China Daily (Canada) - - ANALYSIS -

With huge fi­nan­cial fire­power at its dis­posal, AIIB could prove vi­tal to sus­tain­ing global growth an­drew­moody@chi­

In­vest­ment in Asian in­fra­struc­ture might seem to many in the West like a mere re­gional con­cern — yet it could hold the key to sus­tain­ing global growth and pro­vid­ing jobs both in Europe and even in Don­ald Trump’s Rust Belt.

Asia — which has been the en­gine of global growth for a decade or more — needs to spend $1.7 tril­lion a year on in­fra­struc­ture up to 2030 just to main­tain its cur­rent growth lev­els, ac­cord­ing to the Asian Devel­op­ment Bank. It is cur­rently spend­ing just around half of that, $881 bil­lion.

If the roads, rail­ways, air­ports, power sta­tions, wa­ter sys­tems and other projects are also not built in an en­vi­ron­men­tally sus­tain­able way, the planet it­self could be ir­repara­bly dam­aged with global warm­ing lev­els ris­ing be­yond con­trol.

The Asian In­fra­struc­ture In­vest­ment Bank, head­quar­tered in a fu­tur­is­tic sky­scraper build­ing on Fi­nan­cial Street in Bei­jing’s Xicheng district, could there­fore prove to be one of the most im­por­tant and in­flu­en­tial in­sti­tu­tions in the world over the next few years.

Launched in Jan­uary last year it is one of the most tan­gi­ble projects — along with the Silk Road Fund — to so far emerge from the Chinese gov­ern­ment’s Belt and Road Ini­tia­tive.

With $100 bil­lion of au­tho­rized cap­i­tal, more than that of the World Bank it­self, it has huge fi­nan­cial fire­power at its dis­posal.

With 57 found­ing mem­bers, in­clud­ing the UK, France, Ger­many and Italy as well as Egypt from Africa (South Africa is a prospec­tive mem­ber), it is de­ter­mined to show that it is a mul­ti­lat­eral, rather than just a Chinese, in­sti­tu­tion.

To un­der­line this, the bank’s charis­matic 67-year-old pres­i­dent Jin Liqun, him­self a for­mer vicepres­i­dent of the Asian Devel­op­ment Bank, signed an agree­ment with World Bank Pres­i­dent Jim Yong Kim in Wash­ing­ton on April 23 to strengthen co­op­er­a­tion be­tween the two in­sti­tu­tions.

“Sign­ing this mem­o­ran­dum of un­der­stand­ing fits into our vi­sion of a new kind of in­ter­na­tion­al­ism,” said Jin.

“It deep­ens our re­la­tion­ship with the World Bank Group and sets up the mech­a­nisms through which we can more eas­ily col­lab­o­rate and share in­for­ma­tion. We place a high value on our part­ner­ships, be­cause by work­ing to­gether we greatly in­crease our po­ten­tial for pos­i­tive out­comes in Asia.”

The AIIB was first pro­posed by Pres­i­dent Xi Jin­ping dur­ing a speech in Jakarta in Oc­to­ber 2013.

China re­mains the largest share­holder, with a 26 per­cent hold­ing, enough to give it a veto over ma­jor strate­gic de­ci­sions which re­quire a 75 per­cent ma­jor­ity.

With new mem­bers com­ing on board, that share­hold­ing will be di­luted, so China will have no greater con­trol than any other coun­try mem­ber.

When the bank was be­ing set up, the ad­min­is­tra­tion of then US Barack Obama re­fused to join and put pres­sure on its al­lies to also not par­tic­i­pate, in what many now be­lieve was a clumsy strate­gic mis­take.

But the UK, which was try­ing to build a new “golden era” of re­la­tions with the world’s sec­ond-largest econ­omy, signed up, fol­lowed by other ma­jor Euro­pean economies.

James Woolsey, the for­mer direc­tor of the Cen­tral In­tel­ligence Agency and an ad­viser to US Pres­i­dent Trump dur­ing his cam­paign, in­di­cated the US would, in fact, join but there has been no clear sig­nal so far.

“I think it is un­likely un­less it came as part of a big wider deal be­tween Trump and Xi Jin­ping,” says Ja­cob Kirkegaard, se­nior fel­low at the Peter­son In­sti­tute in Wash­ing­ton.

“Dur­ing the next Demo­cratic ad­min­is­tra­tion or a nor­mal in­ter­na­tion­ally-minded Repub­li­can one, I could see it.”

It has been sug­gested that the AIIB was an at­tempt by Bei­jing to re­shape the global fi­nan­cial ar­chi­tec­ture, which is dom­i­nated by the Wash­ing­ton-based International Mon­e­tary Fund and the World Bank.

So far, how­ever, the new in­sti­tu­tion has ac­tu­ally co-fi­nanced five projects with the World Bank, in­clud­ing a power gen­er­a­tion project in Pak­istan, a nat­u­ral gas pipe­line in Azer­bai­jan and in­fra­struc­ture devel­op­ment in In­done­sia. It has also worked on projects with the Asian Devel­op­ment Bank, it­self set up in 1966 and in which Ja­pan has played a dom­i­nant role.

“If you look at the man­age­ment that they (the AIIB) have ap­pointed, many of them come from hav­ing di­rect ex­pe­ri­ence with the World Bank. The Chinese gov­ern­ment has al­ways seen the AIIB as a com­ple­ment and not a com­peti­tor to the ex­ist­ing international devel­op­ment banks,” adds Kirkegaard.

Sun Yongfu, for­mer direc­tor-gen­eral of the Euro­pean depart­ment of the Chinese Min­istry of Com­merce, agrees that there needs to be new in­sti­tu­tions like the AIIB be­cause the scale of the fund­ing need is so huge.

“The ex­ist­ing in­sti­tu­tions can­not meet the de­mands of the coun­tries within the re­gion. There is a need for the AIIB to pro­vide more fi­nan­cial sup­port.”

Lour­des Casanova, direc­tor of the Emerg­ing Mar­kets In­sti­tute at Cor­nell Univer­sity, how­ever, be­lieves the AIIB has arisen partly out of frus­tra­tion with the ex­ist­ing global fi­nan­cial or­der, some­thing she says is re­flected by the num­ber of de­vel­op­ing coun­tries that are found­ing mem­bers.

“China and many of the emerg­ing market economies like Brazil have been want­ing a more prom­i­nent role within the ex­ist­ing mul­ti­lat­eral banks. The World Bank and the IMF have al­ways been dom­i­nated by the US and Europe,” she says.

“It has been very suc­cess­ful in terms of the num­ber of coun­tries that have joined, which I think has been amaz­ing.”

Jef­frey Tow­son, pro­fes­sor of in­vest­ment at Guanghua School of Man­age­ment in Bei­jing, says where the AIIB is most dis­tinct from the other in­sti­tu­tions is its spe­cial­iza­tion in in­fra­struc­ture.

“If you look at the World Bank, I can’t fig­ure out what it does from its mis­sion state­ment. It is a bit like a laun­dry list. It says it is go­ing to in­crease em­ploy­ment, trade and cre­ate sta­bil­ity and peace and all these kind of things,” he says.

“Fo­cus, how­ever, mat­ters in my view. You look at the AIIB and it is an ab­so­lutely clear strat­egy. China does in­fra­struc­ture better than any­one else. No one is even in their league. Strate­gi­cally, this makes a lot of sense.”

With Asia’s in­fra­struc­ture deficit widen­ing, some be­lieve the re­gion is in a sim­i­lar po­si­tion now to how Europe was in the im­me­di­ate af­ter­math of World War II.

It was then that the International Bank for Re­con­struc­tion and Devel­op­ment — now part of the World Bank Group — was set up at Bret­ton Woods in 1944 to fi­nance many of the much-needed projects to res­ur­rect Europe’s bombed-out cities.

“There is a di­rect par­al­lel. It was set up to deal with what was a dev­as­tated Europe,” says Zhu Ning, Ocean wide pro­fes­sor of fi­nance at Ts­inghua Univer­sity.

“While although Asia is not now dev­as­tated in the same sense, there is a sim­i­lar need for in­fra­struc­ture spend­ing on a huge scale. It is a mo­ment of his­tory for Asia now, as it was for Europe then.”

The bank will aim to tackle the in­fra­struc­ture de­fi­ciency that is now act­ing as a con­straint on the eco­nomic growth of the re­gion, which also has wor­ry­ing im­pli­ca­tions for global growth.

Kirkegaard at the Peter­son In­sti­tute says this could be crit­i­cal.

“Not only would the world lose an im­por­tant en­gine of growth in Asia but there are still hun­dreds of mil­lions of peo­ple, although while not in ab­ject poverty, who do not have ac­cess to clean and run­ning wa­ter and many other ba­sic fa­cil­i­ties.”

He says there could be hugely dam­ag­ing con­se­quences for the planet if the in­fra­struc­ture is not built sus­tain­ably, with­out con­sid­er­a­tion for the en­vi­ron­ment.

“This has to be got right or you are go­ing to end up with a sit­u­a­tion that you had in the United States af­ter World War II, when all the in­fra­struc­ture was built in a very en­er­gy­in­ten­sive polluting man­ner. If this hap­pens again, we are all go­ing to get very warm very quickly.”



Chinese work­ers at a road con­struc­tion site in Pak­istan.

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