[Econ/CA] Asian Infrastructure Investment Bank (AIIB)

Asian Infrastructure Investment Bank

Background

·        ADB report: till 2020, every year, countries in Asia need ~$800 billion for infra-structure investment.

·        Asian Development bank (ADB) itself can’t lend more than $10 billion.

·        Bretton woods organisations (IMF and World Bank) not interested in lending such large fund to Asia alone.

·        Therefore, Jinping came up with idea to setup “multilateral development bank” to lend money exclusively to Asia. (2013)

Real Motive of China

Make truckload of profit	* China has a huge forex reserve. Wants to make profit out it. * AIIB’s total authorized Capital: $100 billion. Out of that, China willing to give 50% capital=> bank circulate loan money => bank earns interest=>China gets truckload of dividend for being largest shareholder.
Help in Maritime Silk policy	* AIIB will finance rail-road-ports infrastructure along the ancient silk route. * Thus, it’ll help China’s maritime Silk policy.
Counter US-Japan dominated IMF+ADB	* IMF not reforming its governance structure. The size of Chinese economy, same as USA. Yet Chinese voting power in IMF = 1/3rd of American voting power. * In ADB, US + Japan =each has ~16% shareholding, while China has ~7%. Again China resents their domination. (*numbers from Business-standard report). * Therefore, China wants to counter IMF + ADB’s hegemony (domination) via BRICS+AIIB. * Countering IMF= will also help to popularize use of Chinese Yuan instead of US dollar.

AIIB Structure

AIIB Membership

·        At first, Asian Infrastructure Investment Bank (AIIB) has total 22 members= China + 21 others who signed MoU.

·        Now (June 2015), the countries in AIIB increased to 57

·        Delegates of 50 countries signed the 60-article agreement that will lay the legal framework for the China-initiated Asian Infrastructure Investment Bank (AIIB).

·        Australia was first to sign the agreement at the Great Hall of the People in the Chinese capital Beijing.

·        Out of the 57 founder-member countries, the remaining seven - Denmark, Kuwait, Malaysia, Philippines, Holland and South Africa and Thailand could not sign the agreement as it was not ratified by their respective domestic authorities.

·        The agreement outlined the financial share of each member, policymaking, business and operational systems and governance structure of the AIIB.

·        Among the Indian neighbouring countries, Afghanistan and Bhutan are not the members of AIIB

·        South Korea and Indonesia which first rejected, later signed

 ·        At first, Asian Infrastructure Investment Bank (AIIB) has total 22 members= 21 others who signed MoU + (22) China

·        Now, a total of 57 countries are in AIIB

(1) Australia                         (2) Azerbaijan                      (3) Bangladesh

(4) Brunei                              (5) Cambodia                       (6) China

(7) Georgia                           (8) India                                 (9) Indonesia

(10) Iran                                (11) Israel                              (12) Jordan

(13) Kazakhstan                   (14) Kuwait                          (15) Kyrgyzstan

(16) Laos                               (17) Malaysia                       (18) Maldives

(19) Mongolia                      (20) Myanmar                      (21) Nepal

(22) New Zealand               (23) Oman                            (24) Pakistan

(25) Philippines                   (26) Qatar                             (27) South Korea

(28) Russia                            (29) Saudi Arabia                (30) Singapore

(31) Sri Lanka                      (32) Tajikistan                      (33) Thailand

(34) Turkey                           (35) UAE                              (36) Uzbekistan

(37) Vietnam                        (38) Austria                          (39) Brazil                

(40) Denmark                       (41) Egypt                             (42) Finland             

(43) France                           (44) Germany                       (45) Iceland

(46) Italy                               (47) Luxembourg                 (48) Malta                

(49) The Netherlands          (50) Norway                         (51) Poland              

(52) Portugal                         (53) South Africa                 (54) Spain                 

(55) Sweden                          (56) Switzerland                  (57) UK

            The number of member countries in the bank is expected to increase to about 70, exceeding the 67-member ADB.

Secretary General: Mr. Jin Liqun

HQ: Beijing; 3 – tier structure
Board of Governors	* Highest Decision Making body. * Voting power according to share holding * Shareholding according to GDP
Board of Directors	* Board of Governors, will elect these directors. * They’ll decide budget and submit reports to Board of Governors
President	* He is the president of Board of directors. * Person with long experience and ethical integrity in banking /economics / finance. * He’ll be selected on “merit”. * Responsible for Day to day administration, hire and fire staff. * He can appoint vice President to reduce work load.

·        Oct 2014: at present only MoU is signed. Bank is yet to begin operations.

·        June 2015: legal framework for the China-initiated Asian Infrastructure Investment Bank (AIIB) was signed

Key features of AIIB

• It will have authorized capital of 100 billion US dollars and the initial subscribed capital is expected to be around 50 billion US Dollar. The paid-in ratio will be 20 per cent.

• Asian countries will contribute up to 75 percent of the total capital and be allocated a share of the quota based on their economic size.

• China will contribute 29.78 billion US dollars of the bank's 100 billion US dollars capital base, becoming its largest shareholder with a 30.34 percent stake.

• India will be the second-biggest shareholder at 8.4 percent, followed by Russia, which will have a 6.5 percent stake.

• China, India and Russia will have a voting share of 26.06 percent, 7.5 percent and 5.92 percent, respectively.

• It will start operations by the end of 2015 under two preconditions: At least 10 prospective members sign the agreement, and the initial subscribed capital is no less than 50 percent of the authorized capital.

Will India benefit from AIIB?

Something is better than nothing	* 12th Five year plan says we need $1 trillion dollar investment in infrastructure. * While Modi is relaxing FDI, promoting “Make in India”, striving for ease of doing business; Modi met Chinese, Japanese and American leaders to invest in India and so on. * But still, $1 trillion is a huge amount, so whatever few billions dollars we get as ‘soft loan’ from AIIB, BRICS bank or xyz other institution- is good.
We do have voting power	* India will be the 2nd largest subscriber to AIIB. * Besides we have good relations with other Asian countries that are in AIIB but are not “best friends” of China. * So collectively, we’ll have sufficient voting power in the board, to counter any moves hurting Indian interest.
Africa will benefit	* Since AIIB will loan to Asian countries, it’ll slightly reduce world bank’s pressure to finance Asian projects. Then World bank can divert more funds to Africa. * African development is also in India’s best interest because:  - Indian exports will increase  - Terror networks will weaken  - Sea-piracy will decrease.
Competition = cheaper loans	* ADB often accused of a “slow-moving bureaucracy”- gives loans too late and with too many strings attached. * China brags that AIIB will have a clean, simplified and efficient bureaucracy. * October 2014:  World Bank President Jim Yong Kim began internal restructuring, reducing staff salary and perks. It means things are not hunky dory with world bank * The entry of AIIB will further increase the competition, catalyze the reforms in other Multilateral banks- perhaps they’ll reduce interest rates, EMIs and may even begin telemarketing for “Sovereign loans”!

 India will not benefit from AIIB

America says so	* AIIB’s objectives are ambiguous * AIIB lacks transparency.
Bogus countries will benefit	* In past, China loaned to countries without good-governance or respect for human rights or functional democracy or environmental safety: Pakistan,Myanmar and many African autocracies to name a few. * Using AIIB, China will try to legitimize such funding in the name of infrastructure development. * Counter argument: in past even ADB loans to Cambodia and Laos have been misused, ethnic minorities were displaced for infra-projects. so, AIIB= villain, and ADB + World bank = saints, such stereotyping is wrong.
China doesn’t listen to others	* 2014, July: South Korea proposed- we should setup AIIB Headquarter in Seoul or Songdo- to reduce the fears of US, Japan and Western powers. * But Jinping rejected the idea and setup HQ in Beijing. This is one of the reasons why South Korea did not come to MoU signing. * China may use the same strong-arm tactics in future as well e.g. AIIBS giving loan to project in PoK and India protests.

  

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