Devel­op­ment fi­nance with Chi­nese char­ac­ter­is­tics?

Financial Mirror (Cyprus) - - FRONT PAGE -

Af­ter a late flurry of ad­di­tions to the found­ing membership of the Asian In­fra­struc­ture In­vest­ment Bank, at­ten­tion now turns to set­ting the China-led AIIB’s rules and reg­u­la­tions. But im­por­tant ques­tions re­main – most im­por­tant, whether the AIIB is a po­ten­tial ri­val or a wel­come com­ple­ment to ex­ist­ing mul­ti­lat­eral fi­nan­cial in­sti­tu­tions like the World Bank. Since China and 20 Asian coun­tries signed the AIIB’s ini­tial mem­o­ran­dum of un­der­stand­ing last Oc­to­ber, 36 other coun­tries – in­clud­ing Australia, Brazil, Egypt, Fin­land, France, Ger­many, In­done­sia, Iran, Is­rael, Italy, Nor­way, Rus­sia, Saudi Ara­bia, South Africa, South Korea, Swe­den, Switzer­land, Turkey, and the United King­dom – have joined as found­ing mem­bers.

Ac­cord­ing to China’s fi­nance min­istry, the AIIB’s found­ing mem­bers are to com­plete ne­go­ti­a­tions on the Ar­ti­cles of Agree­ment be­fore July, with op­er­a­tions to begin by the end of the year. China will serve as the stand­ing chair­man of the ne­go­tia­tors’ meet­ings, which will be co-chaired by the mem­ber coun­try host­ing the talks. The fourth chief ne­go­tia­tors’ meet­ing was com­pleted in Bei­jing in late April, and the fifth will take place in Sin­ga­pore in late May. The Chi­nese econ­o­mist Jin Liqun has been se­lected to lead the AIIB’s Mul­ti­lat­eral In­terim Sec­re­tariat, charged with over­see­ing the bank’s estab­lish­ment.

While GDP will be the ba­sic cri­te­rion for share al­lo­ca­tion among the found­ing mem­bers, the fi­nance min­istry sug­gested in Oc­to­ber that China does not nec­es­sar­ily need the 50% stake that its GDP would im­ply. More­over, although the AIIB will be based in Bei­jing, the min­istry has said that re­gional of­fices and se­nior man­age­ment ap­point­ments will be sub­ject to fur­ther con­sul­ta­tion and ne­go­ti­a­tion.

Like the $50 bln New Devel­op­ment Bank an­nounced by the BRICS coun­tries (Brazil, Rus­sia, In­dia, China, and South Africa) last sum­mer, the AIIB has faced con­sid­er­able scru­tiny, with some West­ern lead­ers ques­tion­ing its gov­er­nance, trans­parency, and mo­tives. In­deed, many in the West have por­trayed their estab­lish­ment as part of an ef­fort to dis­place ex­ist­ing mul­ti­lat­eral lenders.

But the new devel­op­ment banks seem less in­ter­ested in sup­plant­ing cur­rent in­sti­tu­tions than in im­prov­ing upon them – an ob­jec­tive shared by those in­sti­tu­tions them­selves. As Deputy Fi­nance Min­is­ter Shi Yaobin pointed out re­cently, by recog­nis­ing the need to re­form their gov­er­nance, ex­ist­ing mul­ti­lat­eral lenders have shown that there are, in fact, no “best prac­tices” – only “bet­ter prac­tices.” In fact, given its ex­per­i­men­tal ap­proach to devel­op­ment, China is well-suited – and, as some top of­fi­cials have hinted, more than will­ing – to con­trib­ute to this process. If China can help find a way to bal­ance the need for high stan­dards and safe­guards in project lend­ing with the im­per­a­tive of rapid loan dis­per­sion, global eco­nomic gov­er­nance would ben­e­fit sig­nif­i­cantly.

In pi­o­neer­ing a more prag­matic ap­proach to devel­op­ment fi­nance, China’s in­sti­tu­tional model could be the $40 bln Silk Road Fund that Pres­i­dent Xi Jin­ping an­nounced last Novem­ber. The SRF and the AIIB will serve as the key fi­nan­cial in­stru­ments of China’s “One Belt, One Road” strat­egy, cen­tered on the cre­ation of two mod­ern-day Silk Roads – the (over­land) “Silk Road Eco­nomic Belt” and the “Twenty-First Cen­tury Mar­itime Silk Road” – stretch­ing across Asia to­ward Europe. The ini­tia­tive will aim to pro­mote eco­nomic co­op­er­a­tion and in­te­gra­tion in the Asia-Pa­cific re­gion, mainly by pro­vid­ing fi­nanc­ing for in­fra­struc­ture like roads, rail­ways, air­ports, sea­ports, and power plants.

The SRF will be cap­i­talised by four state agen­cies. The State Ad­min­is­tra­tion of For­eign Ex­change will hold a 65% stake; the China In­vest­ment Cor­po­ra­tion (CIC, the coun­try’s sovereign-wealth fund) and the China Ex­port-Im­port Bank (China Exim) will each have a 15% stake; and the China Devel­op­ment Bank (CDB) will hold the re­main­ing 5%.

In a sense, the SRF can be con­sid­ered China’s lat­est sovereign-wealth-fund ini­tia­tive, and some me­dia have even re­ferred to it as the “sec­ond CIC.” But, whereas the CIC is un­der the con­trol of the fi­nance min­istry, the SRF’s op­er­a­tions ap­pear to re­flect the in­flu­ence of the Peo­ple’s Bank of China. In a re­cent in­ter­view, the PBOC’s gover­nor, Zhou Xiaochuan, sug­gested that the SRF would con­cen­trate more on “co­op­er­a­tion projects,” par­tic­u­larly di­rect eq­uity in­vest­ment, be­fore hint­ing at the Fund’s “just right” fi­nanc­ing fea­tures. For ex­am­ple, Zhou in­di­cated that the SRF will adopt at least a 15-year time hori­zon for in­vest­ments, rather than the 7-10-year hori­zon adopted by many pri­vate eq­uity firms, to ac­count for the slower re­turn on in­fra­struc­ture in­vest­ment in de­vel­op­ing coun­tries.

More­over, the SRF could act as a cat­a­lyst for other state fi­nan­cial in­sti­tu­tions to con­trib­ute to a se­lected project’s eq­uity and debt fi­nanc­ing. The Fund and other pri­vate and public in­vestors – would first make joint eq­uity in­vest­ments in the project. China Exim and the CDB could sub­se­quently dis­burse loans for debt fi­nanc­ing, with the CIC pro­vid­ing fur­ther eq­uity fi­nanc­ing.

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