplified by the Washington-based World Bank.

Following the U.K.'s decision to join the AIIB, the White House issued a pointed statement saying it expected the U.K. "will use its voice to push for adoption of high standards".

The AIIB has been viewed by some as a rival to the World Bank and the Tokyo-based Asian Development Bank (ADB). It was founded on the back of Chinese frustrations at a lack of influence in the World Bank and the International Monetary Fund (IMF). Despite reforms to World Bank voting in 2010 which gave China the third-largest share, it still has less than a third of the voting weight of the US, which dominates the institution.

However, the AIIB website insists that the institution will be multilateral, accepting bids from members and non-members, and will implement "strong policies" on accountability and procurement.

Hugo Brennan, Asia analyst at UK-based geopolitical risk consultancy Verisk Maplecroft, says that achieving foreign policy aims, such as increasing regional trade and boosting China's international standing, form a significant element of the motivations behind Beijing setting up the AIIB.

"Beijing isn't doing this out of the goodness of their hearts," says Brennan. "China is a trading nation. The economy is slowing and this is one way of finding new growth areas."

Brennan adds that the U.S. has "backed itself into a corner" and now risks finding itself on the outside of a new player in the global financial architecture.

The AIIB, which will use English as its operating language, is due to become operational by the end of the year, according to Chinese media. Behind China and India, Russia has stumped up $6.5 billion of capital for the project. The biggest western European investor is Germany, who have pledged $4.5 billion.

The institution aims to address Asia's gaping infrastructure gap. The World Bank estimates that some $8 trillion of investment is required between 2010 and 2020 to meet the need for energy, water and transportation projects in Asia.

Erica Downs, senior China analyst at US-based risk consultancy the Eurasia Group, says that the institution has already been a roaring success for Beijing.

"You could make the argument that it has enhanced China's soft power to a far greater degree than they could ever have imagined. The bank hasn't even started operating and they already have G7 countries involved. It's a massive coup for Beijing to have the Australians, the British, the French all involved," says Downs.

China Likely to Wield Veto Over 57-Member Asian Infrastructure Investment Bank | Business