Delegates of 57 Asian Infrastructure Investment Bank (AIIB) founding nations have elected former Chinese Finance Minister Jin Liqun as the first Bank President in Tbilisi.

China is the initiator, the organizer and the biggest contributor to the Bank charter capital with a controlling vote. The new entity challenges the global financial system resting upon the Bretton Woods arrangement that is supported and maintained by the International Monetary Fund and the World Bank. The United States and its close allies are in control of these lending ‘headquarters’. Strangers are not welcome in these financial institutions. They can be nothing but extras even if they are let in. Their real weight and economic potential do not matter in the distribution of seats and the creation of a hierarchy.

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The post-war financial system helped large Western countries not only to recover in the 1950s but also to develop rather rapidly in the 1960s-1970s and to propel the entire global economy. The development slowed down and eventually became more and more problematic amid the enhancement of neo-liberal ideas. Most countries simply could not meet the expense of mounting difficulties. The money could be obtained from IMF and the World Bank on very tough terms. Statistics show that only a few states that took the plunge into the credit flow have reached a safe harbor. And certainly none of them strengthened so much that it could make at least some competition against the IMF and WB founders. Or the Asian Development Bank. ADB, a third major financial institution in terms of importance and capital volume, was established under the UN aegis but managed by Japan and the United States. The world financial system and its standards rest upon these three pillars.

China is an exception. It has not asked anyone for anything, it has not borrowed money, and it has not yielded to anyone’s terms. Quite the opposite, the republic has dictated its terms to everyone wishing to work in it and with it. Strangely enough, all developed countries have accepted these terms – there is no other market of this scale in the world for their products. Europe has made a lot of money in China, and Beijing’s revenue has been even larger; every big country has helped the “world workshop” grow and strengthen. Enough has been written about what has become the Chinese Miracle for some and the Chinese bubble for others. The extra-systemic colossus which rose by itself, using its own recipes, gives many reasons for eulogy and criticism. Yet everyone has to reckon with it: China is a major importer and the biggest exporter in the world. Besides, the republic has the biggest gold and FOREX reserves of more than $4 trillion. A substantial part of these reserves, $1.3 trillion, is invested in U.S. Treasury bonds. At the same time, living standards and incomes of the Chinese population are much lower than those in America.

Strange as it may seem, the poor Chinese lend cheap money to the rich Americans. Besides, China is the main economic and geopolitical rival of America capable of destroying its treasury but it is in no hurry to use these capacities. The two giants are engaged in a protracted semi-war of currencies. Washington is trying to strengthen the Yuan, and Beijing is trying to do the same for the dollar. A weaker dollar unavoidably cuts Chinese exports and GDP growth. China is the real economy victor, and the United States wins in the global financial sphere. The attempts of China and Russia to hold minimal reforms – to increase the quotas of emerging markets in the IMF and the World Bank – have failed again.

N.B. The United States has controlling voting power (over 17%) in the World Bank; China has less than 3 %, and Russia - 2.5 %. Quotas are divided in approximately the same way in the IMF: the U.S. — 17.7%, Germany — 6.1 %, the UK — 4.5 %, France — 4.5 %, China — 2.8 %, and Russia — 2.5 %.

The U.S. shortsightedness, confidence in its might and exceptionalism, which allegedly give it the right to dictate norms of living and conduct to others, have prompted China to create an alternative international financial system. To a large extent, America is a reason why the Asian Infrastructure Investment Bank (AIIB) has been created. Beijing has been careful and cautious as always. It has been hard-headed too: it has not aspired for the entire world but rather focused on the home region, Asia. Chinese President Xi Jinping was the first to say that the world’s largest region needed an independent investment center. So, China believes that the bank is his initiative. It was well-prepared indeed. China and another 20 countries signed the agreement establishing the Asian Infrastructure Investment Bank in October of last year. The partners are India, Pakistan, Kazakhstan, Vietnam, Uzbekistan, Singapore, Laos, Mongolia, Malaysia, Kuwait, Qatar and some others.

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The United States quickly realized its mistake and tried to block the entry of its allies, all the large developed countries, into the AIIB. The political and diplomatic pressure failed, probably, for the first time in years. Beijing demonstrated surprising activity, efficiency and successfulness of efforts in the implementation of its project. The diplomatic operation it held to win allies is amazing. China succeeded in attracting another 30 countries, practically the entirety of Europe. The closest U.S. allies – the UK, Germany, France, Italy, the Netherlands and Australia – backed the alternative to the IMF and the World Bank. They were not even offered a carrot. The AIIB Charter assigned 75% of quotas to regional states and 25% to the others.

The AIIB founding agreement was signed in Paris on Monday, June 29, 2015. Thirty states backed the Chinese initiative immediately, and seven more were planned to complete the relevant procedures by the end of 2015. Russia found itself in the second group of Bank founders. The prolonged reflection of Moscow is understandable and easy to explain. Our financial elites are loyal and diligent followers of the IMF and the World Bank. It was hard to take a 180-degree turn in a snap. Eventually, the West pushed Russia into the change of its vector by the sanctions and the financial blockade. China behaved as if it did not notice the prolonged contemplation and treated Russia with respect by offering honorary conditions. The Chinese leaders also answered the question why the AIIB should be formed after the BRICS Development Bank had been established. It has the same main founders – China, India, Russia (and Brazil) – as the AIIB. Will the nearly kindred institutions be rivals? No, they won’t. They are not rivals, they are partners. There is enough work for everyone.

The Chinese do not deny that the AIIB project is a ‘touchstone’ for the new foreign strategy. They deserve praise: ‘the touchstone’ was masterly put into place and the project rocketed within a year. The bank has been founded and will get down to business next year. Every country which expressed such a wish became its founder (only the request of Taiwan has been rejected: Beijing sticks to the principle of ‘two systems – one country’). The bank’s charter capital amounts to $100 billion. It is divided into a million shares, each of $100,000. The main five co-founders are China, India, Russia, Germany and South Korea. The biggest investor ($29.8 billion) with the controlling voting power is China. Russia’s contribution is $6.5 billion.

N.B. The voting power is 26.6% for China, 7.5 % for India, and 5.9 % for Russia (together the three countries control 46.3 % of the charter capital and 40 % of voting power).

The news agency Xinhua has called the AIIB “an important mechanism which can provide mutual benefits to Asian countries.” Indeed, this is true. The huge Asia-Pacific region does not fit the existent global economy, which is too tight for it. Even the strong and rich but isolated countries have to obey global economy regulations. China has offered a remarkable strategy, ‘One Belt, One Road’, and is ready to make unprecedented investment: the cost of the New Silk Road and Maritime Silk Road programs nears $100 billion. According to analysts, China plans to spend $500 billion on the development of infrastructures, the economy and border territories.

Naturally, this will not happen immediately. China has planned progress for the next 20 and 50 years to come. The plans imply multilateral cooperation. China is putting up a financial umbrella over its region, and it will be convenient for both ‘Asian tigers’ (developed countries) and growing ‘tiger cubs’. The AIIB is a financial platform for interaction which is offering initial resources and a sufficient degree of independence from global rivals.

CCI-Inform has mentioned ‘four great benefits’ of China from the project, according to Doctor of Economics Liu Shang: the creation of China-style free trade zones in the Asia Pacific region, an unlimited increase in orders for goods and services of Chinese companies and lesser dependence on American and European export markets, accelerated internalization of the Yuan (growing exports expand the scope of Yuan settlements and enhance prerequisites for transformation of the Chinese money into a world reserve currency), weakening Western control over the Asia Pacific region and a possibility of replacing Western standards with those established by China.

Russia’s expectations are much more modest. In the words of Finance Minister Anton Siluanov, the AIIB may invest in the development of infrastructures in Siberia and the Far East. This is a concrete goal, and a more general one is the new bank’s support to the Russian economy in its turn to the East. The wish of Western nations to become AIIB founders despite the U.S. bans is understandable. This membership is seen as a way to access future infrastructural projects in the Asia Pacific region.

So far, things have been going smoothly for China and its alternative financial system project. Even the World Bank and the Asian Development Bank have expressed their wish to cooperate with the newborn financial institution. But there is no doubt the U.S. will answer to the challenge of its main geopolitical rival. The economy is an area where you need to be prepared to beat your rival if you want peace...

N.B. Major financial institutions by comparison: the charter capital stands at $283 billion for the World Bank, $165 billion for the Asian Development Bank, $50 billion for the BRICS Development Bank (planned to be enlarged to $100 billion), and $100 billion for the Asian Infrastructure Investment Bank.

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The Encyclopedia of Myths says that once upon a time there was a nomad people, the Abii (Ptolemy attributed them to the Scythians, Homer - to the Thracians). They mostly fed on milk and were known for their chastity and peacefulness. Those wonderful qualities were enough only for being mentioned in myths. The modern financial ‘tribe’ should remember that ancient true story or legend and be prepared to stand up for itself…

Leonid Levitsky

The journal Russia Today, issue No 17, 2015