Is the Asian Infrastructure Investment Bank an Anti-US Dollar Alliance?

What is common between the U.K., France, Germany, Italy and now South Korea? Can’t think of an answer? Well, they are all U.S. allies who are accepting China’s invitation to become members of the Asian Infrastructure Investment Bank (AIIB). And they are doing this against the advice of the United States.

Initiated last October by China, the world’s second largest economy, the AIIB is being touted as a potential rival to established financial institutions such as the World Bank and the Asian Development Bank (ADB). It is designed to finance infrastructure projects in areas such as energy, transportation, and communication in Asia, the world's fastest-developing region. China is set to provide up to 50 percent of its $50 billion initial capital. So far, more than 30 countries have announced their intention to join the bank as founding members.

The rationale behind AIIB is, that given Asia’s rapid economic expansion, existing global financial institutions such as the World Bank and the ADB can no longer satisfy the region’s needs due to their limited capital and adoption of different priorities. Moreover, the World Bank and the ADB are dominated by the U.S. and Japan respectively.

Many analysts are of the opinion that the AIIB is a means of spreading China’s “soft power” since its ability to play a substantial role in development finance through the World Bank is constrained by the low voting rights currently allocated to the East Asian nation. Meanwhile, major European economies are eager to join the bank to reap possible benefits from a stronger relationship with China. These countries, not only have firm economic ties with China, but also long-term experiences in development finance. Given the huge unmet demand for power, transportation, water and communication, European companies are intent on joining in the construction of modern infrastructure in Asia.

So what implication does the AIIB have for the United States? The bank is certainly viewed by Washington officials with great suspicion, who see it as a plot to dilute U.S. control of the banking system. The U.S. has expressed reservations about the new institution on the grounds that it would not meet environmental standards, procurement requirements and other safeguards adopted by the World Bank, the International Monetary Fund and the Asian Development Bank for their lending projects. It has even attempted to persuade regional allies such as Australia, South Korea and Japan to stay out of the bank, and publicly rebuked Britain’s decision to become a founding member.

The AIIB may be the first step that demolishes the strength of U.S. Dollar as a global currency. Currently, nearly every major financial or commodity contract in the world is priced in U.S. dollars, and this requires that the entire world not only hold U.S. dollars in order to engage in trade, but also to use the U.S. banking system. As of now, even aircraft manufacturers in Europe sell jets to European airlines in U.S. dollars (instead of euros). Transactions for oil between Brazil and India settle in USD, while contracts for aluminium traded in London also clear in U.S. Dollars.

However, all this might change in the near future. The China International Payment System (CIPS) is due to kick off this year, bringing the Yuan a step closer to becoming a global trading currency. At present, the Yuan is the fifth most used in international payments, and the new system could make payment transfers just as easy as in dollars and euros. With U.S. debt hovering at levels of roughly $60 trillion, many countries are looking for an alternative to the current global currency, and China may just have the answer.