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Saturday, 17 June 2017

China builds global role, one infrastructure loan at a time

Regional initiative: An attendee walks past the entrance to the venue of the AIIB annual meeting in Jeju, South Korea in June. The China-led AIIB can now boast a loan book of US2.5bil, capped by new projects in India, Georgia and Tajikistan. — Bloomberg

Regional initiative: An attendee walks past the entrance to the venue of the AIIB annual meeting in Jeju, South Korea in June. The China-led AIIB can now boast a loan book of US2.5bil, capped by new projects in India, Georgia and Tajikistan. — Bloomberg

THE China-led Asian Infrastructure Investment Bank (AIIB) is a mere start-up among development lenders – but already has a global footprint.

Kicking off its second annual conference in the South Korean resort island of Jeju yesterday, the bank can now boast a loan book of US$2.5bil, capped by new projects in India, Georgia and Tajikistan announced on Thursday. It also approved Argentina, Madagascar and Tonga as members yesterday.

With 80 members backing investments from a gas pipeline in Azerbaijan to a power plant in India, the institution can with some justification claim to be taking its place among established bodies like the Japan-led Asian Development Bank and the Washington-based World Bank.

As tension between the Trump administration and China has ebbed and flowed over regional trade and security, the AIIB has eased, for now, initial fears that it was set up to extend hegemony over its neighbours. The bank has presented itself as a key part of the multilateral global system that Chinese President Xi Jinping has vowed to defend.

Newly elected South Korean President Moon Jae-in addressing the opening ceremony, hailing AIIB’s achievement and pledging to beef up the country’s support for the bank.

“The AIIB’s role to support Asian infrastructure is very important” as countries have seen reduced fiscal room since the global financial crisis, says Moon, adding that the bank’s investment approach is in line with the economic growth method South Korea is seeking.

The bank expects to double its lending in the next five years, with US$6bil to US$7bil of projects in the pipeline already, chief investment officer D. J. Pandian says in an interview with Bloomberg Television.

“It’s a good case study where China can have a leadership role without dominating the institution,” says Zhu Jiejin, an associate professor at Fudan University’s School of International Relations and Public Affairs in Shanghai and senior researcher at the school’s Centre for BRICS Studies. Still, AIIB has a political dimension and “massive infrastructure building in Asia sponsored by a China-led development bank necessarily enhances China’s regional clout.”

For the moment, China seems to be working to directly dispel concerns that it can’t, or won’t, adhere to international norms when it comes to governance of projects abroad.

Among the 16 projects approved by the AIIB, 12 were co-financed with other development lenders including the World Bank, ADB, and European Bank for Reconstruction and Development. The arrangements implied that the bank is less likely to compromise humanitarian and environmental standards as initially feared, at least not in those projects.

Jin Liqun, the bank’s president, put focus on the environment in his speech at the opening ceremony, saying that the bank has an important role to play as a facilitator and supporter of the Paris Agreement. He says there are no plans for coal projects and that proposals that might hurt the environment will not be considered.

The AIIB’s rules and procedures demonstrate both adherence to key norms in the multilateral system, as well as a willingness to innovate, says Scott Morris, a senior fellow at the Washington-based Centre for Global Development.

Operating without a resident board, which costs the World Bank US$70mil annually, according to David Dollar, a senior fellow at the Brookings Institution in Washington, and recruiting external audit committee members, are some of the AIIB’s new approaches. A dedicated focus on infrastructure is also considered as a timely return to the historical mandate of development banks.

The ADB estimated in February that Asia’s emerging economies need US$26 trillion in new infrastructure by 2030. The share of infrastructure in the World Bank’s business has dropped from 70% in its early days to 30% in the 2000s, says Dollar, a former US Treasury attache in Beijing. In contrast, all 16 AIIB projects have been concentrated in infrastructure, mostly in energy and transport sectors.

The challenge for the AIIB now is to translate political success into operational effectiveness, which will ultimately depend on people, says Morris. The ability to recruit an international workforce to Beijing will be one of the difficulties, he says.

The bank has about 100 staff, mostly senior managers and support employees, in its provisional headquarters in Beijing’s Financial Street district. It has to balance between fleshing out the institution and adhering to its own imperative of remaining “lean.”

A further task is to differentiate itself from China’s Belt and Road initiative – a trade and infrastructure push that also involves regional neighbours. AIIB staff are wary of being seen as just the house bank for Xi’s project, even though Xi himself said in 2014 the bank was established to finance Belt and Road infrastructure.

“It would be a huge mistake to think the two are the same,” says Wang Wen, executive dean of the Chongyang Institute for Financial Studies at Renmin University in Beijing. He says the AIIB is a China-proposed supplement to the international finance system, and the Belt and Road is a diplomatic push.

Xi proposed the maritime “road” component of the initiative during a 2013 speech to the Indonesian parliament in which he also introduced the plan for the AIIB “to finance infrastructure construction and promote regional interconnectivity and economic integration,” according to the official Xinhua News Agency.

Whatever the outcome of that tussle, China is set for a soft-power boost through the interplay of financial clout and infrastructure planning. To achieve that, it can afford to sit back and let the AIIB do its work.

“The smart move is to let it be managed collaboratively by all the country members,” Dollar says. “China doesn’t need AIIB to pursue narrow foreign-policy goals, it has other instruments for that.” — Bloomberg

Tags / Keywords: Banking , AIIB

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