57 nations have joined, but its governance remain unknown.

The Asia Infrastructure Investment Bank (AIIB) is an international organization put forth by China in October 2014, designed for infrastructure investment in Asia. Researchers claim that Asia requires 8 trillion dollars of infrastructure investment in a 20-year span from 2010 until 2030. As such, China took the opportunity to sign on numerous countries to take part in a large-scale infrastructure investment plan.

For now, Japan has expressed no intention of joining. This is because the AIIB’s management methods remain unknown. We do not know how much each country will contribute, and how much voice each country will have. There is an additional possibility that China will wield veto-power as well as control over who receives how much investment.

Even so, 57 countries that wanted to deepen economic ties with China have agreed to become founding members. One after another, America’s allies have joined in, creating controversy over the issue.

China aims to make the Chinese Yuan the reserve currency

There are other institutions with similar aims: the Asia Development Bank (ADB) run by Japan, and the World Bank backed by the U.S.
So why is China creating a new investment bank? China has its own reasons for creating the AIIB. One such aim is to beat back the influence of the U.S. dollar as the reserve currency, which has been the foundation for America’s power since WWII.

What is a ‘reserve currency’?

To put it simply, a reserve currency refers to the world’s most used currency. For instance, when Japan buys oil from Saudi Arabia the payment will not be made in the national currency of either country, but will be made in U.S. dollars.
China aims for the Chinese Yuan to one day become the reserve currency. This is because even if China were to become embroiled in a conflict with the West and lose the ability to acquire dollars due to sanctions, they can mitigate the damage done to them if they can continue to trade using the Chinese Yuan.

China wants to increase their trust with the AIIB

The Chinese Yuan, however, will not immediately become the reserve currency after the establishment of the AIIB. The reserve currency is determined by the fraction of foreign-exchange reserves (the money used to pay other countries) each country around the world has. In 2014, the top 3 were USD at 63%, Euro at 22% and Japanese yen at 4%. The Chinese Yuan did not even make it to the top 5.

China will first aim to diminish the power of the USD. In addition, the AIIB will lead to the spread of a China-centric economic system, which will in turn lead to the improved credibility of the Yuan where ‘China is a superpower and the Yuan is stable’.

As far as the AIIB, they may be able to deepen their trust if they are able to successfully manage the bank, similar to how the ADB or the World Bank did for Japan and the U.S. On the other hand, if China uses it for malicious ends, they will lose credibility. One must remember that China created the AIIB to expand their economic power.