AIIB:  A Viable Win-Win Model for the Global Financial Order?
By Henry Hing Lee Chan

AIIB: A Viable Win-Win Model for the Global Financial Order?

Jun. 29, 2016  |     |  0 comments


When the UK announced its decision to join the China-initiated new regional multilateral development bank, the Asian Infrastructure Investment Bank (AIIB), in March 2015, the initial reaction from the US was anger. The White House issued a statement declaring that it was “worried about a trend of constant accommodation” of China, and that it hoped and expected the UK to use its influence to ensure that high standards of governance would be upheld in the Chinese-led institution. Many western countries soon followed the UK’s decision and the AIIB was set up in January 2016 with all major economic powers sans the US, Japan, and Canada (Watt, Lewis, & Branigan, 2015).


Initial anger of the US over the AIIB subsided with the visit of Chinese President Xi Jinping to the US in September 2015. US officials declared what amounted to a truce in their campaign against the AIIB, claiming that the US had secured commitments from China to address Washington’s concerns (Donnan, 2015).


Initial worries of clashes between the AIIB and existing Bretton Woods institutions such as the World Bank (WB) and the Asian Development Bank (ADB) have subsided with increasing cooperation among these institutions and adoption of similar governance rules on existing multilateral development banks (MDBs) by the AIIB.


Cooperation among MDBs


The Financial Times reported on April 19, 2016 that the AIIB is working on three initial project loans in partnership with the ADB, the European Bank for Reconstruction and Development (EBRD), the Department for International Development (DfID) of the UK, and the WB. The AIIB will help to fund a highway in Pakistan, a road project in Tajikistan, and a ring road in Almaty, Kazakhstan. In Pakistan, the AIIB will join the ADB in funding a 64 km stretch of highway connecting Shorkot to Khanewal. The project is led by ADB and the project’s terms were recently revised to allow the AIIB to participate. Under AIIB guidelines, the AIIB can only fund projects open to companies from all countries, while the ADB restricts project participation to bidders from its member countries. However, the ADB will retain its lead role and it will administer the project on behalf of the other co-financiers. The ADB will carry out project bidding in according to its procurement guidelines and procedures. In Tajikistan, the AIIB will join the EBRD in funding a road in the country’s capital, Dushanbe. The third road project in Kazakhstan is funding the Bakad Ring Road in the country’s commercial capital, Almaty. The project is a joint World Bank-EBRD-AIIB undertaking (Mitchell & Farchy, 2016).


By initially focusing on projects led by other international development banks, the AIIB can build up a loan portfolio far more quickly than would be possible if it acted on its own. Meanwhile, the WB, ADB, and other MDBs can tap into the resources of AIIB and save their resources for additional projects. The willingness of the AIIB and other existing MDBs to reach out to one another bodes well for cooperation among them. The AIIB has signed an agreement to co-finance USD 1.2 billion in projects with the WB in 2016, and it is evaluating 18 project proposals which will be co-financed with the WB and another 8 with the ADB. The extent of cooperation between the AIIB and the existing MDBs surprised the former US ambassador at the ADB, Robert M. Orr (Orr, 2016).


Implications for Successful Cooperation among MDBs


Aside from the financial gains on both sides, there are several intangible benefits that are more important down the road:


First is the build-up of mutual trust. There are persistent concerns in the US and Japan behind the intention of China’s setting up of the AIIB. They suspected that the AIIB is going to be a policy instrument of China, and look at the AIIB as a rival to the WB and ADB. Now with the perceived rivals working together, the immediate worry of these MDBs being distracted from their development financing role due to geo-political rivalry is diminished. Also, the cooperation affirms the commitment of China to the existing Bretton Woods global financial architecture. The Chinese commitment to Bretton Woods is very important in the midst of the global economic slowdown.


Second is the assurance of high governance standards for the AIIB. Although the AIIB had repeatedly assured the public that it will be “lean, clean and green,” and that it will enforce a governance standard comparable to that of the WB, ADB, and other MDBs, many observers note that China has no experience running such an institution (Wei, 2016). Now with major Western nations joining the organization, senior staffs recruited internationally based on merit, and joint projects with existing MDBs, criticism against the AIIB on governance grounds is now muted. The current setup provides an excellent learning opportunity for China. Learning how to establish and implement the highest possible governance standard is important not only for China, but also for the smooth operation of the MDB system in the future.


Third is improving the efficiency of the MDB system. In the discussion leading to the AIIB formation, it was pointed out that existing institutions are slow and bureaucratic. Former US ambassador Orr wrote that the ADB is running along an official Washington-style bureaucracy model. A typical project takes 7 years upward from project initiation to completion. The annual operating budgets of the WB and the ADB are in the mid-single digits of their loan volume, a level that is many times over that of private financial institutions. The AIIB had vowed to trim down expenses and shorten project evaluation time. The ideas of a non-resident board of directors and a staff size of 700 as compared to resident board and a staff size of over 2000 in the ADB are cited among the means to improve cost structure and efficiency (Orr, 2016).


Fourth is that a successful or conditional collaboration between the AIIB and other MDBs will demonstrate the workability of such cooperation despite the geo-political rivalries of their respective major stakeholders. A study released by the Global Economic Governance Initiative of Boston University in cooperation with the Chinese Academy of Social Science’s Institute for World Economics and Politics in May 2016 shows that China is emerging as the global leader in development finance (Gallaghan, Kamal, & Wang, 2016).


In contrast to the stagnation in lending of traditional multilateral development banks in past decade, China is increasing its development lending through its two global policy banks, the China Development Bank (CDB) and the Export-Import Bank of China (Exim Bank). These two institutions had outstanding overseas loans amounting to USD 684 billion at the end of 2015, just a little less than USD 700 billion owed to the six Western-backed MDBs that were set up decades earlier (Kynge, 2016). See Figure 1.


Figure 1. China Policy Banks Dominate Global Development Finance (Global Assets in USD Billion)


Source: Kynge (2016).


In addition, China has set up fourteen regional funds with total available funds of more than USD 116 billion. See Figure 2. Adding all these funds brings the total Chinese financing to well above the USD 700 billion in assets of the six Western-backed development banks.


Figure 2. Chinese Development Funds in the World Economy



Source: Gallaghan, Kamal, & Wang (2016).


Chinese build-up in the area of development finance started in the 2000s and the trajectory mimics the economic ascendancy of China. The AIIB certainly harbors growth ambitions, as its Articles of Agreement (AOA) state that the AIIB’s investment capacity may reach USD 250 billion by the end of 2020. Its stated annual goal of USD 10-15 billion in the near term will make its size comparable to that of the ADB, an institution that was set up in 1966. Given that the Western-backed MDBs appear to have stagnated in their ability to increase their capital bases and lending power, the AIIB will be more important in the area of infrastructure development lending down the road.


The Chinese economy is slowly re-balancing towards domestic consumption and that should provide for more stable macro-economic performance down the road. China’s enormous domestic savings and consistent annual USD 200-300 billion current account surplus underpins the country’s position as a major development fund provider in the foreseeable future. Cooperation between the AIIB and other MDBs should serve as a good working model for countries with differences in geopolitical interests and ideologies to set their problems aside and work for the common interest.


References


Donnan, S. (2015, September 27). White House declares truce with China over AIIB. The Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/23c51438-64ca-11e5-a28b-50226830d644.html#axzz49oIhLMxM


Gallaghan, K., Kamal, R., & Wang, Y. (2016, May 16). Fueling growth & financing risk: The benefits & risks of China's development finance in the global energy sector. Retrieved from http://www.bu.edu/pardeeschool/files/2016/05/Fueling-Growth.FINAL_.version.pdf


Kynge, J. (2016, May 17). China become global leader in development finance. The Financial Times. Retrieved from http://www.ft.com/intl/cms/s/3/b995cc7a-1c33-11e6-a7bc-ee846770ec15.html?siteedition=intl&ftcamp=crm/email//nbe/Comment/product#axzz48tdUq8rV


Mitchell, T., & Farchy, J. (2016, April 19). China’s AIIB seeks to pave new Silk Road with first projects. The Financial Times. Retrieved from http://www.ft.com/intl/cms/s/2/a36af0d0-05fc-11e6-9b51-0fb5e65703ce.html#axzz49oIhLMxM


Orr, R. (2016, May 4). The Asian Development Bank and the Asian Infrastructure Investment Bank: Conditional collaboration? Retrieved from https://www.csis.org/analysis/pacnet-39-asian-development-bank-and-asian-infrastructure-investment-bank-conditional


Watt, N., Lewis, P., & Branigan, T. (2015, March 13). US anger at Britain joining Chinese-led investment bank AIIB. The Guardian. Retrieved from http://www.theguardian.com/us-news/2015/mar/13/white-house-pointedly-asks-uk-to-use-its-voice-as-part-of-chinese-led-bank


Wei, L. L. (2016, January 22). China-led development bank AIIB will be lean, clean and green, says its president. Wall Street Journal. Retrieved from http://www.wsj.com/articles/china-led-development-bank-will-be-lean-clean-and-green-says-head-1453479933




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