Will AIIB be a lender with Chinese characteristics?
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FOREIGN VIEWS
After a late flurry of additions to the founding membership of the Asian Infrastructure Investment Bank, attention now turns to setting the China-led AIIB’s rules and regulations. But important questions remain — whether the AIIB is a potential rival or a complement to existing multilateral financial institutions like the World Bank.
Since China and 20 mostly Asian countries signed the AIIB’s initial memorandum of understanding last October, 36 other countries — including Australia, Brazil, Egypt, Finland, France, Germany, Indonesia, Iran, Israel, Italy, Norway, Russia, Saudi Arabia, South Africa, South Korea, Sweden, Switzerland, Turkey and the UK — have joined as founding members.
According to China’s finance ministry, the AIIB’s founding members are to complete negotiations on the Articles of Agreement before July, with operations to begin by the end of the year.
Like the US$50 billion development bank announced by the BRICS countries (Brazil, Russia, India, China and South Africa) last summer, the AIIB has faced considerable scrutiny, with some Western leaders questioning its governance, transparency and motives. Indeed, many in the West have portrayed their establishment as part of an effort to displace existing multilateral lenders.
But the new development banks seem less interested in supplanting current institutions than in improving upon them — an objective shared by those institutions themselves. As Chinese Deputy Finance Minister Shi Yaobin pointed out recently, by recognizing the need to reform their governance, existing multilateral lenders have shown that there are, in fact, no “best practices” — only “better practices.” There is no reason improvements cannot originate elsewhere.
Practical approach
In fact, given its experimental approach to development, China is well-suited — and, as some top officials have hinted, more than willing — to contribute to this process.
If China can help find a way to balance the need for high standards and safeguards in project lending with the imperative of rapid loan dispersion, global economic governance would benefit significantly.
In pioneering a more pragmatic approach to development finance, China’s institutional model could be the US$40 billion Silk Road Fund that Chinese President Xi Jinping announced last November.
The SRF and the AIIB will serve as the key financial instruments of China’s “One Belt, One Road” strategy, centered on the creation of two modern-day Silk Roads — the (overland) “Silk Road Economic Belt” and the “Twenty-First Century Maritime Silk Road” — stretching across Asia toward Europe. The initiative will aim to promote economic cooperation and integration in the Asia-Pacific region, mainly by providing financing for infrastructure like roads, railways, airports, seaports and power plants.
Yet the SRF has received scant attention from Western media. This is unfortunate, because what little is known about it suggests that it could play an important role in transforming development finance. In a sense, the SRF can be considered China’s latest sovereign-wealth-fund initiative.
In a recent interview, the People’s Bank of China’s governor, Zhou Xiaochuan, suggested that the SRF would concentrate more on “cooperation projects,” particularly direct equity investment, before hinting at the Fund’s “just right” financing features. For example, Zhou indicated that the SRF will adopt at least a 15-year time horizon for investments, rather than the 7-to-10-year horizon adopted by many private equity firms, to account for the slower return on infrastructure investment in developing countries.
Moreover, the SRF could act as a catalyst for other state financial institutions to contribute to a selected project’s equity and debt financing. When the AIIB is up and running, it, too, could support this process, by arranging debt financing alongside SRF’s initial equity investment.
There is still much to digest in these new financing initiatives. But one can see the emerging contours of a South-South development-finance landscape — one with the potential to transform multilateral lending more broadly.
Richard Kozul-Wright is director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development. Daniel Poon is an Economic Affairs Officer at the United Nations Conference on Trade and Development. Copyright: Project Syndicate, 2015. www.project-syndicate.org. Shanghai Daily condensed the article.
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