AIIB, NDB and the global capital markets
9 June 2015
We have recently seen the advent of two multilateral lending institutions that could have important ramifications for the global financial markets, including specifically the capital markets. The Asian Infrastructure Investment Bank (AIIB) is an initiative led by China, and the New Development Bank (NDB) is a combined effort of the BRICS nations, namely, China, Russia, Brazil, India, and South Africa. The AIIB would be based in Beijing and the NDB in Shanghai. If successful, these banks could challenge the domination of the IMF and the World Bank, and strengthen China's claim as being a counterbalance to the US domination of the global financial markets. But not everyone sees these new organizations as competitors for existing lending bodies. The World Bank and IMF have themselves come out in support of the AIIB, as it could create a much needed emphasis on infrastructure development in Asia. Also, AIIB is hoping to learn from the past experience of World Bank, including by hiring its alumni. Such new banks could also lead to changes at the IMF and World Bank which might be forced to streamline their operations in order to remain meaningful. From the capital market point of view, an important effect of AIIB and NDB could be an increase in the importance of the Renminbi as a reserve currency, and a decrease in the relevance of the US dollar. While this would make for a more diverse marketplace, it might also create friction between the leading global economies, as evidenced by the US refusal to support the AIIB at a time when all its allies welcomed or indeed joined it. Finally, it is possible to see AIIB & NDB as institutions that allow emerging markets such as the BRICS countries to assert themselves on the world stage, something that IMF has not allowed them to do, as it has failed to reform in the last few years to take their economic growth and increased buying power into consideration. We will just have to wait and see to find out if they are indeed able to live up to their promise in this regard.