Source: Beijing Review Published: 2017-1-19
Although being officially launched only a year ago, the Asian Infrastructure Investment Bank (AIIB) is rapidly expanding with grand goals, with $1.73 billion worth of loans issued thus far to nine energy and infrastructure construction projects in seven countries.
The bank was first proposed by Chinese President Xi Jinping during a visit to Indonesia in October 2013.
One year later, on October 24, 2014, the representatives of 21 Asian countries willing to join the AIIB as founding members signed a memorandum of understanding (MoU) on establishing the bank in Beijing. The MoU set the AIIB`s authorized capital to $100 billion, with an initial subscribed capital pegged at $50 billion. In March 2015, the United Kingdom declared its interest in becoming a founding member of the AIIB as the first Western country to apply, shortly followed by 17 other European countries including France, Germany and Italy.
In April 2015, 57 countries were confirmed to have joined or have applied to join the AIIB as prospective founding members. These 57 countries are from Asia, Europe, Africa, Oceania and South America, including four countries from the Group of Seven (G7) and 14 from the Group of Twenty (G20).
In a recent interview held at the AIIB headquarters, the bank`s president Jin Liqun revealed that there are about 30 countries queuing up to join the AIIB at the moment. "The AIIB pays considerable attention to projects of cross-border infrastructure, green infrastructure, renewable energy, clean transportation and climate change mitigation," Jin told Ta Kung Pao, a Hong Kong-based newspaper, in December 2016.
From 2010 to 2020, as much as $8 trillion is needed if all Asian economies are to upgrade their infrastructure to reach the world average, according to the Asian Development Bank (ADB). However, multilateral development institutions like the World Bank and ADB tend to fix their eyes on poverty reduction on a global scale, while funds allocated to infrastructure construction in Asia are quite limited. The AIIB is expected to fill that gap.
"In many Asian countries, infrastructures, especially inter-state transport facilities are quite backward, which has severely affected cross-border trade and investment. Since infrastructure construction has become a major driving force in China`s economic growth, the same method may also be viable in breaking the development bottleneck of some Asian countries," Chen Fengying, a research fellow with the China Institutes of Contemporary International Relations, told 21st Century Business Herald, explaining the birth of the AIIB.
By gradually expanding the scale of operation, it`s expected that loans issued annually could hit $10 billion to $15 billion within the next five or six years, said Jin, confirming that the bank is not short of capital.
To go with the flow, the bank may consider issuing yuan-denominated bonds, engaging in joint financing with the private sector and lending money to private enterprises, said Jin at the first annual meeting of the AIIB held in June 2016. Jin believes that the bank`s success partly consists in how well it can mobilize private funds.
Vice President and Chief Investment Officer of the AIIB D.J. Pandian noted that the bank`s investment projects have to be financially sustainable, environmentally friendly and acceptable to the local society.
Compared to the complicated formalities that projects have to go through to get loans from the ADB, the AIIB boasts a high rate of efficiency when replying to loan applications. The AIIB has simplified the procedures which investment projects face, but it still sticks to strict international standards when it comes to project examination and verification, said Pandian.
However, since the AIIB is a multilateral development bank rather than a commercial bank, people should not expect the bank`s investment projects to register a rate of return of 8 to 12 percent, said Pandian. Instead, people should measure the return of these projects by the progress of people`s well-being and the simplification of trade procedures, he stressed.
Nonetheless, uncertainties such as long investment payoff periods and delayed progress are quite common to infrastructure construction projects. "Risks are a major concern that prevents private capital from stepping into these projects. Risk is rather serious in Asian countries with underdeveloped infrastructure facilities. Hence, effective risk control and prevention measures are essential to the implementation of these projects," said Xiang Junyong, a research fellow with Chongyang Institute for Financial Studies, Renmin University of China.
Scrambling for membership
Of the existing 57 founding member countries, 75 percent are located in Asia. The AIIB expects the number of AIIB member countries to reach 90 in 2017, according to a report by the 21st Century Business Herald.
It is also worth mentioning that Canada officially applied to join the AIIB in August 2016, making it the first country in North America to do so.
"Canada has actively applied for AIIB membership because it smelled investment opportunities in Asian infrastructure construction and now hopes to grasp a share of the market for its domestic companies," said Chen. She added that many developed countries have noticed emerging markets` rapid rise and therefore intend to fuel their own economic growth by investing in those countries.
Though the AIIB is primarily engaged in Asian infrastructure construction, to a larger extent, it represents a kind of international economic relations, said Chen.
The AIIB has a clear three-tier structure--a board of governors, a board of directors, and a management team. When a new member joins, China and other founding members will see their shares and right to vote adjusted.
Currently, among the G7, only the United States and Japan have not submitted an application to join the AIIB.
The United States often seeks to occupy the leading position when participating in international financial cooperation. Therefore, the prerequisite of the country`s joining may be China giving up its dominant role, said Yan Xuetong, President of the Institute for International Relations, Tsinghua University.
Chen said this kind of mindset could make it difficult for the United States to join the AIIB.
"The AIIB`s door is open all the time. We will maintain policy consistency, because the bank is a multilateral development institution," said Jin.
The author is a research fellow at Chongyang Institute for Financial Studies, Renmin University of China.