The genesis of AIIB and the role of China in promoting the global economy

First, the Chinese want to promote its global image and create a likeminded community that addresses their own economic grievances and offers assistance when required. To this end, the roles of the IMF, the World Bank, WTO and the ADB have often been questioned. It is alleged that the existing institutions are controlled by the developed economies and their policies serve these masters only. The IMF is the case in point. In the IMF, America, as the world’s biggest economy, enjoys supreme power and it alone controls nearly 17 percent of total votes. Likewise, the seven largest high-income countries (Canada, Italy, France, Germany, Japan, the UK and the USA) control almost 45 percent of the votes. Important decisions within the IMF are made by votes with the weight of each nation’s vote proportional to its influence. Since the larger economies have a bigger share in the IMF, they exercise power on particular issues.

Second, the Chinese economy is going through a critical phase, where it needs to rebalance the economy. The key challenges are to shift from external demand to domestic demand. Shift from government investment to private investment, from traditional elements of production to advance means of production. Traditionally, the Chinese economy has been driven by the gross fixed capital formation. Annually, China spends over 40 percent of its GDP on infrastructure development. And this had been the key drive of Chinese economic growth.

Since the last couple of years, efforts have been made to shift the drivers of growth from an industry-led economy to a service oriented economy. The new normal model has paid dividends but the growth rate hasslowed down. Last year, China posted a GDP growth rate of 7.4 percent, marking the lowest pace of expansion since 1990. A slow growth rate could result in pressure on employment, low saving-low investment and widen the fiscal imbalance. Nevertheless, the Chinese economy enjoys sound macroeconomic fundamentals, and for that reason, a slow growth rate is not a serious concern among policy makers.

Third, China is very eager to promote its economy and maintain the pace of economic growth to eliminate the fear of a mid- income trap. Some experts believe that China’s demographic dividend is rapidly waning and the economy is gradually approaching the Lewis turning point. If Chinese authorities fail to re-structure its economy, it might fall into the middle-income trap. It is worth mentioning that some of the Latin America countries, Japan, and Malaysia have gone through this transformation, but they fell into the "middle-income trap" or the "high-income trap”.

Many experts disagree with the above connotation. It is argued that the size of the Chinese economy is much bigger than the above cited economies. Furthermore, China enjoys huge domestic consumption, thus it is unlikely that the economy will go through the same transition or trap in any mid-income gap.