Enlarging Shareholders

By+Bai+Shi

A significant shift occurred when four major eurozone economies applied for founding membership of the Chinaproposed Asian Infrastructure Investment Bank （AIIB）， dispelling concerns of some developed economies over the initiatives ability to successfully revolutionize infrastructure development in Asia.

Britain became the first big Western economy to apply on March 12， with France， Germany and Italy submitting their applications five days later. On March 20， Switzerland and Luxemburg announced their intention to join the bank. More countries have followed suit ahead of the March 31 deadline.

After publicly voicing initial concerns over the banks commitment to international standards on governance， the United States shifted its tone by expressing willingness to cooperate with the AIIB under the framework of other international financial institutions. Meanwhile， Japan has been closely watching the banks progress since it was announced in Beijing last October with the participation of 21 Asian countries， fearing the new Asian bank would diminish the influence of the Japan-dominated Asian Development Bank （ADB）.

Attractive

Europes decision to join the bank did not come as a surprise to most analysts.

Zhang Yuewen， a research fellow at the Institute of Finance and Banking under the Chinese Academy of Social Sciences （CASS）， said that the four major European economies decision to join the AIIB despite strong U.S. opposition was in accordance with their national interests.

China envisions huge opportunities for Asias future development， which it aims to tap into by proposing a series of initiatives to boost connectivity and infrastructure construction， such as the Silk Road Economic Belt and the 21st Century Maritime Silk Road initiatives and the AIIB. European countries will find worthwhile investment opportunities as those initiatives are put into practice， Zhang said.

It has been widely recognized that Asia will soon be home to the worlds fastest growing markets. There is no reason for European companies to ignore this golden opportunity， Zhang said. UK Chancellor George Osborne said in a statement that joining the AIIB at the founding stage would create “an unrivalled opportunity for the UK and Asia to invest and grow together.”

The EU is now facing multiple challenges， including a debt crisis， sluggish growth and pressures from reforming its fiscal， tax and social welfare systems. Joining the AIIB and getting in on the ground floor of Asian development is a smart move for any far-sighted investor， said Pang Zhongying， professor of international relations at Renmin University of China.

The China-proposed bank will help advance reform of current global financial institutions， said Pang.

The EU prefers a multilateral style of global financial governance. Although a plan was reached as early as in 2010 on reforming the International Monetary Fund （IMF） and World Bank， the United States has stubbornly blocked the implementation of the plan， causing discontent from both Europe and emerging countries. These conflicting national interests have put a wedge between the EU and the United States， Pang said.

As the dominant power in global institutions， the United States shows mixed reactions to the rise of emerging economies. On one hand， it wants emerging countries to contribute more to global governance； but on the other hand， it fears that its control of global institutions will be weakened by China and other emerging players. As a result， due to U.S. opposition， the reform plan of increasing shares of emerging economies in the IMF and World Bank has been delayed， said Wang Yong， a professor of international relations at Peking University. Wang said the United States takes the same attitude toward the AIIB.

The AIIB will also benefit from the participation of European countries， Pang said.

With at least 35 founding members stretching across Asia to Europe， the AIIB has already secured a promising position as a global multilateral bank， Pang said.

The European economies can bring leading managerial expertise and operation experience to this new bank.

“They can help the AIIB incorporate high standards in terms of building management structure， making rules and dealing with nonperforming assets. Europes participation will raise the AIIBs credit rating， which can lower the cost of financing when it issues bonds in the future，” said Yao Zhizhong， Deputy Director of the Institute of World Economics and Politics under the CASS.

However， European participation in the Asia-led initiative could result in occasional disagreements， Pang said.

Major European countries possess great weight in global financial governance. Developed and developing economies might have differing views on some issues. To address these differences， China and European founding members will need to work out a new model of cooperation to ensure the sound operation of the new bank.

Open and inclusive

As for U.S. concerns over the AIIBs governance and transparency， Chinese Foreign Ministry spokesperson Hong Lei stressed at a press conference on March 17 that the AIIB will follow the principles of openness， inclusiveness， transparency， responsibility and fairness in designing its governance structure and operation policy.

The AIIB will effectively cooperate with and complement the existing multilateral development banks such as the World Bank and the ADB to provide investment and financing for infrastructure building in Asia， said Hong.

Strengthening connectivity， especially in terms of infrastructure， is greatly needed by many developing economies in the AsiaPacific region， said Shen Minghui， associate researcher at the Institute of Asia-Pacific Studies under the CASS.

According to the ADB， $8 trillion will be needed from 2010-20 for infrastructure construction in Asia. And according to the World Bank and the Organization for Economic Cooperation and Development， $55 trillion will be needed for global infrastructure development by 2030.

However， the annual loans from ADB can only meet 2 percent of this heavy investment demand.

The ADB and the AIIB have different aims and positions. While the former mainly addresses poverty alleviation， the latter is primarily focused on infrastructure development. The AIIB could become a useful complement for promoting regional development and bring more opportunities for investors who have an eye on Asias massive growth potential， said Liu Zongyi， assistant researcher with Shanghai Institutes for International Studies.

The World Bank and the ADB， led by developed economies， will continue to play a leading role in conventional financial governance. The AIIB will be inclined to meet actual needs of developing economies—foremost among which is infrastructure construction financing， said Guo Tianyong， Director of the Banking Research Center of the Central University of Finance and Economics. He added that the establishment of the AIIB will help improve the current international finance system.

The Memorandum of Understanding on Establishing the AIIB， signed by 21 countries last October in Beijing， stipulates that the authorized capital of the AIIB will be $100 billion and the initial subscribed capital is expected to be around $50 billion. Chinas share of this total could reach 50 percent， which will eventually be diluted when more countries decide to join. The bank is poised to begin operations by the end of this year under a set of rules and regulations agreed upon by all participating members.