How Should the Hundred-billion-dollar AIIB Make A Good Start?

written by Li Min / translated by Ma Jinyu

How Should the Hundred-billion-dollar AIIB Make A Good Start?

written by Li Min / translated by Ma Jinyu

After 173 days of gestation, Chinaproposed Asian Infrastructure Investment Bank (AIIB) has expanded its “circle of friends” -- 57 countries confi rmed their intention to join as AIIB’s founding members up to the 15th of April, 2015.

The shift from wait-and-see attitude to active participation is signifi cant and hardwon, which makes a good start for the establishment of AIIB.

It is a completely new track waiting for China and other founding members after“qualifying”.

How should the AIIB position itself, make decisions and operate its own business? China and its fellows still have a lot of work to do to achieve good grades.

What Role Does AIIB Play?

AIIB will be established as an intergovernmental multilateral development organization in Asian region and operated in accordance with the model and principles of multilateral development banks, with a focus on infrastructure construction.

Similar to the World Bank, AIIB in concept refers to as an intergovernmental multilateral organization, which decides that it is not simply an economic organization with the intent to pursue profi ts. However, the operation mode of the multilateral banks expects that it is better not to lose money and not to keep too many bad loans. This requires AIIB to make clear its role and position before decision-making, which means that it should support China’s strategic target of “One Belt, One Road”, serve Asian infrastructure as well as put emphasis on economic development and profi t margin.

At the end of 2013, China proposed to construct Silk Road Economic Belt and the 21st Century Maritime Silk Road, known for short as the “One Belt, One Road” so as to achieve “community diplomacy” with countries along the road. The “One Belt, One Road” runs through Asia, Europe and Africa, with active East Asia economic rim and developed European economic rim locating respectively on its two ends. Countries in its central area have great potential for economic development and there are a large number of infrastructure to be updated. Therefore, with the core task of investing in infrastructure construction, AIIB, which was planned to be built in the end of 2014, is an important step of “One Belt, One Road”. It shows China’s concrete actions and commitment, which also greatly promotes fi nancial impetus for the construction of the “One Belt, One Road”. It can be said that “service” is the task coming with the birth of the AIIB.

On the other hand, there are economic concerns that bring non-Asian countries to join the AIIB. Peter Drysdale, head of the East Asian Bureau of Economic Research and Emeritus Professor of Economics at the Australian National University, said: “Compared to other regional banks, the greatest charm of the AIIB is that the infrastructure projects itfocuses will continue to spur economic growth, exert great influence in the transformation of Asia and fuel the engine of global economic growth”.

Meanwhile, the active participation of different countries will help AIIB operate scientifically and reasonably, increase consensuses of all members and improve its credibility in international community.

In the coming decade, about $730 billion is needed each year for infrastructure financing, which is hard for the existing international financial institutions. Infrastructure exerts immeasurable infl uence in driving economy. Hence, AIIB should emphasize on all members’ real needs for economic development, no matter whether it is about the standpoints for future development or the standards for project decision.

What Should the AIIB Do?

How the AIIB works is the top priority after defining its role and tasks. What should the AIIB do? Experts and scholars shared diff erent opinions on organizational structures and decision-making, project selection and AIIB’s relationship with other existing financial systems etc. How many directors and managers should the AIIB arrange? And what are their responsibilities, functions and authority? The setting of organizational structure directly aff ects its operational effi ciency.

The AIIB is a newbie in international financial system. Both learning and innovation are essential for it to get along well with its peers and keep pace with the others.

Mr. Jin Liqun, the Secretary General of the Multilateral Interim Secretariat of AIIB also denoted that the AIIB will be a new multilateral fi nancial institution co-created by all members, which will well present the interests of all members. It will make innovation based on the good practices and experience of the existing multilateral development institutions.

Mr. David Daokui Li, Director of the Center for China in the World Economy at Tsinghua University’s School of Economics and Management suggested that the AIIB should set up three committees. The first one is the Board of Directors. The seats and voting power will be allocated on the basis of members’ investment volume. The second one is Representative Council. All members would have a seat, regardless of their size and investment volume. The third one is Consultative Council, which is comprised by representatives from offi cial labor unions, entrepreneurs, capital market and community opinion leaders and even cultural and environmental protection organizations. The three committees should cooperate and consult together. The Board of Directors should make full deliberation and discussion before making specifi c decisions.

Mr. Lou Jiwei, Minister of Finance of China, also claimed that governance structure is the most important part in AIIB’s regulations, which is being negotiated currently. The AIIB will set up three-tier management structure, including the council, the board of directors and the management, thus to establish effective monitoring mechanism and ensure efficiency, openness and transparency of decision-making.

Consideration must be given to both democracy and efficiency when the AIIB seeks the appropriate solution for the voting mechanism. In the aspect of project operation, credit and risk will be major factors aff ecting AIIB's project strategy and model. According to AIIB’s core tasks, the investment projects in infrastructure construction such as railways, ports and highways, all demand a long-term time and huge funds. The low credit ratings and uncertain factors of some investment target countries will also increase the risk of investment and complicate the risk structure.

In this regard, Mr. Su Liangyu, Deputy General Manager at China Guangzhou Yuexiu Financial Investment Group believed that the AIIB, with a clear division of power and responsibility, should make the distribution of profit and loss as well as the selection of investment projects. For example, some strategies like crowdfunding mechanism can be applied in specific projects. It should well define all members’ power and responsibility as well as the share of profit and loss, thus to ensure the sources of financing in the future.

“Generally, project-host country should provide AIIB with guarantee on government finances, corresponding strategic resources or assets. This to some extent avoids investment risks, and achieves high and stable returns. The investment risk can be controlled within a certain range as long as the commercialized operation and the principle of small profi ts but breakeven are carried out”, Mr. Wang Jun, Deputy Director of Consultation and Research Department at China International Center for Economic and Technical Exchange, said.

After close consultation and careful planning, we expect that the AIIB will have a perfect performance since its inception.