Sun, May 24, 2015 page8

• Benefits of China-led development

  • By Richard Kozul-Wright and Daniel Poon
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  After a late flurry of additions to the founding membership of the Asian Infrastructure Investment Bank (AIIB), attention now turns to formulating the China-led AIIB’s rules and regulations, but important questions remain — most prominently, whether the AIIB is a potential rival or a welcome complement to existing multilateral financial institutions such as the World Bank.

  Since China and 20 mostly Asian countries signed the AIIB’s initial memorandum of understanding in October last year, 36 other countries — including Australia, Brazil, Egypt, Finland, France, Germany, Indonesia, Iran, Israel, Italy, Norway, Russia, Saudi Arabia, South Africa, South Korea, Sweden, Switzerland, Turkey and Britain — have joined as founding members.

  According to the Chinese Ministry of Finance, the AIIB’s founding members are to complete negotiations on the Articles of Agreement before July, with operations to begin by the end of the year. China is set to serve as the standing chairman of the negotiators’ meetings, which is to be co-chaired by the member nation hosting the talks. The fourth chief negotiators’ meeting was completed in Beijing last month and the fifth took place in Singapore this week. Chinese economist Jin Liqun (金立群) has been selected to lead the AIIB’s Multilateral Interim Secretariat, charged with overseeing the bank’s establishment.

  While GDP is to be the basic criterion for share allocation among the founding members, the Ministry of Finance suggested in October last year that China does not necessarily need the 50 percent stake that its GDP would imply. In addition, although the AIIB is to be based in Beijing, the ministry has said that regional offices and senior management appointments are to be subject to further consultation and negotiation.

  Like the US$50 billion New Development Bank announced by the BRICS (Brazil, Russia, India, China and South Africa) last year, the AIIB has faced considerable scrutiny, with some Western leaders questioning its governance, transparency and motives.

  However, the new development banks seem less interested in supplanting current institutions than in improving upon them — an objective shared by those institutions themselves. As Chinese Vice Minister of Finance Shi Yaobin (史耀斌) said recently, by recognizing the need to reform their governance, existing multilateral lenders have shown that there are no “best practices” — only “better practices.”

  In pioneering a more pragmatic approach to development finance, China’s institutional model could be the US$40 billion Silk Road Fund that Chinese President Xi Jinping (習近平) announced in November last year. The Silk Road Fund and the AIIB are set to serve as the key financial instruments of China’s “One Belt, One Road” strategy, centered on the creation of two modern-day Silk Roads — the (overland) “Silk Road Economic Belt” and the “Twenty-First Century Maritime Silk Road” — stretching across Asia toward Europe. The initiative is aimed at promoting economic cooperation and integration in the Asia-Pacific region, mainly by providing financing for infrastructure like roads, railways, airports, seaports and power plants.

  Yet the Silk Road Fund has received scant attention from Western media. This is unfortunate, because what little is known about it indicates that it could play an important role in transforming development finance.

  According to Chinese media, the fund is to be capitalized by four state agencies. The Chinese State Administration of Foreign Exchange is set to hold a 65 percent stake; the China Investment Corp (CIC) and the China Export-Import Bank are set to each have a 15 percent stake; and the China Development Bank is set to hold the remaining 5 percent. The fund was officially registered in December last year, and held its first board of directors meeting the following month.

  In a sense, the Silk Road Fund can be considered China’s latest sovereign-wealth-fund initiative, and some media have even referred to it as the “second CIC.” However, whereas the CIC is under the managerial control of the Ministry of Finance, the fund’s operations appear to reflect the influence of the People’s Bank of China.

  In a recent interview, the People’s Bank of China Governor Zhou Xiaochuan (周小川) suggested that the fund would concentrate more on “cooperation projects,” particularly direct equity investment, before hinting at the fund’s “just right” financing features. For example, Zhou indicated that the fund would adopt at least a 15-year horizon for investments, rather than the seven-to-ten-year horizon adopted by many private equity firms, to account for the slower return on infrastructure investment in developing countries.

  In addition, the fund could be a catalyst for other state financial institutions to contribute to a selected project’s equity and debt financing. The fund and other private and public investors — would first make joint equity investments in the project. China Export-Import Bank and the China Development Bank could subsequently disburse loans for debt financing, with the CIC providing further equity financing. When the AIIB is up and running, it too, could support this process, by arranging debt financing alongside the Silk Road Fund’s initial equity investment.

  There is still much to digest in these new financing initiatives, but it is possible to see a South-South development-finance landscape emerging — one with the potential to transform multilateral lending more broadly.

  Richard Kozul-Wright is director of the Division on Globalization and Development Strategies at the UN Conference on Trade and Development and Daniel Poon is an economic affairs officer with the conference.

  Copyright: Project Syndicate
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