China’s plan to develop a new pan-Asian development bank, aimed at financing Asia’s growing infrastructure needs, is welcomed by would-be competitor development banks, GTR has learnt.
A spokesperson at the Asian Development Bank (ADB), currently the only development bank with regional reach in Asia, tells GTR: “There are huge gaps in the financing for infrastructure in Asia. Having a new partner bank to help fill some of those gaps is very welcome, provided that the new bank is going to be adhering to international standards and regulations.”
The new bank, called the Asian Infrastructure Development Bank (AIIB), will be headquartered in Shanghai and will focus on developing much-needed projects like ports, roads and bridges, as well as water and energy infrastructure, according to GTR’s source. “Talks have so far focussed on infrastructure so I’m not sure yet if there’ll be a focus on capital markets, including trade finance,” he says.
According to figures from the ADB, Asia needs to spend close to US$300bn on infrastructure by 2020 to sustain its current growth trajectory. China, recognising the need to improve the infrastructure in neighbouring countries as well as its own to sustain growth, is reported to have recently pledged a further US$50bn (on top of its original US$50bn pledge) to the bank’s registered capital.
GTR understands that China has been approaching its neighbours to shore up support for the bank, since President Xi Jinping first announced its proposal at an Asia-Pacific Economic Cooperation (APEC) meeting in October last year.
Japan, South Korea, Malaysia, Nepal and India are amongst 22 countries reported to be involved in discussions with Chinese officials to join the bank. In April this year, Mongolia became the first Asian economy to sign a memorandum of understanding (MoU) with China, committing its future co-operation in establishing the AIIB. Several rounds of multilateral consultations with potential member-countries are reportedly planned for the coming months.
Singapore is the latest country to commit its support to the AIIB. President Tan Keng Yam announced in August that the country is “willing to push forward the establishment of AIIB with China and actively promote international business in renminbi”.
At an event in June, the Chinese finance minister, Lou Jiwei, reportedly announced China’s intention to ensure the relationship between the AIIB and existing development banks was “supplementary and co-operative”.
Jiwei said the AIIB will be mandated to carry out “quasi-commercial” operations, initially offering sovereign loans to fund projects in member countries, with a view to developing public-private partnership (PPP) financing for projects that can’t receive government guarantees. In terms of its governmental structure, Jiwei reportedly claimed the AIIB will “adopt and learn” some of the best practices of multilaterals such as the ADB.
The president of the World Bank, Jim Yong Kim, has also stated the AIIB is a welcome addition to the global pool of multilateral development banks, whose common challenges remain poverty and stagnant economic growth.
In July this year, Kim said at a press conference in Beijing how vital the need for additional financing for infrastructure projects in Asia has become. “We see that there is a massive need for new investments in infrastructure and we think we can work very well and co-operatively with the AIIB once it becomes a reality,” he said.
A NEW WORLD ORDER?
China’s progress in developing plans for the AIIB whilst simultaneously partnering with Brazil, Russia, India and South Africa to form plans for the New Development Bank (NDB), or the so-called ‘Brics bank’, can be seen as an attempt to shift the dynamics of the international financial system: for so long dominated by the Western-led World Bank and International Monetary Fund (IMF).
The NDB was announced in late-July at a meeting between the five leaders of the Brics nations in Brazil. It will reportedly be open to membership from other nations but the combined share of the founding members cannot fall below 55%. The NDB will also be headquartered in Shanghai for its first five years.
The World Bank, has welcomed the NDB as well as the AIIB, saying it can contribute significantly to the “infrastructure financing gap” currently seen in developing countries.
But GTR’s source believes that these introductions, rather than complimenting the current order, could serve to disrupt it. “If the traditional Bretton Woods institutions don’t change to reflect the new order of things, meaning the increasingly influential emerging markets, then the traditional institutions will be circumvented and new ones will be created.”
The rate at which China is increasing its global infrastructure spending certainly suggests the country is happy to pursue its own agenda. PwC’s report, Capital project and infrastructure spending: Outlook to 2025, predicts that 60% of global infrastructure spending will take place in Asia Pacific by 2025, driven mainly by China’s growth plans.