Asia Economy

Why the US shouldn't worry about the AIIB

US reaction on AIIB is a victory for China: Pro
US reaction on AIIB is a victory for China: Pro

The China-led Asian Investment Infrastructure Bank (AIIB) is a symbolic institution with no real significance for the global financial system, according to some economists.

"We keep hearing that this bank is an unprecedented move by China, we've never seen anything like this before, it represents a dramatic change in governance of the global trade and capital flow regime - that's all nonsense," Michael Pettis, finance professor at Peking University, told CNBC on Thursday.

Many experts have said the bank is a threat to America's current dominance within international financial institutions like the World Bank. 57 countries are founding members of the new bank, 37 of which are Asian countries, China announced on Wednesday. The U.S., Canada and Japan are the sole Group of Seven (G-7) countries that remain absent.

Read MoreChina says no to Taiwan on AIIB: What it means

"I think this whole discussion of the AIIB has simply been overblown," said Fraser Howie, managing director at Newedge Singapore. "If China is trying to use this Trojan Horse to undermine the U.S. dollar and take its rightful place in the financial world, it's just not going to happen using [the AIIB]."


Pettis, a longtime China-watcher and senior associate at the Carnegie Endowment for International Peace, highlighted two major requirements for the AIIB to become an important institution: China's economy would have to rival the size of the U.S. in the 1940s and 1950s - a period of profound political and economic clout for America - and the renminbi would have to become the world's top reserve currency.

The chances of both those events occurring are slim, according to Pettis. "Maybe China will one day become the largest economy in the world - and I'm skeptical it will - but even if it does, it will never achieve the size that the U.S. did in the 1940s."

Furthermore, the renminbi will be at best a minor reserve currency, in Pettis's view.

"There are only two ways how the world can accumulate renminbi: either China's central bank takes on trillions of dollars of risk of sub-investment grade countries or China must be willing to run large current account deficits, and it probably won't do that."

The signing ceremony of the Asian Infrastructure Investment Bank at the Great Hall of the People in Beijing on October 24, 2014.
Getty Images - Takaki Yajima-Pool

What makes the AIIB special?

The AIIB will be prone to the same challenges as the much-hyped initiatives that preceded it, according to Newedge's Howie.

"In the past decade, China has invested in Africa, Latin America and its struggling just as developed countries did before them to get paid back."

Moreover, the bank's lack of clear intentions is a key challenge in its quest for global relevance, he added.

"When the World Bank was set up, its goal was poverty reduction. That is not the goal of [the AIIB], there isn't a clear goal. They're talking about building Asian infrastructure, but are you really trying to tell me the world doesn't have enough capital to fund Asian infrastructure?"

Wait and see

The general consensus among experts is that it's still too early to say just how momentous the creation of the AIIB is. Details on the bank's funding as well as governance have yet to be laid out in precise form, leading the U.S. to state it will only welcome the AIIB if its standards match those of existing institutions.

"There are still a lot of uncertainties. There hasn't been a new institution like this in many years," warned Philippe Le Corre, fellow at The Brookings Institution. "China is conscious of the fact that it cannot fail. Washington and Tokyo are both watching, so it's a big challenge."