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Asian Infrastructure Development Bank able to compete with biggest financial institutions

21:05 | 29.01.2016 | Analytic


29 January 2016. PenzaNews. The Asian Infrastructure Investment Bank (AIIB), which officially opened for business on 16 January 2016 in Beijing with participation of representatives from the 57 member countries, will be able to strongly compete with the International Monetary Fund (IMF), the World Bank (WB), the European Bank for Reconstruction and Development (EBRD) and even the Asian Development Bank (ADB) in the future, the foreign media quote experts and economists.

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Some of them say the emergence of a new international institution with the authorized capital stock of $100 billion, which seeks to overcome infrastructure deficit in Asian countries, was triggered by the US authorities, who now express displeasure over the very idea behind the alternative financial center.

As media reports note, the decision to create the AIIB came forth when the United States refused to ratify a series of slight changes to the governance of the International Monetary Fund that would redistribute quotas and increase the representation of China and other Asian countries at the IMF corporate management.

As the result, in October 2013, the Chinese President Xi Jinping and the Premier of the State Council of the People’s Republic of China Li Keqiang announced the AIIB initiative in October 2013. A year later, China together with 21 countries signed a memorandum of understanding, and soon after, on 29 June 2015, representatives from the 57 founding countries signed the establishment agreement.

According to Jin Liqun, President of the AIIB, former Vice Minister of Finance of the PRC, originally the initiative was met with doubts by many, but the attitude changed later on, and currently, China is in the process of gaining credibility and building up mutual trust by collective consultation and making decisions based on democratic approaches.

However, China, while being the organization’s largest shareholder, has no plans to exercise its veto power or expand its vote share, which, as Jin Liqun adds, is a major contrast to the World Bank, in which the United States “has maintained its veto power by amending the articles of agreement.”

“The new lender will set itself apart from other similar institutions,” stresses the AIIB President, adding that transparency, openness, independence and accountability will be the institution’s main principles of work.

The launch of the AIIB already forced some existing international banking institutions to review their activities in the Asia-Pacific region, says Tran Viet Thai, deputy director for the Institute for Foreign Policy and Strategic Studies at the Diplomatic Academy of Vietnam.

“For example, the Asian Development Bank is already in the process of restructuring its infrastructure loans to focus on other lucrative ones. […] Even more than that, I already see competition between AIIB and ADB in Asia, especially in infrastructure projects in the region,” the analyst stressed.

At the same time, he reminded that the organizations such as WB, IMF, EBRD and ADB have been functioning for several decades, and the AIIB will need to go to great lengths to compete with them on the same level.

“I do hope that in the long run, these institutions can share the same international standards, can cooperate with each other to provide the best products for its customers,” the expert said.

In his opinion, the AIIB will encounter no significant hindrances and will find its own niche among other financial organizations.

“The demand for building infrastructure in Asia Pacific region and all over the world is very high. None of the currently existing financial institutions can meet this demand. There is still a lot of room for the bank to play,” Tran Viet Thai noted.

From his point of view, the AIIB will prioritize “build-operate-transfer” and public-private partnership projects, as Chinese construction companies are able to complete practically any jobs, even the most difficult ones.

He also suggested that loan conditions will be defined through talks not only with AIIB representatives, but with the Chinese government as well.

“I hope the Asian Infrastructure Investment Bank will be a politics-free institution, but nothing can be separated from politics in the world of today,” Tran Viet Thai added.

At the same time, Nick Haekkerup, Member of Folketing for the Danish Social Democratic Party, expressed his belief that investment will become the key reference factor for the AIIB.

“The opinion of the Foreign Ministry of Denmark is that the way that the setup is made by now ensures that these political intentions will not prevail. […] I think that the number of countries participating by now shows that there is a large commitment to the new bank,” he said.

Nick Haekkerup also said he hopes the AIIB will promote investment and benefit the life in the Asian region, which will also benefit other countries such as Denmark.

“Our companies will then have a better chance of participating in investments. We foresee that this will contribute to economic growth, and our companies will have a better chance of selling their products to people living in Asia,” the Folketing MP described.

In turn, Alicia Garcia Herrero, chief economist for Asia and the Pacific at Natixis Asia, senior research fellow at Bruegel, argued that the AIIB should first of all support the cross-border infrastructure projects.

Such projects would be harder to do at the national level, she explained.

She also suggested that the Asian Infrastructure Investment Bank will be competing with the Asia Development Bank and the World Bank, while financial institutions in the Silk Road Economic Belt will be cooperating with the AIIB, rather than ADB, EBRD or WB.

One of the possible priority projects for the AIIB at the early stage is the construction of the railroad from Asia to Europe, said Andrei Ostrovski, Doctor of Economics, professor and vice-principal at the Institute of Far Eastern Studies.

“There are three options: the northern route through Russia, the central through the Caspian Sea and Turkey, and the southern through Iran. In fact, all three of them are viable,” the expert explained, and added that ensuring suitable political conditions will be one of the key requirements to projects.

In his opinion, even though AIIB is primarily economy-oriented, activity of bank members is also stimulated by their intention to develop financial and political relations with Beijing.

“Right now, money is enough in Beijing, including gold and free reserves, fast-developing economy, and renminbi is now actively involved in the financial market: it became an international reserve currency as of the end of the previous year. So if the bank keeps working well, it can just as well compete with the World Bank and the IMF,” Doctor of Economics concluded.

In turn, Mark Harbers, Finance Spokesman, Dutch MP for The People’s Party for Freedom and Democracy, said he hopes the AIIB will seek to diversify relations with other banking institutions.

“Eventually, economic growth is in everybody’s best interest. But of course we should continue to scrutinize and monitor the functioning of the AIIB. It is our job as politicians of the AIIB member states to prevent such external political pressure from affecting decisions,” the politician stressed.

From his point of view, the AIIB leadership must create only a brief list of key objectives and prioritize the projects that could bring the most “bang for their buck,” to keep the organization independent from politics.

“The launch of the AIIB is a positive step in the world economy. Trade benefits everybody and the AIIB could be a great way in getting more infrastructure and a more prosperous life to people in the region,” said the Dutch Finance Spokesman.

Meanwhile, Marc Lanteigne, expert on China, senior research fellow at the Norwegian Institute of International Affairs, noted that the number of founding members became much larger than China had expected, which could cause certain challenges in the future.

“You have a combination of European economies, Asian economies, with much different views at times on development assistance and financial aid,” the expert explained.

According to him, several countries, such as the United Kingdom, joined the project because they acknowledge the importance of developing Asian economy on the global level.

“The traditional regime, such as the IMF, the World Bank and even the Asia Development Bank, were really not efficient to really engage or really understand the specific economic conditions in Asia. The results are a bit of frustration on China’s part. Even though China is growing very rapidly economically, has a very strong role in many parts of the world when it comes to development assistance, it was not very well represented in the traditional regime,” said the expert on China, adding that the opening of the BRICS New Development Bank in 2015 was one of the first steps towards the new world order.

He also pointed out that the AIIB is yet to define the issues in Asia that must be dealt with first.

“There is talk about including communications and transportation infrastructure. This is everything from the basics, the road building, the bridge building, but also as a way of improving trade and economic activity within the region. There are all kinds of areas in poverty reduction which are being debated right now, And there are all kinds of discussion about how to develop better economic governance, especially in countries which are still trying to work their way through the very difficult global economic situation. It is a very long laundry list,” Marc Lanteigne stressed.

The Asian Infrastructure Investment Bank (AIIB) is an international financial organization with the objective to foster financial cooperation in Asia-Pacific region.

The bank, which was based upon the 2013 initiative by China, aims to develop infrastructure and production sectors, including energy, transportation, telecommunications, agriculture and other areas.

The stock capital of the AIIB is $100 billion. The top three bank shareholders who have the biggest vote in the bank board of directors are China (26.06%), India (7.5%), and Russia (5.92%).

The bank was co-founded by a total of 57 states, who signed the AIIB Articles of Agreement which serve as its foundation. As a regional bank, the AIIB’s Asian members hold nearly 75% of the capital stock.

The official opening ceremony of the AIIB took place on 16 January 2016 in Beijing, which is also the location of the international bank’s headquarters.

The first annual meeting of the AIIB founding member countries is scheduled to take place in June. 

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