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http://www.cnbc.com/id/102526769

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Global institutions, including the International Monetary Fund (IMF) and the World Bank, have endorsed a China-led international bank, despite opposition from the U.S.

"We are comfortable with the idea of a bank that puts together finance for infrastructure, because our view is that there is a huge need for infrastructure in emerging markets countries," David Lipton, the first deputy managing director of the IMF, told CNBC early on Monday.

The $50-billion Asian Infrastructure Investment Bank (AIIB) is being established to meet the need for greater infrastructure investment in lower- and middle-income Asian countries. It comes amid complaints by China and other major emerging economies that they lack influence in institutions such as the IMF, the Asian Development Bank and the World Bank.
Tomohiro Ohsumi | Bloomberg | Getty ImagesSupport for the AIIB has gathered speed in Europe this month, with the U.K. the first country to sign up, followed by Germany, France and Italy and then Luxembourg and Switzerland.

However, Washington has expressed misgivings, officially because of concerns about standards of governance and environmental and societal safeguards. Unofficially, the country's is thought to be worried about sacrificing its clout in Asia to China, as well as piqued by criticism of slow reforms in the IMF and World Bank.
"While this is seen as a diplomatic setback for the Obama administration, the underlying (blame) may lie with Congress," said strategists led by Marc Chandler at Brown Brothers Harriman in a research note on Monday.

"It has blocked IMF funding which is the precondition for reforming the voting (quotas), which would give China and other developing countries a greater voice. In contrast, the Obama Administration seems to recognize that if China (and others) do not get a larger voice in the existing institutions, it will create parallel institutions."

He added: "The frustration with the U.S. is palpable."

China 'a leader of the world'

"China is now a leader of the world," Sri Mulyani Indrawati, managing director of the World Bank, told CNBC on Sunday in Beijing.

"They (Chinese leaders) try to show that they have sound principles in not only presenting a development solution, but also in establishing this new institution and that is why many of the countries now are becoming members of this institution."

Jim McCaughan, CEO of Principal Global Investors, said that China's move was part of a bid to establish the yuan as a global currency—and that the U.S. might be more positive towards the AIIB then its official statements suggested.

"I think Washington will collaborate; I do not think it will officially join, but I think they will collaborate, at least behind the scenes," McCaughan told CNBC early on Monday, adding that the bank was part of a "bigger picture."

"Ultimately, Chinese economic policymakers, I believe, are pushing towards the idea of the renminbi as a reserve currency… this is one small step in that direction, having a multilateral institution that they can lead," McCaughan said.

Chandler concurred. "Being recognized as a reserve currency and included in the SDR (Special Drawing Rights) basket would be a recognition of China's reform efforts and its increasing importance in the world economy. It would likely further enhance the internationalization of the yuan."

He added that some of Washington's concerns about the AIIB were valid.

"Leaving aside U.S. parochial concerns, which seem to be over the increase of China's influence, there are reasonable questions about the transparency and governance of the AIIB," Chandler said.

"It does not appear to be simply a development bank with China as a key shareholder. Rather than promote neo-liberal values, embodied in the Washington Consensus, the AIIB could encourage China's state capitalism model. The criteria for picking projects is also not clear."

FORBES

Another one bites the dust. South Korea is seeking to be a founding member of Beijing’s latest globalization push, the Asian Infrastructure Investment Bank (AIIB).

South Korea marks yet another Washington ally that has expressed a desire to join the bank despite U.S. misgivings about it. China has basically been left out of having any say within the large Bretton Woods institutions — International Monetary Fund and the World Bank. In creating the AIIB, China is basically saying that they are willing to go it alone in helping to fund southeast Asia’s massive infrastructure needs.

South Korea’s finance ministry said in a statement on Friday the AIIB would help fund large scale infrastructure projects and compliment existing projects like highway construction in India and water treatment in Vietnam being funded by the World Bank.

“he AIIB is the first international financial institution Korea joins as a major member country from its inception. Korea’s growing economic role in the world requires Korea to take on more responsibilities, and the AIIB will be an important venue for Korea to that end,” the government said in the statement. The Finance Ministry said that the government elected to join the AIIB after certain changes to corporate governance were made. It did not specify those changes.

The U.S. said it welcomed the AIIB, but essentially doubted China’s dedication to labor and human rights in large scale projects, let alone environmental standards that are factored into World Bank loans. Japan remains in the U.S.’s corner on this one and has refrained from joining.

On Thursday, NATO member Turkey applied to join the AIIB too. Becoming a founding member depends on other members approving their membership. If approved, both Turkey and South Korea will be part of the growing AIIB family next month.

The application deadline for prospective founding members is March 31.

Twenty-one countries agreed to fund the $100 billion bank in a memorandum of understanding last October. All members were from Asia. Shortly after, European friends of the U.S. hopped on the bandwagon. Britain opened the flood gates. Then in came France, Germany, Luxembourg, Switzerland and Italy. Australia is considering it.

Chin’s AIIB is another way for Beijing to lobby for its currency’s global significance. Part of that process includes opening their capital accounts to foreign investors and having their renminbi become part of the IMF's special drawing rights, which is the Fund’s currency basket. The IMF will decide on that in December. China has already taken steps to open its capital account to foreigners, allowing investors to buy mainland fixed income for the first time last year.

The AIIB is a glimpse into the future. The U.S. will likely push against including the renminbi in the IMF’s currency basket as that would open the door to it becoming a global reserve currency. Right now, the dollar dominates the foreign currency reserves of the world’s central banks, followed by the euro and the yen. But if the renminbi were included, it could potentially take a few trillion out of the U.S. Treasury market as emerging market central banks will have the currency of the world’s No. 2 economy and biggest trading partner to add to their government’s rainy day fund.

“Emerging market central banks essentially help fund U.S. debt,” says Jan Dehn, an economist with the Ashmore Group in London. “When the renmimbi becomes a global reserve currency, it will threaten the U.S. position as the dominant currency at these central banks. It could be a blow to the dollar.”

The AIIB is the second development bank China launched in the last year. In July 2014, China, Russia, Brazil, India and South Africa signed an agreement to create another $100 billion bank. The so-called New Development Bank will be a dollar-denominated lender to infrastructure and other projects in each of the five member nations’ economies.