Washington wrong but questions remain over AIIB

China's efforts to create an Asian Infrastructure Investment Bank (AIIB) have sparked a political firestorm with the US. The US has been antagonistic toward the AIIB but has failed to persuade its European and Asian allies not to join. Australia has reconsidered its view and the UK, France, Germany and Italy are joining.

It is usually unwise for the world's largest debtor, the US, to oppose the initiatives of the world's largest creditor, China, which holds $4 trillion in foreign reserves. And the AIIB case is no exception.

No one questions that there is a need for more investment in infrastructure in Asia. The Asian Development Bank (ADB) estimates that $8 trillion will be needed between 2010 and 2020. 

The ADB has a capital base of some $160 billion. The World Bank has $223 billion. And both the ADB and World Bank lending portfolios are not concentrated on infrastructure. Clearly, additional infrastructure funding is needed to sustain Asian growth.

For years, the US has urged China to be a "responsible stakeholder" in the international system. Now with its "One Belt and One Road" initiative and the AIIB, China is self-consciously trying to create public goods. So it appears a bit hypocritical for the US to try to oppose the idea of the AIIB while offering no alternative. 

Moreover, the failure of the US Congress to pass IMF reform has left China, the world's second largest economy, with fewer votes in the IMF than France. 

This inability to alter the 1947 Bretton Woods system to reflect the economic and financial success of emerging economies has been a source of frustration for China, the BRICS and other emerging economies. It should not be surprising that China is asserting itself and fashioning new financial institutions.

That said, the challenge ahead for China is how to make the AIIB a credible institution. To be fair, the US, as well as many of the more than 30 nations joining the AIIB, have raised a number of legitimate questions and concerns about the bank's governance, transparency, decision-structure, safeguards (corruption, labor and environmental standards and so on) and lending practices. 

China is putting up much of the some $50 billion of initial capital for the AIIB. If it seeks substantial investment from other member countries, it will need to address the concerns that have been raised. 

How will the AIIB be governed? What lending criteria will it adopt? What will be the decision-making process? Will its policies be transparent and address issues like labor and environment?

While it does not necessarily have to replicate all the policies of the ADB or World Bank, how the AIIB answers those questions will go a long way toward determining the comfort level of its member states and its success as an institution. That requires a rigorous consultation process, and for China to manage this process in a way that inspires confidence among the AIIB member states. It would also be a reassuring step for China and the AIIB to consult closely with the ADB and World Bank and to eventually fashion an ongoing coordination mechanism with the Bretton Woods institutions to avoid redundancy and maximize the impact of each institution's lending.

At their joint press conference after the APEC Summit last November, at one point, Chinese President Xi Jinping turned to his US counterpart Barack Obama and stated unambiguously that the US is welcome to join the AIIB. It is an interesting idea, and one that would allow the US to be present at the creation and play a role in shaping the new institution.