He who pays the piper calls the tune: China and the AIIB

AIIB: When China first went public with its idea for a new, Asia-centric development bank back in 2013, it could have hardly imagined that within a matter of months Germany, Russia, Australia and the UK would all be scrambling to get a slice of the action, but scramble they did. On 29 June 2015, representatives from a total of 57 countries convened in the Great People’s Hall in Beijing to sign up as founding members of the Asian Infrastructure Investment Bank (AIIB). Another twenty or so are said to be waiting in the wings, including Taiwan.
Part of the impetus behind the AIIB was Chinese frustration with what it considered to be the slow pace of reforms and governance within established global financial institutions like the IMF, the World Bank and the Asian Development Bank. Its claim that these were Western institutions dominated by and skewed towards American, European and Japanese interests gained traction when both Washington and Tokyo pointedly declined an invitation to the new show in town.
Their antipathy to the bank stems from their perception of the threat it poses to the influence they exert through those same development banks that had exasperated China in the first place, although publicly they justify their resistance on the grounds that they do not believe that the AIIB will live up to the ‘highest global standards’ for governance or lending. They also insist that the AIIB’s share and voting structures mean that China will enjoy an in-built veto and that it is part of a wider strategy to increase its ‘soft power’ across Asia.
The Obama administration went one step further by publicly admonishing the UK for its enthusiasm for the project and deriding it for its ‘constant accommodation’ of the Chinese.
When asked why the UK had decided to risk Washington’s wrath by joining, successive British mandarins and civil servants probably spoke for many of their West European counterparts when they replied with a question of their own, no doubt to applause from private sector businessmen and women all the way from Talin to Tasmania: “What do we have to lose?” There is, they would argue, a greater risk in not joining, as membership at least raises the possibility of getting in on any of the large infrastructure deals that the new bank choses to fund. Those companies whose countries are not members will either not be able to bid or will at the very least be at a disadvantage.
You have to be in it to win it, after all; and Western Europe in particular has everything to gain by helping develop new business-to-business and consumer markets across the Eurasian land mass.
But can the AIIB live up to its promise?

The Mandate

According to China’s Minister of Finance Lou Jiwei, the AIIB’s central mandate is to support investment in infrastructure and other manufacturing industries in Asia with a view to promoting economic development and regional co-operation across the region. Its remit is therefore narrower than institutions like the ADB and IMF both of which have socio-economic agendas that have sometimes hampered progress. 

Indonesian Finance Minister Bambang Brodjonero

Interviewed in the World Street Journal earlier this year, Indonesia’s Finance Minister Bambang Brodjonegoro predicted that the AIIB would target large-scale infrastructure projects such as toll roads, power plants, seaports and airports, rather than the smaller capital programmes like irrigation systems and rural roads that fall to other development banks.
In any case, fears that the new bank will encroach on existing development banks’ territory will probably prove to be groundless for the simple reason that there is a massive shortfall in infrastructure funding across the continent. In 2009, the ADB estimated that $8 trillion needed to be spent across Asia over the ensuing decade, 51% of it on electricity, 29% on transport and 13% on communications.
Although details remain scarce, grand projects put forward so far include funding a Beijing to Baghdad high-speed railway to support the development of the Silk Road Economic Belt trade route that China sees stretching from Xi’an in central China across Central Asia, through the Middle East and on to Europe, ultimately reaching Rotterdam in the Netherlands; something well beyond the scope of the existing development banks.

Governance

Natalie Lichtenstein, counsel to AIIB

For ‘highest global standards’, the AIIB would argue, read interminable decision-making processes; but while President elect Jin Liqun has gone out of his way to insist that the AIIB will do its utmost to make sure it is quicker on its feet, its structure is conventional enough. Having appointed top US lawyer and former World Bank employee Natalie Lichtenstein as chief counsel for its interim secretariat, the AIIB has adopted a three-tier structure consisting of:

  • A council made up of representatives from all member countries with the authority to delegate decision-making power to the board of directors and management
  • A board of directors that will periodically convene to decide major policy decisions
  • A management team that will be responsible for day-to-day operations organized into various departments including lending and risk management

Funding and Voting

The devil will, of course, be in the detail and it is the make-up of these boards and teams that will prove crucial; and if the profile of their staff were to reflect the voting muscle of AIIB member countries, then it would indisputably be within China’s powers to steer the agenda; as things stand, Beijing controls over 30% of the shares and 26% of the votes far outgunning India in second place with 8.5% of the shares and 7.5% of the votes.

AIIB President elect Jin Liqun

But although the bank’s voting structure means that China will retain the upper hand as the largest shareholder, it has offered to forgo outright veto power when it comes to day-today operations, a gesture that has helped win over some keyfounding members. “China is the major shareholder. But this does not mean that this is China’s bank. The bank is not owned, managed or operated by China,” the bank’s President elect Jin Liqun said recently. “The bank practices universal procurement and universal recruitment.”

RETURN ON INVESTMENT

What is also not clear is just how long China will be able to retain control of the bank. Genuinely taken aback by the global enthusiasm for its idea, Beijing has already felt it necessary to double its initial investment from $50bn to $100bn to reinforce its hegemony over its protegé. If the AIIB continues to gain momentum and attract funding from across the world, China’s plans to use the bank to increase its sphere of influence could end up being a victim of the project’s success as its percentage share of the AIIB’s capital gets diluted.
Because China’s pockets are not as deep as they were when the AIIB was initially conceived. The world’s second-largest economy grew by 6.9% in the three months ended in September, the slowest since early 2009 in the aftermath of the global financial crisis, data showed Monday and down from 7% in the previous quarter. Private sector forecasters have cut their outlook for China’s growth this year to between 6.5% and 7%. While many a Western economy might wish that they had such problems, fears are growing that its slowdown could have serious long-term consequences and that its days of largesse could be coming to an end.
While insisting on his commitment to creating a ‘lean, clean and green’ financial institution Jin has also made it clear that the AIIB is not going to be a soft touch and will adhere closely to private-sector principles. The bank is initially expected to provide sovereign loans to countries for their infrastructure projects but, where projects are not guaranteed by sovereign credit, it also plans to provide financing through public-private partnerships (PPPs).
This will allow it to share the risks and rewards with the private sector while simultaneously tapping into its investment reserves. And, as may very well happen, China’s foreign capital reserves cease to grow, the AIIB could end up adhering more closely to the principles of capitalism than any of its counterparts.

Keys to success

According to international law firm Ashurt, the AIIB will succeed or fail on its ability to unlock a successful pipeline of bankable projects in Asia which will in turn require

  • Building capacity
  • Establishing the necessary legal and regulatory framework
  • Adequate project preparation
  • A clear and transparent tendering process
  • Appropriate risk allocation
  • A published pipeline of projects

With the bank hoping to start lending by the end of the year, it should be clear soon enough if the AIIB’s capabilities match Beijing’s ambitions.