Economy

Banking on Beijing is Good For China, and the World

The Asian Infrastructure Investment Bank and the New Development Bank are the first multilateral institutions to be sponsored by developing nations and mark the arrival of a new international financial order

Asia Infrastructure Investment Bank. Credit: finance.gov.pk

Founding ceremony of the Asian Infrastructure Investment Bank in Beijing, October 2014. Credit: finance.gov.pk

One of the most talked-about new international financial initiatives in recent decades is the proposed establishment of new development institutions like the Asian Infrastructure Investment Bank (AIIB) and the BRICS-sponsored New Development Bank (NDB).

The AIIB’s establishment was formally proposed by Chinese President Xi Jinping in October 2013. It had a relatively slow start as many countries needed time to understand the proposal and assess their options of joining or not given the respective national and global dynamics. In the meantime, the United States was not helpful as it saw, or was perceived as seeing, the AIIB as a direct competitor to existing players like the Asian Development Bank (ADB) and World Bank, which by no coincidence have been dominated by the West.

The UK’s decision to join theAIIB earlier this year is considered a milestone as many other Western countries immediately followed suit, breaking ranks with the US. The AIIB has now attracted global attention and garnered broad support with 57 countries and regions having signed up to become founding shareholders of the new institution, making it one of the most multilateral institutions in the world and the first multilateral institution initiated by a developing country.

A unique role for AIIB

The AIIB will be the first multilateral development institution headquartered in the Chinese capital. While its Beijing headquarters may be close to China’s domestic policy institutions like the China Development Bank (CDB), the AIIB distinguishes itself from its domestic neighbours in significant ways: its multilateral nature, its mission and focus, its governance & management structure, though these are yet to be agreed upon by the expanded shareholder group. Consider its peers:

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Note: ADB’s capital is paid-in capital & reserves; All data is as of end-2014

Compared to the ADB, the AIIB will be much more focused on infrastructure projects, and given China’s success in this area it will bring new experiences as well as the much-needed additional funding to fill the huge infrastructure investment gap in Asia’s developing world and beyond.  According to one estimate, Asia will need US$800 billion in infrastructure investment every year until at least 2020. The ADB has a total balance sheet size of US$160 billion while the Word Bank has US$290 billion, and what is available from them for new infrastructure financing in Asia is a lot less than their total assets.

Therefore, the AIIB’s positioning should be and is clear: it is to fill the gap and supplement, not to disrupt, the existing institutions. It will be a China-headquartered, Asia infrastructure-focused, multilateral development institution with an international-standard governance board and management team. It will be both Asia and the world’s “most Chinese” multilateral development institution and the most international one among all development institutions led by China. Simply put, it will be both regional and global as well as Chinese.

AIIB & New World Order

The establishment of the AIIB and NDB marks a turning point and carries profound significance, reflecting the shifting power globally, with post-war global governance bodies (financial, economic and political) having hitherto been dominated by the US-led West. In the case of NDB, it is for the first time that developing countries as a group have sponsored a global development institution without prior endorsement from the developed world. In this context, the AIIB and NDB represent the first, yet major, step in re-balancing the current unbalanced global governance, which has been dominated by the developed world.

Many international China watchers know about the Chinese government’s “One Belt and One Road” (BAR) strategy – the inter-continental partnership initiative that China has decided to undertake to further integrate itself with the rest of the world. The initiative is probably easier known as the “New Silk Road” strategy that emulates the ancient Silk Road that travelled from China to Europe.

The establishment of the AIIB (and to an extent the NDB) is part of China’s broad globalisation and modernisation initiative. China believes it is crucial to broaden and deepen her global integration as she embarks on the next phase of economic development.

One may take it for granted that China is undertaking this strategy out of her own interest. China’s previous policy bias towards investment and a restrictive foreign exchange policy so far have led to over-investment and excess capacity domestically in certain industrial sectors. To rebalance and upgrade her industrial capabilities, she needs to channel more investments into higher-value-added sectors as well as overseas. The strategy has started working. In 2014, China’s outbound direct investment reached US$140 billion, making her a net capital exporting country for the first time in history.

More importantly, China also knows from her own recent experiences that developing infrastructure is critical to economic growth and China wants to share her valuable experiences with other developing countries. It is a nice and convenient addition that China’s large savings are available for global deployment.

China now considers herself as willing and able to contribute more to the world’s development. Together with other developing nations, she attempted to increase her contribution to and shareholding of the ADB and WB. But the effort to reform within the system and with the existent institutions has been frustrated. It is against this global background that AIIB and the broad BAR initiative were proposed as an alternative and opportunity for China to answer the world’s call for more visible and active roles for developing countries, while furthering her own growth objectives.

The New Thinking

Needless to say, the AIIB and NDB will learn from the best practices that the ADB and other development banks have accumulated over the years, in terms of strategic focus, key governance and operational matters. But simply copying those will not be enough. They will need fresh and progressive thinking about how to govern more democratically, how to operate more efficiently and effectively (which have been areas of criticism for incumbent players), how to engage more broadly with private partners and the general public, and so on.

To achieve these goals, the AIIB (and NDB) must embrace new technology and new financial tools such as “internet finance”. Take an example of crowd-funding that is a recent financial innovation that has gained a lot of interest in China and the US. Given the vast visibility and direct connectivity it establishes among the funded party and numerous investors involved, crowd-funding will be an effective way for a public institution like AIIB to broaden its funding sources, potentially lower the financial cost, and raise the level of public participation in what it does and aims to achieve. Crowd-funding (and other innovative solutions) has the necessary ingredients to become a powerful tool to unleash the full potential of the public-private-partnership that is sorely sought after but which has proven so elusive with existing institutions and conventional funding methods.

Fortunately we are now in a new world with access to new technologies, new financing tools, new lessons and new models for development. To leverage them properly to help achieve our shared goals, we need new thinking and the ability to act decisively!

This is a modified version of an article in Chinese that appeared in Boao Review.

Ben Shenglin is Professor and Dean, Academy of Internet Finance, Zhejiang University, and Executive Director, International Monetary Institute, Renmin University of China