Treasurer Joe Hockey, in a joint statement with Foreign Minister Julie Bishop, said the decision came after "extensive discussions" with China and other "key partners around the world".
The treasurer will attend a signing ceremony at the Great Hall of the People in Beijing on Monday 29 June.
"There is an estimated infrastructure financing gap of around US$8 trillion in the Asian region over the current decade," Mr Hockey said.
"The Asian Infrastructure Investment Bank [AIIB] will be part of the solution to closing this gap," he said.
The AIIB will work closely with the private sector, allowing Australian businesses to take advantage of the growth of infrastructure in the Asia-Pacific region, said Mr Hockey.
"Australia will contribute around AU$930 million as paid-in capital to the AIIB over five years and will be the sixth largest shareholder. The AIIB will have paid-in capital of US$20 (AU$25.2) billion with total authorised capital of US$100 (AU$126.2) billion," he said.
Industry Super Australia (ISA), whose industry fund members dedicate between 10 and 15 per cent of their portfolios to infrastructure, was quick to welcome the announcement.
ISA chairman Peter Collins said the decision would be a "huge fillip" for Australian expertise in funds management, engineering, construction, architecture and legal services.
"The activities of the AIIB will not only provide new opportunities to deploy capital but also export the funds’ know-how in connecting pension savings to bankable projects," Mr Collins said.
"The resources of the Asian Infrastructure Investment Bank will increase scope for pension and sovereign wealth funds to invest in long term, productive assets in the region," he said.
"Australia, like Asia, is dealing with the challenges of a shrinking workforce and an ageing population. To meet this challenge it is vital we better match the long term investment horizon of retirement savings to strengthen our economic capital base, while simultaneously producing superior risk-adjusted performance returns on retirement savings. It’s a win-win," Mr Collins said.
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