The Asian Infrastructure Investment Bank was seen initially by some as a brash newcomer intent on breaking into the world of development banking by throwing around the money of a nouveau-riche China on possibly sub-standard projects and securing multi-billion dollar contracts for Chinese firms.
It was feared that the AIIB would dole out money indiscriminately in order to secure infrastructure projects, more or less ignoring the strict environmental and other standards that the family of United Nations-founded multilateral development banks (MDBs) had developed over decades of experience.
But that was several years ago when the AIIB was still in the planning stage. Now, when talking about the way forward for the AIIB and other MDBs, its president and chairman Jin Liqun employs a quotation from Albert Einstein: “We cannot solve our problems with the same thinking we used when we created them.”
These institutions must, says the former vice finance minister of China during an interview with GlobalMarkets, avoid “following the beaten track that leads to environmental degradation and global warming”.
These are remarkable words coming from someone at the top of an institution which some saw initially as a potential wrecker of accepted economic development norms, as an environmental spoiler and an outcast among MDBs.
“We must leverage the collective experience of our member countries and draw upon that knowledge to support innovative infrastructure projects that are financially viable, environmentally friendly and beneficial to local communities,” says Jin.
These words could easily have come from the leaders of the World Bank, the Asian Development Bank and other MDBs that initially closed ranks, issuing a warning that the entry of newcomers such as the AIIB and others could cause a lowering of development standards.
The fact that they come instead from the head of the AIIB underlines just how far the institution has gone out of its way since its formal launch in January 2016 to gain international acceptance and become a good team player.
“We have strong co-operation with other multilateral development banks,” Jin notes. The AIIB, he says, will “use its relationships with other MDBs and private financiers to meet Asia’s growing infrastructure demands”.
Just how big these demands are likely to be was illustrated in a report by the Asian Development Bank (ADB) that said that developing and emerging nations needed to spend $1.5tr annually on infrastructure between now and 2030.
If infrastructure is to be adapted to meet the threat of climate change — which Jin acknowledges to be a very real one — then annual spending must rise to $1.7tr, said the ADB, almost doubling its estimate some seven or eight years ago.
The bank has now attained the status of an established MDB itself with 70 countries from around the world in membership and more waiting to join.
Notable exceptions are the United States and Japan, with the US thought unlikely to be in a hurry to embrace new multilateral institutions under the Trump administration and Japan intent on promoting development through bilateral efforts and via the Asian Development Bank.
The AIIB is eager to learn lessons from others as well as to pass on the lessons of China’s own economic development, says Jin. “We were delighted to partner with a number of MDBs on six out of nine projects in 2016.
“We have agreements in place to strengthen co-operation with the European Investment Bank, the World Bank, the Asian Development Bank and the EBRD. I have also presented to the board at the ADB to discuss ways for us to work together. There is very strong co-operation happening among the MDBs.”
Co-operating with other development banks has allowed the Beijing-based AIIB to draw upon the expertise of the ADB and others and to get involved in a series of joint projects after little more than a year of operations and with a modest staff of only around 100 professionals so far.
Funding
There is more, however, to Jin’s insistence on the need to be a good citizen of the development world. The AIIB needs to tap global debt markets to supplement its capital base. While China is rich it is not as flush with foreign currency reserves as it was when the AIIB was first mooted and some expected the AIIB to draw mainly on Chinese domestic funds.
Jin avoids comment on the issue of China’s diminishing international reserves. He says only that “it would be inappropriate to comment on a member’s internal policies”. But he expresses confidence that the AIIB will be able to raise debt to supplement its $100bn equity base.
“Financial markets favour high grade credits like the AIIB and other multilateral financial institutions,” he says. “I am optimistic we will be able to generate sufficient demand for the instruments we plan to bring to market.”
Some analysts say that rising interest rates in the US and widening differentials with Asian rates could cause funds to flee emerging market credits. They also argue that President Donald Trump’s plan to spend $1tr on US infrastructure could act as a magnet to draw funds away from Asia.
“It remains to be seen,” says Jin, whether increased US rates and other factors will drive outflows from Asian markets. But “at this stage, it does not seem so,” he adds.
One Belt, one Road
How will the AIIB sell itself to portfolio investors interested in getting a piece of the Asian infrastructure action? Are they likely to want to know whether it will simply be a competitor to the ADB, or is it a part of Chinese president Xi Jinping’s grand plan to “connect” the Eurasian continent?
Jin hedges somewhat on this. The AIIB will “support innovative infrastructure projects that are financially viable, environmentally friendly and beneficial to local communities. We are currently concentrating our efforts in energy, transport and sustainable cities.”
Pressed to say more about the relationship between the AIIB and President Xi’s One Belt, One Road (OBOR) scheme for linking East Asia with Europe via Central Asia, South Asia, the Middle East and beyond, Jin again resorts to rather hedged terms.
“OBOR has major strategic implications in terms of opening markets and creating growth opportunities, both for the 65 countries it touches and beyond,” he says. “As there is a large overlap between the [AIIB] membership and countries participating in OBOR [we] will consider projects [in] OBOR.”
But, he says “it is important to keep in mind that AIIB’s mandate goes beyond OBOR. All of our members, like China, have their own plans for infrastructure development and all are welcome to submit projects to AIIB for consideration and financing.”
The AIIB, Jin says, “can finance projects which meet our policies, criteria and guidelines. Those criteria are strict, he says, countering initial fears that the emergence of the AIIB and of the Brics Bank (or New Development Bank) could result in a lowering of standards.
Another area where the AIIB has come into line with long established development banks is on the need for private capital to supplement the role of governments and MDBs in financing Asia’s “infrastructure gap” on the gap between projected needs and current spending.
“What we need to do is to catalyse private capital,” says Jin. “And we need to do so in partnership with governments if we are going to meet the infrastructure needs in the region.”
There was speculation when President Xi first announced the planned formation of the AIIB in 2013 that China would use the bank to help launch the “internationalisation” of China’s currency, the renminbi (RMB), and that it would make RMB-denominated loans in order to do that.
“In the early stages of the bank’s existence, it is likely that our loans will be denominated mainly in US dollars,” says Jin. “Over the course of the next two years, we will establish and increase our capacity to provide financing in other currencies, certainly including RMB.”
The AIIB recently signed an agreement with the World Bank’s International Finance Corporation on international swaps and derivatives. “This emphasises how AIIB will gradually build capacity to support its clients’ requests for different currencies,” says Jin.
Will the AIIB seek to raise funds in RMB or in dollars, and will it issue bonds denominated in other Asian and international currencies? “As a global player, the AIIB will generate and tap demand where it makes sense and where the bank can achieve the best possible terms to finance its mission,” Jin says.
“Since the bank’s functional currency is US dollars, it will come as no surprise that the bank also has the ambition, over time, to establish a curve of transparent pricing references in US dollars.”