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China to play big role in new regional lender

Beijing-backed Asian Infrastructure Investment Bank is seen as aiding China's leadership goals

PUBLISHED : Friday, 25 April, 2014, 10:42am
UPDATED : Saturday, 26 April, 2014, 1:52am

China's planned US$50 billion Asian Infrastructure Investment Bank (AIIB) will help Beijing strengthen its leadership in regional issues, observers say.

It is the second multilateral lender on the drawing board in which China will play a major role, after the BRICS Development Bank that Brazil, Russia, India, China and South Africa have proposed setting up to fund their economic development.

The AIIB is designed to meet a huge demand for infrastructure funding from countries in the region, such as India, Indonesia and Pakistan, that are seeking to narrow the funding gap left unfilled by the Asian Development Bank (ADB).

Researchers say the AIIB is likely to be headed by an official from China, while its headquarters may be based in another country.

Jin Liqun, chairman of China International Capital Corporation (CICC) and a former vice-minister of finance, is heading a team preparing to set up the bank.

An intergovernmental memorandum establishing the bank is due to be signed this autumn.

Jin, who previously served as a vice-president of the ADB and an alternate executive director of the World Bank, would be an ideal candidate to be the first president of the new bank, given his rich experience in international finance, people who helped in research for the plan told the South China Morning Post.

CICC did not immediately respond to queries on Jin's possible new role.

"The management of AIIB has yet to be decided, but Beijing's leading role is clear", as China is the largest economy in the region and potentially the largest investor in the bank, said Zhao Changhui of China Strategic Thinkers, a non-governmental research institute.

Wang Jun, a senior researcher with the China Centre for International Economic Exchanges, a state-backed think tank headed by former vice-premier Zeng Peiyan, said: "China will certainly play an important role in influencing the bank's development strategy and business direction."

During a visit to Southeast Asia in October, President Xi Jinping proposed setting up the regional lender.

The plan would help facilitate a national strategy laid out by Xi of promoting a "Silk Road" economic belt and a seaborne "Silk Road" route, with the goal of boosting China's trade and investment ties with more than 10 countries in Asia and Europe, including Russia, Uzbekistan and Turkmenistan.

The "Silk Road" plans, expected to spur fresh demand for logistics, trade and infrastructure in China's underdeveloped inland areas, were named after the famous ancient mercantile routes via which China shipped its silk and tea to countries in the West as early as the Han dynasty (206BC-AD220).

"Establishing the AIIB would be a win-win game for driving growth in China and other middle- and low-income economies in Asia, where bottlenecks in infrastructure have hindered economic development," said Liu Peilin, a senior researcher at the State Council Development Research Centre.

China has hinted that funding for the bank should not be a big challenge.

"Many countries have reacted actively to the plan," Finance Minister Lou Jiwei told an international audience at the Boao Forum in Hainan province early this month.

Lou said the share of the capital to be contributed by each of the member countries is subject to final negotiations, but China has promised to contribute "a relatively large share", though it will not necessarily be a controlling shareholder.

The bank may also set up a trust fund and introduce private investors, he said.

Beijing also hopes to shift more of its excessive construction capacity overseas, via the AIIB, and take some pressure off the rapid build-up of its foreign exchange reserves, now nearly US$4 trillion and one-third of the world's total.

The new bank and the ADB will complement each other in providing funding to countries in the region, but they will also inevitably compete in securing good projects and raising financing, observers say.

Hamid Sharif, country director of the ADB in China, welcomed the proposed bank, saying the AIIB's resources could complement those of existing multilateral development banks, which cannot fully meet the financing needs of emerging economies.

In the Asia-Pacific region, annual financing needs for infrastructure are estimated at more than US$800 billion, of which only less than 5 per cent has been secured, Sharif said.

Meanwhile, the new bank could channel the region's substantial savings and foreign exchange reserves to address development needs, he said.

"The ADB hopes the proposed bank will co-ordinate with existing donors, including ourselves," Sharif said. "With our long experience and large skills base, [multilateral development banks] can help the bank become operational and gain momentum," he said.

Observers expect the two lenders' areas of activity to overlap but only in part.

The Manila-based ADB has 48 regional members, including China, and 19 members outside the region. Its primary goal is to free the people of the Asia-Pacific region from poverty.

The bank has allocated funds to improve health and education, reduce environmental damage and build bridges and roads.

The AIIB, as its name suggests, will be more infrastructure-focused.

Zhao expects the AIIB to offer favourable interest rates to investors, and it could issue yuan-denominated bonds in future to attract funds from Chinese citizens who have parked most of their savings at banks as deposits because of the limited channels of investment open to them.

But Liu said the AIIB might face some challenges in obtaining funds.

"The returns on the projects invested by multilateral institutions such as the ADB or the World Bank often have the fiscal revenue of the countries that receive the aid as collateral," Liu said. "Therefore the safety of the investments is secure, which in turn enables the lenders to raise funds on the capital markets at relatively low cost."

Asked if the emergence of the AIIB might fuel concern about China becoming a greater threat to the rest of the world, Liu said the worry was unfounded.

"The AIIB is nothing but a channel through which China can contribute to global development and poverty reduction," he said. "Ironically, in many cases, those who worry about the so-called threat from China are the ones who argue that China should shoulder bigger responsibilities in the international community."


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