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China’s new ‘World Bank’ gains support despite warnings

US CHINA
Andrew Harrer | Bloomberg | Getty Images

Opposition and warnings from the U.S. and senior U.K. diplomats have not stopped China's alternative to the World Bank, the Asian Infrastructure Investment Bank (AIIB), from gaining global support.

The U.K., a long-term U.S. ally, is joining the bank despite concerns from the U.S. and even against advice from some of its own Foreign Office diplomats, according to a report in the Financial Times on Friday.


Chancellor of the Exchequer George Osborne, who is tipped as a future U.K. Foreign Secretary post-election, reportedly over-rode warnings from U.K. diplomats to join the bank, which is being set up to fund infrastructure projects in Asia.

The U.K. is far from the only U.S. ally to join the bank. South Korea, long one of the U.S.'s staunchest allies in Asia, announced Thursday that it would be a founding member of the bank, sending shares in some of its iron and steel companies sharply higher. While it has a historic allegiance to the U.S., as China backed neighboring North Korea during the Korean War, China is now South Korea's biggest trading partner.


"We are comfortable with the idea of a bank that puts together finance for infrastructure, because our view is that there is a huge need for infrastructure in emerging markets countries," David Lipton, the first deputy managing director of the International Monetary Fund, an institution to which the U.S. is the biggest contributor, told CNBC earlier this week.

This should not be seen just as the victory of trading ties over fears about the rise of China's power. The more countries who join, the more China's power to dictate decisions made by the bank is diluted.


Voting rights will be allocated based on GDP – and when the banks first, Asian, founding members, signed up late last year, this meant China would control more than a 60 per cent of the votes. With economies as large as Germany, the U.K. and France joining, this share will fall, and it has been reported that China has given up its veto over investment decisions to get the European powers involved. So China has had to pay a price for getting the West to the table.

Chinese interests are also arguably not being met by existing institutions. In the World Bank, China's voting share is just 4.9 per cent, compared to 16.3 percent held by the U.S., which it is close to outstripping as the world's biggest economy.