World Economy

AIIB to Take Concrete Shape at Founders Meeting

AIIB to Take Concrete Shape at Founders MeetingAIIB to Take Concrete Shape at Founders Meeting

One of China’s biggest ever foreign policy successes will take concrete shape on Monday when delegates from 57 countries sign an agreement on the Asian Infrastructure Investment Bank in Beijing.

The founding members of the China-backed AIIB will sign articles of agreement that decide each member’s share and the bank’s initial capital, Reuters reported.

The multilateral institution, seen as a rival to the western-dominated World Bank and Asian Development Bank, was initially opposed by the United States but has attracted many prominent US allies including Britain, Germany, Australia and South Korea. Other founding members include most Asian nations and countries from the Middle East and South America.

Japan and the United States are the most prominent nations not represented in the bank. China has said it has left the door open for them to join.

“It’s a huge diplomatic and strategic win for China,” said Malcolm Cook, a senior fellow at the Institute of Southeast Asian Studies in Singapore, said of the AIIB.

“(But) the fact that so many have signed on will mean that the management of the AIIB will be quite complicated...The more countries you have on board, the more interests will be at play and more each member will of course want the institution to serve their own interests.”

One senior western diplomat in Beijing said China had felt it had no choice but to set up its own bank after repeated attempts to reform existing institutions like the International Monetary Fund to take into account China’s role as the world’s second-largest economy were blocked in Washington.

“The United States only has itself to blame,” said the diplomat, from a country which has signed up to the AIIB, speaking on condition of anonymity.

 Share of Each Country

Asian countries are expected to own up to 75% of the bank while European and other nations will own the remainder. Each Asian member will then be allotted a share of that 75% quota based on their economic size, two Japanese sources have said.

The AIIB will begin with authorized capital of $50 billion, eventually to be raised to $100 billion.

China is likely to hold a 25-30% stake, while India will be the second-biggest shareholder with a possible 10-15%, delegates at a meeting to finalize the new bank’s articles of agreement told Reuters in May.

Germany plans to take a 4.1% stake to become the fourth-biggest member after China, India and Russia, according to a finance ministry draft document seen by Reuters earlier this month.

Australia said last Wednesday it would contribute A$930 million ($719.36 million) over five years to become the institution’s sixth largest shareholder.

 Veto Power

China says it will not hold veto power within the AIIB, unlike the World Bank where the United States holds a limited veto.

The AIIB is the brain child of influential Chinese think-tank China Center for International Economic Exchanges, or CCIEE, which is helmed by former vice premiers and ambassadors, among others. The think-tank had proposed the creation of the bank in 2013 as an institution that balances China’s political and economic priorities, CCIEE officials said.

“The AIIB has made a lot of progress so far in its preparatory work, but this is only the first step in a long road ahead,” Chinese Finance Minister Lou Jiwei said in a commentary published on the website of the official People’s Daily newspaper on Thursday.

“It will require a lot more effort to bring the AIIB up to the standards of global financial institutions.”

Apart from backing the AIIB, China has also pledged billions of dollars to the Silk Road fund and the “One Belt, One Road” initiative, which are also aimed at funding infrastructure to increase trade and connectivity between Europe and Asia.

 Infrastructure Needs

Asia’s ability to finance infrastructure projects has failed to keep pace with the region’s booming needs, but market players are optimistic the AIIB will help plug the gap.

“Infrastructure projects have been slow because they are not bankable due to high risks. Developers also have limited capacity to raise funds from the capital market. Due to this lack of financial support, many infrastructure projects can’t proceed,” Liew Mun Leong, chairman of urbanization and infrastructure consultancy Surbana Jurong, told CNBC’s “Managing Asia” as part of the special series “Asia Builders.”

There’s a pressing need for “something higher order than capital markets” to help fill the region’s gaping funding gap, Liew added.

As the competition to provide for Asia’s infrastructure financing needs heats up, Japan unveiled a plan in May to provide $110 billion in aid, a move that will be great news for Asian economies in urgent need of new basic infrastructure to support their economic and social development.

According to figures provided by the ADB, the fast-growing region will need an estimated $8.22 trillion of infrastructure investment for the current decade, as the scale and diversity of demands magnify due to factors such as rapid urbanization.

Current international finance remains insufficient, according to statistics from research firm World Resources Institute. In the financial year ending 2014, the World Bank’s overall spending on infrastructure was $24.2 billion, while the ADB’s total spending across all sectors was only $21 billion.

As such, developers who attended the “Asia Builders” conference feel the AIIB will be able to lend a much-needed helping hand to countries such as Indonesia.