World banks on Asia's future

Updated: 2015-04-03 07:27

By Zhang Chunyan and Ning Hui(China Daily Europe)

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New Asian investment institution has had countries lining up at the door for membership

Six months ago, when 21 countries, including China, India and Singapore, signed an agreement in Beijing to set up an infrastructure investment bank for Asia, the news barely registered a ripple globally.

But as its groundbreaking importance has gradually dawned on the world's movers and shakers, what at first resembled a club with rather limited appeal has developed into one that everyone now seems to want to join.

World banks on Asia's future

So much so that when the deadline to join the now prestigious Asian Infrastructure Investment Bank was reached on March 31, the number of membership hopefuls had ballooned to 52.

Standing first in line was the British Chancellor of the Exchequer, George Osborne, who had announced on March 12 that Britain would be the first "major Western country" to apply for membership. France, Germany and Italy quickly followed suit, as did Luxembourg and Switzerland. Other European countries in the queue were Austria, Denmark, Finland, Norway, the Netherlands, Sweden, Portugal and Hungary.

Watching warily from the sidelines was the United States, which recently expressed its concerns about this new institution. But Washington's unease over a bank in whose founding China has played a key role, seemed to do little to dampen the enthusiasm of other countries, and soon Australia, Brazil, Russia, South Korea and Turkey were filling out membership forms, too.

But for all the enthusiasm that has greeted the bank's founding, there has also been fierce debate in the ranks of academics, diplomats, journalists, politicians and public servants worldwide about the merits of joining it. Soon after news of the bank's establishment found its way into the media - even before an official announcement was made - Australia declared that it would not take part, only to do an about-face in recent days after it became clear that in not joining it would be left in the cold.

Hours before the deadline for applications closed on March 31, Iceland, Israel, Norway and Spain announced that they, too, wanted to join, bringing to 52 the number of potential founding countries.

It will take about two weeks for the application process to be completed, and the final list of founding members will be settled by April 15. After that, countries will be able to apply to become ordinary members.

The genesis of the relatively short process that unfolds over the next 10 days or so was a speech President Xi Jinping gave in Indonesia about 18 months ago in which he proposed a bank to finance infrastructure projects in Asia. The need is clear, considering that the demand for such funds outstrips the loans that the International Monetary Fund, the World Bank and the Asian Development Bank grant.

Beijing estimates that between now and 2020 about $730 billion will be needed annually to fund infrastructure spending in Asia. The authorized capital of the new bank is $100 billion, and the initial subscribed capital is expected to be about $50 billion.

The bank aims to use a variety of support measures - including loans, equity investments and guarantees - to boost investment in many sectors, including agriculture, energy, telecommunications, transport and urban development.

Beijing hopes to put together the articles of agreement, the basic rules governing the bank, by the end of June and to have the bank operating by the end of this year. But drawing up rules of management may be one of the easier parts of bringing this grand plan to fruition.

With so many countries as founding members, one of the thorniest issues is how voting shares in the bank will be allocated to its founding members.

Voting rights

The 21 countries that signed the agreement in Beijing in October agreed that GDP would be the basic parameter in determining share allocation among member countries.

Shi Yaobin, China's vice-finance minister, says that while the bank's shareholding structure is subject to negotiation, there will be a different arrangement for Asian members and non-Asian members.

One option is for the bank's Asian members to have 75 percent of the voting shares, with the right of each of those members potentially depending on the size of their GDP. The remaining 25 percent of the voting shares would then go to non-Asian members.

Shi sidestepped the issue of whether Beijing gave up veto power over bank decisions to gain support from potential members in Europe, saying only that China never sought this role.

"So whether China sought or gave up veto power is not a valid question."

The Chinese Finance Ministry says that negotiations between potential founders on the new bank's draft rules were held at a conference in Almaty, Kazakhstan, from March 30 to 31.

Jin Liqun, secretary-general of the bank's multilateral interim secretariat, reported on the latest developments regarding the bank's preparatory work to representatives from 29 would-be founding members. Representatives also discussed governance, procurement and environmental and social frameworks.

But before the representatives set about doing those tasks, and well before the application deadline on March 31, the US had urged its allies not to join the bank, seeing it as a rival to the World Bank and the Asian Development Bank, in which the US wields decisive influence. However, strategic allies of the US from Europe to Asia apparently decided to turn a deaf ear to Washington's pleas and join the new institution.

Analysts say that joining the bank at the founding stage will give these countries greater voice and secure larger shares of effervescent markets, draw them closer to Asian partners, especially China, and lower barriers in their engagement with Asia.

Part of having a greater voice includes the right to frame the bank's rules of governance and operation. Countries that join after the deadline will have voting rights but less say in making rules.

Company gains

However, it is not only countries that stand to gain enormously from the bank's operations, says Daniel Runde, a specialist in international development and international studies and a former political appointee in the administration of George W. Bush.

In the US magazine Foreign Policy, he says: "With Britain as a member, British companies will get favorable treatment on big infrastructure deals funded by this new bank. Those companies whose countries are not members will not be able to bid, or will be at a disadvantage."

British Prime Minister David Cameron has made international development a big part of his governing program, and he now faces an election in about five weeks in which the economy will be the top issue, Runde says.

In response to US reservations regarding British membership in the new bank, a Cameron spokesman says: "We think it's in the UK's national interest."

Experts say that trade and investment with China and other emerging countries in Asia is also an important reason to attract European countries to join the Asian Infrastructure Investment Bank.

"The global economy is more and more driven by the East," says Danny Quah, director of the Southeast Asia Centre at the London School of Economics and Political Science.

"It happened spectacularly in the global financial crisis where lots of Western observers were surprised by how strongly China and Asia continued growing. Western Europe has to realize that what is good for the world economy is good for them. So by making growth in Asia more sustainable, it will be better for them."

Nicola Cassarini, senior fellow for Asia at the Institute of International Affairs in Rome, says: "This is a necessary opportunity actually to join a multilateral organization, and to show the European countries are committed to Asian development. All these add to what the Europeans can put on the table when they go to Asia, also the fact that they are committed to develop the region and put money in the bank that focuses on infrastructure in Asia."

Given that major European countries have already applied to join the bank, what others do makes little substantive difference, says Rod Wye, associate fellow at the think tank Chatham House in London.

"Clearly there is an enormous need for infrastructure development in Asia, which could provide good opportunities for British and European companies."

For the new bank, the participation of European countries as main economic powers will strengthen its ability to raise funds and make it more internationalized, representative and inclusive. Those countries will also be able to help the bank meet high standards of governance, transparency and lending.

"Europe has a lot of experience in the field of multilateral cooperation and the financing of infrastructure through multilateral banks," says Pierre Gramegna, Luxembourg's minister of finance.

"The European countries can thus contribute to working with the other members to ensure that the bank will meet the highest and most stringent standards in terms of good governance, transparent lending policies, social and environmental safeguards as well as state-of-the-art procurement guidelines."

Eswar Prasad, former head of the IMF's China division, says the new bank is a "prime example of China's increasingly savvy and disciplined approach to international economic engagement, an approach that emphasizes constructive engagement".

Management structure

The keenness of European countries in being involved with the bank early reflects the fact that they are keen on gaining board membership and that they realize one of their cities could be in the running to host the bank's European offices.

Chinese Finance Minister Lou Jiwei says the bank will have a three-tier management structure: a board of governors, a board of directors and a president.

The board of governors, as the highest decision-making body, will elect a non-resident board of directors, which will determine budgets and projects. Even if China has more members on the boards than do other countries, it will be unable to treat the institution as a Chinese policy bank and dictate its decisions.

Indeed, if China tries to push for unpopular loan or procurement decisions to advance its own economic or strategic agenda, an unbiased board of directors is likely to push back.

Shi says founding members agreed in October that the bank's headquarters would be in Beijing. Whether or not the bank sets up other key offices depends on how the bank's operations develop, Shi says.

Rolf Langhammer, professor and former vice-president of the Kiel Institute for the World Economy in Germany, says that for practical purposes it makes sense for the bank to have European offices, possibly in Frankfurt or London.

Early opposition to the bank from the US was apparently based on the fear that China would use it to enhance its influence in the region. Britain's announcement on March 12 that it would apply to join the bank appeared to rile the US, a reaction that many experts say was unwise.

"The US has always said it wants China to be a very responsible leader," Quah of the London School of Economics says.

"When China wants to do that, the first thing the US should do is applaud. But it didn't. When other countries said China was actually doing the right thing, the US wanted to slap them."

Prasad says: "The US criticism that institutions like the new bank will lead to a race to the bottom in governance standards rings hollow."

The irony, Prasad says, is that the intransigence of the US Congress has blocked governance reforms in institutions in which the US has traditionally wielded inordinate influence such as the IMF, whose legitimacy and effectiveness is being eroded by poor governance.

Cassarini of the Institute of International Affairs in Italy says: "Washington criticizing China was a political criticism, but in terms of on the ground, in terms of infrastructure investment, I think the World Bank people will be happy because there will be a new bank which will actually be financing a lot."

Since the US made its worries with the new bank known early on it has softened its stance. US Treasury Secretary Jack Lew, who visited China several days ago as US President Barack Obama's special envoy, said on March 30 that the US looked forward to working with the new bank.

Washington and Beijing could work together through the China-US Strategic and Economic Dialogue, the World Bank, the Asian Infrastructure Investment Bank and any other mechanisms the two countries accept, he said.

But for all that warm talk, the names of both the US and its ally Japan were still conspicuously absent when applications for joining the bank closed the day after Lew made his comments.

Possible challenges

As an open multilateral financial institution, the new bank's goal is to do infrastructure better, and it has said it is willing to work closely with other institutions and all countries.

"I think overall it is actually very good," Quah says. "Obviously other countries are joining at the funding stage. If the bank is going to be a vehicle for China expressing its wishes on helping emerging economies across Asia, then certainly it would be good that all these countries will be part of the discussion."

The Asian Development Bank has a particular focus on dealing with poverty, Wye says, and it is good to have several banks focusing on different tasks working together.

Analysts say that among the key issues that need to be resolved are the rules for governance and how the capital is divided.

There are also questions over how the bank will provide loans, who receives them and the type of companies that benefit from them, Wye says.

Langhammer says it is difficult to form symmetric relationships for cross-border investment projects that will be equally beneficial to all parties.

Sun Yun, a fellow at the East Asia Program at the Henry L. Stimson Center in Washington, says more attention should be paid to the challenges posed by the way the bank is run.

For example, standards and regulations governing the bank may bring into conflict ideals of upholding standards and making practical decisions, she says.

China has said the bank will deliver funding more efficiently and effectively than the World Bank and the Asia Development Bank. Nevertheless, Beijing also appears to realize that for practical reasons stringent rules and regulations are a must.

On the renminbi's role in the bank, Langhammer says: "In infrastructure, you will not become an international currency if in one small segment of the market, such as infrastructure investment, your currency is used."

Although the renminbi is slowly becoming an international invoice currency, it is still not a fully fledge internationally traded currency, he says.

Cassarini says: "It would be a major success for China if it can manage to show the world that it is able to create an international bank with a focus in Asia in infrastructure that many countries are going to join."

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Zhang Qi and Carolynn Look contributed to this story.

World banks on Asia's future

World banks on Asia's future

World banks on Asia's future

World banks on Asia's future

(China Daily European Weekly 04/03/2015 page1)