Two new China-based development banks are set to begin lending this year, adding a new layer to social and infrastructure funding across Asia. Talk of a challenge to the established order, however, is overdone.
The more things change, the more they stay the same. Since Chinese President Xi Jinping first called for the creation of a new multilateral development bank at a speech in Bali in October 2013, the international community has been wrestling with the implications. Would the Asian Infrastructure Investment Bank be an extension of China’s soft power? Would it follow the same governance and sustainability standards as the established MDBs? Would it threaten the US-dominated global financial system that has been in place since the Bretton-Woods agreement of 1944?
Almost three years later, the answers to those questions remain unclear. The AIIB has won the support of the vast majority of the international community, despite the reluctance of the US and Japan (the ADB’s biggest shareholders). A total of 57 governments signed up in 2015, and another 30 are looking to follow suit, the AIIB President told Reuters in March.
The huge amount of global attention has been a diplomatic coup for Beijing, but the bank has so far been careful to stick closely to the established script.
The AIIB’s first loans will be in US dollars, rather than renminbi – as many observers had speculated – and the bank’s top management includes former ADB and World Bank executives, pointing to a desire to work in partnership rather than competition with the established MDBs. The AIIB’s first President, Jin Liqun, is himself a former ADB executive, having served as a vice president from 2003–08.
“We will do our best to promote broad-based economic and social development through sustainable infrastructure investment in the Bank’s member countries,” Jin said in a speech at the AIIB’s inauguration ceremony in January.
The AIIB officially opened for business in January and is still recruiting investment specialists, but is due to approve its first projects at its next board meeting in June. One of its first investments is likely to be a co-financing with the ADB and the UK’s Department for International Development. The next section of Pakistan’s M4 motorway is out to tender, with bids from contractors due by May 23. (See below.)
The bank is planning to approve US$1.2bn of financing in 2016, and is also discussing almost a dozen co-financings with the World Bank Group, it said in April.
Much like the other MDBs, it plans to raise funds for its disbursements in the capital markets, initially in US dollars, although the AIIB has not set a timetable for its first issue. Michael Dee, a former Morgan Stanley and Temasek Holdings executive, is on board as senior financial adviser.
“The challenge, of course, is that even with the arrival of these two new institutions the gap remains large. It’s going to be critical that we all collectively work on how we can use our balance sheet to leverage more investment in infrastructure across the region.”
Jin has pledged to make the AIIB “lean, clean and green”, promising quicker project approvals and a streamlined institution. While that could be read as a criticism of the ADB’s bureaucratic procedures, the selection of the first projects points firmly to a collaborative stance.
Jin is also keen to dispel any fears that the new bank will cut corners when it comes to lending safeguards and governance standards.
“We will do our best to promote broad-based economic and social development through sustainable infrastructure investment in the Bank’s member countries. We will do our best to protect the environment and take care of the people in project areas,” Jin said in a speech at the AIIB’s inauguration ceremony in January.
Standards
A co-financing will allow the AIIB to begin lending quickly, since the due diligence has already been completed by the ADB, but offers little guide of the AIIB’s own policies to appease its critics.
The US, notably, continues to call for scrutiny of the new bank’s standards.
Treasury secretary Jack Lew, writing in Foreign Affairs on April 11, said it was “paramount” to include the standards and lessons learned at the World Bank and elsewhere “so that the AIIB can reinforce the existing global financial architecture”.
“In September 2015, China pledged that such new institutions would operate in line with the high governance and environmental standards of existing institutions such as the World Bank. And it is important that China keep this pledge,” Lew wrote.
Takehiko Nakao, the ADB’s President, has welcomed the chance to cooperate with the new institution.
“With Mr Jin we agreed that infrastructure is more needed, financing is more needed and we can cooperate. We have started identifying projects,” Nakao said in an interview in late March.
“We also agreed that safeguard policies for social impact and environmental impact are crucial, and procurement systems should be fair and competitive.”
The ADB has provided “a lot of help” in setting policies and systems, Nakao said. Some differences are already clear, however. The AIIB will pursue a universal procurement approach, meaning it will not favour Asian contractors in the projects it supports. The ADB’s policy usually allows bids only from its eligible member countries.
The AIIB also aims to be a leaner and more efficient institution by operating without a resident board and without big country offices, again in contrast to the ADB’s structure.
“Because of those different views on how to manage the bank, I think we can complement each other,” said Nakao.
Building BRICS
China is also hosting a second major new multilateral in the shape of the New Development Bank, formerly known as the BRICS Development Bank.
The Shanghai-based NDB was formally launched in July 2015 with equal capital contributions from Brazil, Russia, India, China and South Africa. Its initial subscribed capital will be US$50bn, with paid-in capital of US$10bn to come in instalments by 2020.
Each of its five founding members will have equal voting rights, and no single nation has veto powers – a contrast to the US’s veto power over the International Monetary Fund. The first president is from India, with each of the four vice presidents coming from the remaining members.
While the structure may differ from other multilaterals, the NDB’s charter expresses a similar mission:
“The bank shall mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, complementing the existing efforts of multilateral and regional financial institutions for global growth and development.”
The NDB’s South African vice president Leslie Maasdorp, who is responsible for the bank’s financing and treasury operations, reiterated a desire to collaborate with existing multilateral institutions at China’s Boao Forum in March.
“We are working closely together with the World Bank and the Asian Development Bank because, as you know, there is such a big demand for infrastructure. There is not enough capital to fill all the gaps in terms of funding,” he said during a panel discussion, according to the state-run Xinhua news agency.
KV Kamath, President of the NDB, is also a former ADB executive, having worked in the private sector department from 1988 to 1996. Nakao, the current ADB President, is also open to collaboration with the new institution, but has yet to discuss co-financing opportunities with the NDB management.
“We have supported them in several respects,” said Nakao. “I hope we can meet either in Manila or in Shanghai within this year to accelerate our cooperation.”
Like the AIIB, the NDB has yet to begin lending, though its president pledged last year that the first disbursements would be approved in April 2016 and would be made in Chinese renminbi.
That suggests the bank’s operations may be more of a departure from the established order.
The NDB plans to issue Rmb3bn–Rmb5bn of bonds in China’s onshore markets in the second quarter, Maasdorp told reporters in March. The bank aims to approve US$1.5bn–$2bn of investments this year, according to reports on its web site. NDB President Kamath said in February that its first investments would focus on green energy. The NDB did not immediately reply to email inquiries.
Whatever direction the new banks take, it is clear that Asia stands to benefit from the increased capacity for infrastructure financing.
“It’s hard to predict how things are going to change given that the operating models for these two institutions are not yet entirely clear,” said Stephen Groff, ADB vice president and a US citizen.
The ADB has put the region’s infrastructure requirement at US$8trn over the 10-year period to 2020. While most of that will come from countries’ own resources, any addition to the US$27bn of assistance that the Manila-based institution approved in 2015 is to be welcomed.
“We certainly welcome the addition of these two new institutions to help plug that gap. The challenge, of course, is that even with the arrival of these two new institutions the gap remains large,” said Groff.
“It’s going to be critical that we all collectively work on how we can use our balance sheet to leverage more investment in infrastructure across the region – whether that be government investment or private sector.”
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