Australia has officially signed up to join China’s new Asian Infrastructure Investment Bank (AIIB) as a founding member. As part of the agreement, the government will contribute $930 million over the next five years as paid in capital. That makes us the sixth largest shareholder in the regional bank.
The government is on a roll. You rarely hear that, but they deserve a bit of credit for this. Earlier this week they finalised a free trade agreement with China, our biggest trading partner. That completed a trifecta of major FTA deals. Since coming to office, the Abbott government has signed off on similar deals with Japan and South Korea.
But the AIIB is potentially the biggest coup they’ve pulled off.
Crucially, as its name suggests, it’s designed as an infrastructure bank first. Treasurer Joe Hockey was keen to stress that it won’t act as development bank. He explains:
‘It’s not about poverty alleviation. It’s an infrastructure bank that will work closely with the private sector’.
The bank’s focus on infrastructure makes it an investment-led initiative. As the Treasurer points out, that’s good news for Australia’s private sector.
We’re not talking about small sums either. The AIIB will start off with $25 billion worth of paid-in capital, with total authorised capital of $125 billion.
What does this mean?
Importantly, the AIIB will give Australian companies a chance to take a leading role in the growth of regional infrastructure in the future. This is promising for several reasons.
Consider for a moment the fact that Asia will make up 60% of total global infrastructure investment over the next decade. As our largest trading partner, China’s share of this will rise from 22% today to 36% by 2025. These figures alone highlight what a boon the AIIB could prove to be to Australian businesses.
At worst, it should result in more work for our industries to compete in across Asia. Mining, construction, and service sectors look primed to take advantage of this.
What might this look like?
Let’s assume that our position as a major AIIB stakeholder leads to new trade opportunities with Cambodia. Say, for instance, the Cambodian government decides to build a new retirement village in Phnom Penh.
The project requires a lot of steel, which our iron ore exporters are all too keen to supply. Potentially, this opens up opportunities for Aussie contractors to assist with construction.
But what if our expertise in healthcare services leads to new investment opportunities? A major healthcare provider may decide to invest capital in the project.
That’s just a hypothetical example of course. But it goes without saying that having closer ties to Asian neighbours can only be a good thing. The AIIB can open up new opportunities that otherwise wouldn’t have existed.
That’s not something we can afford to lose out on considering the current state of the economy.
Why Australia’s membership of the AIIB draws criticism
Australia’s AIIB membership has faced heavy political pressure. Most of it has come from outside our borders.
Our traditional partners, like the US and Japan, have criticised our intention to join the bank. They hold fears that the AIIB will reshape Asian geopolitics. That’s not surprising. After all, it’s in their interests to contain China’s growing influence in the region. A stronger China reduces American influence in the region, which they hope to prevent.
Make no mistake, the bank should go a long way to cementing China’s position as top dog in the region. The US has used the World Bank and IMF to expand their global influence in a similar way.
But none of this matters to Australia. We have pressing economic issues to worry about. The AIIB is a major step towards addressing some those concerns.
Asia isn’t the future — it’s the present.
Contributor, The Daily Reckoning
PS: Aussie businesses have been reluctant to spend domestically. They see a sluggish economy with few prospects for growth.
But investing in Asia is now a serious consideration for many Australian businesses. With Asia making up 60% of global infrastructure spending in the next decade, the opportunities are endless.
It helps that the leading nation behind the AIIB is also our largest trading partner. Alongside the free trade deal, we’re becoming ever more integrated with China. That’s why The Daily Reckoning’s editor, Phillip J. Anderson, remains bullish on China.
Phil disagrees with economists who say that slowing growth rates in China point to economic disaster. In fact, he thinks China’s boom is only beginning — and that it’s set to last another decade.
In a free report, Phil will show how you can profit from the mainstream’s ignorance. He’ll equip you with the right tools to invest confidently in China. To find out how to download his report, ‘The Cassandra Syndrome: After This Report, You Won’t Worry About China Again for Another Decade’, click here.