Asian Infrastructure Investment Bank:When Big Money Makes the Difference

Written by | Saturday, April 5th, 2014

Last October, at the annual leaders’ meeting of the Asia-Pacific Economic Co-operation (APEC) Forum in Bali, Xi Jinping took his Asian peers by surprise with the announcement of the China’s plans to launch an “Asian Infrastructure Bank”.  In a few months’ time, China has rushed to work out practical plans to establish the new-fangled Asian Infrastructure Investment Bank (AIIB), with a pilot capital amount of 50 billion US dollars, and its launch set for the coming fall. But what is leading China and the APEC countries to rush to join forces and launch this new Bank?
For one, the massive outflow of capital investments from emerging to developed economies, initiated in 2013 and still on the move, with central banks raising interest rates to protect their national currencies, all these events have triggered a dearth of capital investment in Asia. With the pendulum of capital flows swinging back to the advanced countries, several hundred billion dollars have poured into developed-market equity. If Asia is no more the coveted destination of capital investments that it was in the past ten years, it still remains the most dynamic continent in the world. GDP growth projections for the whole region are still encouraging with an average annual growth rate of 6 percent in 2014-18. The projected medium-term growth rates are considerably higher than the average growth prior to the global financial crisis (5.1 percent and 4.9 percent respectively).
Yet, for Asia’s economy to keep humming along propped up by its rather fast economic growth and deepening regional economic and trade cooperation, strong infrastructure spending and implementation of structural economic reforms are critical. When it comes to infrastructure investment, connectivity outlets are of critical importance – yet, public funds for infrastructure needs in Asia are rather limited. Large banks, which typically supply funds for infrastructure projects, are now hindered by the new capital rules – the “Basel 3” – to cover capital investment needs. Other financial institutions, namely pension funds, sovereign-wealth funds, and insurance companies, all together allocate a puny 0.8 percent of their assets into infrastructure projects.
Looking into the region’s financial outlets, the ASEAN Infrastructure Fund set up in 2009, is a major step toward investing more of the region’s resources in its growing infrastructure needs. This regional fund has raised up to $US485.2 million to be invested in infrastructure, of which $US335.2 million comes from the ten ASEAN member states and the remaining $US150 million is provided by the Asian Development Bank. Yet, The Fund’s total lending commitment of $4 billion through to 2020 is inadequate to fill the money pot. In 2011, The Asian Development Bank (ADB) estimates that developing Asian economies need to invest US$8 trillion from 2010 to 2020, just to keep pace with expected infrastructure needs. The supply of savings, much of which is generated in Asia, is more than adequate to begin to fill some of the demand for infrastructure.
And here comes the AIIB. The strong rationale for setting up a new-fangled bank dedicated to infrastructure stays in Asia’s savings, which, excluding China with its $US3.82 trillion foreign exchanges reserves, see ASEAN countries controlling over $US700 billion in reserves. So it is quite rational to consider establishing a new regional platform for investment and fund-raising to channel more investment capitals into infrastructure. As a financial catalyst of the region, the AIIB will look like a multilateral development institution, which will, in operational modalities and principles, imitate other multilateral development banks (MDBs). For its fundamental mandate to promote Asian economic development and regional economic cooperation, the AIIB is set to act as the new financial catalyst of Asia’s economic growth.
With a strong focus on infrastructure construction in Asia to promote regional connectivity and economic cooperation, and in view of the huge financing gap in the infrastructure sector, due to differentiated mandates and priorities, the relationship between the AIIB and existing MDBs will be complementary and cooperative rather than competitive. As Lou Jiwei, China’s Minister of Finance said, China will promote cooperation between the AIIB and the existing MDBs so as to jointly advance the sustainable and stable development of Asian economies. He specifically pointed out that “we believe that with the joint efforts of all the founding members, the AIIB will grow into a professional and highly efficient platform of infrastructure financing and into an Multilateral Development Bank that fully represents the cooperative willingness of all counties in the region. It should meet the development needs of regional economies better and promote regional economic cooperation remarkably well.”
In contrast to the World Bank, which imposes strict conditionalities, and puts investment priorities more on poverty reduction than productive infrastructure on commercial term, the AIIB’s impact on the region could be greater than the World Bank. Last but not the least, the huge global infrastructure requirements, estimated at around US$50 trillion in the next two decades, provide plenty of room for the AIIB to project its financial reach beyond the region, likely challenging the World Bank on its own realm.

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