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Nations investing faith in Asian bank plan

Zhao Yinan and Zhang Chunyan
Updated: Apr 1,2015 7:35 AM     China Daily

Analysts back new China-led AIIB to make profit and bring change to the global financial system.

Washington has appeared to soften its stance on the new Asian Infrastructure Investment Bank, which some view as a challenger to the US-dominated World Bank, after seeing many key allies flock to join the China-led project.

US Treasury Secretary Jacob Lew said on March 30 that the US is looking forward to cooperating with the financial institution, which was first proposed by Beijing in 2013 and aims to boost funding for infrastructure construction in Asia’s developing nations.

Previous reports quoting White House insiders suggested the US had been angered by allies such as Britain rushing to sign up with the AIIB.

Yet, analysts say the tone of Lew’s comments, which came during his visit to Beijing as the special envoy of US President Barack Obama and just a day before the deadline for applications for founding members of the bank, leaves the door open for the US to adopt an observer status in the coming months when details of the bank are settled.

The change in the US stance may have to do with Japan, its strongest ally in Asia, announcing it is likely to join the AIIB in a few months, according to a Financial Times report that quoted Masato Kitera, the Japanese ambassador to Beijing.

In a meeting with Premier Li Keqiang on March 30, Lew said the US welcomes and supports proposals that are helpful to infrastructure construction, and cooperation on that regard can be carried out through any mechanisms accepted by the two countries, including the annual China-US Strategic and Economic Dialogue, the World Bank and the AIIB.

If Japan does join, it means the US will be the only G8 nation not clear about its attitude toward the bank project, set to be launched by the end of this year with initial capital of $50 billion.

Kyrgyzstan and Sweden applied on March 31, taking the total number of would-be founding members to 46 across five continents.

Even before the announcement of when it will launch, the AIIB has dominated headlines, resulting in clashes of opinions on whether the bank can succeed in making money through infrastructure construction-as well as establishing a new financial system to reduce the US dollar’s influence on the global economy.

“It would surprise me if a profitable deal with relatively low risk does not attract many investors,” said economist Ding Yifan at the State Council’s Development Research Center.

With the primary goal to finance railways, roads and other buildings in developing Asian markets, the AIIB is more likely to make a profit than the Japan-dominated Asian Development Bank, which also focuses on poverty alleviation, education and environment improvement, he said.

“The market is huge, but demand has been held back because of complex procedures and the additional conditions set by existing regional fund providers,” Ding said. “Also, the long return cycle and geopolitical risks have put off private investors from entering to the sector.”

According to the ADB, demand for infrastructure investment in Asia will top $800 billion by 2020, an amount far beyond the funding capability of existing multinational financial institutions.

Economic strength

When President Xi Jinping first proposed establishing the AIIB, during a visit to the Indonesian capital of Jakarta in 2013, it generated little buzz.

Only when the bigger picture became clearer did people see how China could potentially deal with its excessive industrial production capacity and at the same time attempt to “go beyond a regional development institution and ... influence the global financial order”, said Shen Jianguang, chief Asia economist at Mizuho Securities Asia.

Shen said he learned of the difficulties facing a developing country in getting a loan while working at the International Monetary Fund, which is based in Washington DC. There, he said, even small amounts of money-several million dollars-come with “lengthy additional conditions and negotiations with local administrations”.

Whether the AIIB can reduce the red tape that has long hampered international financial institutions is unknown, he said, but the competition provided by an alternative credit lender could aid infrastructure upgrading and speed up interconnectivity in Asian countries.

Zhang Yuyan, director of the Chinese Academy of Social Sciences’ Institute of World Economics, said it is difficult to predict the return rate while details of the bank are still undecided. However, the outlook for the infrastructure building business is hopeful, he said, not only because of the continent’s large demand, but also because the Chinese government has shown how to build economic strength by expanding transportation and other facilities.

As China has invested widely in infrastructure construction, both overseas and at home, the rail equipment manufacturing and construction industries have surged.

On March 30, China’s two leading rail equipment manufacturers reported all-time high profits for 2014, with an annual increase in sales of more than 20 percent, amid strong efforts of the government to export the equipment to developing markets in South Asia, Africa and Europe.

“However, as its economic clout is growing, China faces increasing risks in geopolitics and commodity price changes,” Zhang said. “I think the country is trying to reduce the risks by inviting other nations to join in bilateral projects on a multinational platform, where every country is a stakeholder.”

In November, Mexico scrapped a $3.75 billion contract with a Chinese-led consortium to build a 210-kilometer, high-speed rail line. The line would have connected the capital, Mexico City, with a northern industrial hub.

Such a U-turn is a risk faced by many Chinese investors overseas.

Sri Lanka recently resumed a $1.4 billion port project in Colombo after a suspension that lasted months due to changes in policy caused by a leadership reshuffle. Media reports estimated the commercial losses ran as high as $380,000 a day.

Yu Yongding, an academician at the Chinese Academy of Social Sciences, said China has taken too many risks by lending money to places such as Ukraine and Latin American and African countries where there is political unrest.

“Some people believe it is all settled once they reach a deal with a local government, but it’s not always the case,” he said, adding that major infrastructure construction projects can often pass through several countries, making them even more complicated.

More influence

Ultimately, the AIIB is a chance for Beijing to set its own economic agenda, according to Ding at the State Council’s Development Research Center.

“The country has become tired of the fact that its say in the global financial system does not match its economic strength,” he said. “Beijing has been waiting for the West to change the spectrum, but now it seems to have decided to make its own, as little progress has been made over the years.”

During his meeting with the US Treasury Secretary on March 30, Premier Li Keqiang expressed hope that the US will approve reform of the International Monetary Fund “as soon as possible”, the second time he has mentioned the issue in of week.

China, along with other developing countries, has been trying to increase its say in the institution by reallocating the IMF quota and including the renminbi in the basket of special drawing rights, an exchange arrangement under the institution.

By preventing the reform project from taking effect for more than two years, the US has maintained its power to veto major IMF decisions as the largest stakeholder.

“It’s too early to say if better integration in Asia and more economic influence over Asian countries will lead to changes in the region and eventually challenge the US-dominated international financial system,” Ding said.

“But it’s likely, since changes to the international order have all gradually begun.”

European appeal

Trade and investment opportunities in China and other developing Asian nations have attracted European countries to join the Asian Infrastructure Investment Bank, according to insiders.

Experts also predict that the involvement of European countries will help the AIIB to meet high standards in governance and transparent lending.

“The global economy is increasingly driven by the East,” said Danny Quah, director of the London School of Economics and Political Science’s Southeast Asia Centre. “During the global financial crisis, many Western observers were surprised by how strongly China and Asia continued to grow.

“Western Europe has to realize that what is good for the world economy is good for them,” he added. “Making growth in Asia more sustainable is better for them.”

Quah said trade and investment links with China and other Asian countries are already important to Europe, leading to nations such as Britain, Germany, France, Italy and Luxembourg submitting applications to become founding members of the AIIB.

Founding members will help decide how the bank is governed and operated, while countries that join after the March 31 deadline will have voting rights but less of a say in the rule-making process.

“This is an opportunity to join a multilateral organization, and to show that Europe is committed to Asian development,” said Nicola Cassarini, a senior fellow for Asia at the nonprofit Istituto Affari Internazionali in Italy.

Finland was among the latest countries to apply to the AIIB on March 30, while the governments of the Netherlands and Denmark were expected to follow suit.

“Europe has a lot of experience in the field of multilateral cooperation and the financing of infrastructure through multilateral banks,” said Pierre Gramegna, Luxembourg’s finance minister. “European countries can contribute to ... ensure the AIIB meets the highest and most stringent standards in terms of good governance, transparent lending policies, social and environmental safeguards and state-of-the-art procurement guidelines.”

According to estimates by the Asian Development Bank, infrastructure construction in Asia will require an investment of $8 trillion over the next decade.

Gramegna said the AIIB can play an important role in helping countries meet those needs in coordination with other multilateral development institutions, such as the World Bank.

More than 40 countries on five continents have so far joined or applied to join the AIIB as founding members.

The bank is to be established by the end of this year.

What they say

The US position on the AIIB remains clear and consistent ... But the United States believes that there is a pressing need to enhance infrastructure investment around the world, and we believe that any new multilateral institution should incorporate the high standards that the international community has collectively built at the World Bank and at other regional development banks.

-- White House statement

The IMF is willing to cooperate with the AIIB as there is massive room for cooperation with AIIB on infrastructure financing.

-- Christine Lagarde, International Monetary Fund chief

All of the investments that currently existing will not meet the need that exists in developing countries, so we welcome any new organizations, any countries, the BRICS bank, AIIB. We think that the need for new investments in infrastructure is massive and we think that we can work very well and cooperative with any of these new banks once they become a reality.

-- Jim Yong Kim, World Bank president