Signing in at Asia’s New Bank
Jun. 29, 2015
China’s Asian Infrastructure Investment Bank is closer to launch after an official signing ceremony at the Great Hall of the People in Beijing. Officials from 57 nations took part in the event that marks a significant step for the world’s second-largest economy.
China is flexing its muscles with the regional bank that will give it a higher profile on the global financial scene. It announced plans to set up the institution in October last year.
China’s leaders want to have a bigger say in international financial circles, in keeping with the country’s economic might. State-run media have been highlighting the significance of the new bank, and the financial sector is watching closely.
“Let’s work together to build the AIIB into a new type of professional and effective multinational bank for the 21st century,” Chinese Finance Minister Lou Jiwei said at the signing ceremony. “Its platform will ensure solidarity and provide its members with a win-win outcome.”
The bank’s foundation membership was initially limited to about 20 countries, mainly from Southeast Asia. That changed in March, when Britain said it would take part and dozens of other countries - including other G7 powers in Europe - followed.
Representatives from seven countries, including the Philippines and Thailand, did not sign the papers at Monday’s ceremony. Chinese officials gave no reason, but said those countries can sign the pact after completing domestic procedures.
The AIIB is to be capitalized at $100 billion. China will hold the largest stake, about 30 percent, followed by India, Russia and Germany. Countries from the Asia-Pacific region will contribute three-quarters of the total capital and the remainder will come from Europe and other areas.
Beijing will have a board voting right of more than 25 percent, effectively giving the country veto power over key decisions. The board of directors consists of nine members from Asia and three from elsewhere. Chinese officials say the 12 directors will be non-resident, based outside the AIIB’s Beijing headquarters.
The articles of agreement give China an unrivalled influence over the management of the new bank, and reaction to its launch is mixed. Emerging economies in regions including Southeast Asia welcome China’s move and hope it will help finance infrastructure for their growing economies.
But leaders of the United States and Japan have decided against joining the AIIB over concerns that its governance lacks transparency. “The Japanese government hopes the AIIB will meet the standard of an international financial institution, including its governance,” says Japanese Chief Cabinet Secretary Yoshihide Suga. “We hope the new bank will contribute to sustainable development in Asia. Japan will closely monitor how the bank is run.”
Suga says Japan hopes to work with the AIIB to promote infrastructure investments in Southeast Asia. Chinese leaders maintain Japan, the US and other countries are always welcome to join.
World Bank President Jim Yong Kim says the China-led bank is an important new partner with a common goal of ending poverty. Kim also says he hopes the AIIB will work closely with other international institutions to help fund global infrastructure.
Officials in Beijing expect the bank to be up and running by the end of the year.
Professor Masahiro Kawai, from the University of Tokyo’s Graduate School of Public Policy, joined Sho Beppu and Aki Shibuya in the studio to discuss the emerging bank.
Beppu: Professor Kawai, let me ask you about a chart we have that shows the top contributors to the World Bank, the Asian Development Bank and the AIIB. China is contributing 30 per cent to the AIIB, why is China investing so much in this bank?
Kawai: Obviously China wants to have dominance in the AIIB, in the management of the AIIB. Having 30 percent in terms of capital contribution share is huge, and China also has veto power which means that China can prevent any policy which is not consistent with China’s policy intentions. Now in the case of the ADB (Asian Development Bank) for example, Japan and the US have to be together in order to have veto power. But in the case of the AIIB, only China as a single country can have veto power. China wants to make sure that it can run the AIIB on its own.
Shibuya: What is China trying to achieve through this institution?
Kawai: China, being the number two economic power in the world, and number one in Asia, wants to run an Asian institution focusing on infrastructure investment. Infrastructure investment is something that China has been proud of because China has been very successful in building infrastructure, so China wants to take leadership in this area.
Beppu: The Chinese Central Bank just lowered its key interest rates. Is it possible that China is using the AIIB to divert attention from its economic slowdown?
Kawai: Economic slowdown is taking place. I think this is not a short term phenomenon. This is a structural phenomenon, meaning that China’s economic growth is going to slow down over a long period of time, from 10 percent several years ago, to 8 percent, 7 percent, and 6 percent, 5 percent in the future. China needs more businesses abroad, so in helping build infrastructure abroad, Chinese products could be exported, and Chinese infrastructure firms can operate in Asia’s developing countries. In addition to domestic economic needs I think there’s some potential for the AIIB to be used to realize China’s foreign policy objectives. In other words, expanding its economic and political influence westwards to central Asia, so the AIIB can serve several objectives for China.
Beppu: Is the AIIB project moving along as China would expect?
Kawai: I think so, except there are some countries that have not signed the articles of agreement. They indicated there may be some difficulties. These countries that haven’t signed perhaps have concerns over China’s dominance over the AIIB, or its very aggressive behavior in the South China Sea may be generating some concerns. Some countries may feel that they may not be getting enough economic benefits. We want to see what’s going to happen to these countries.
Beppu: Japan and the United States are still refraining from joining this bank. The reasons officials are citing is lack of transparency. How important is this notion?
Kawai: Transparency is extremely important, because many people have concerns about China’s true intentions in managing and running the AIIB. It will be beneficial for China to make this bank as transparent as possible. It’s extremely important for the AIIB to provide all the necessary powers to the board of directors. The board members are not going to reside in Beijing, which is a pity, but a lot of decision-making powers would have to be given to the board members, otherwise this concern over transparency will continue to linger.
Beppu: Do you think the AIIB will succeed?
Kawai: I hope so, however it’s going to be a big challenge for China because an international financial institution of this size, of this caliber, requires a high degree of transparency, accountability and co-ordination. This is something that the Chinese political system is lacking so the AIIB faces a tremendous challenge for success.