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Opening of AIIB hailed as 'historic moment', experts flag challenges

President of Asian Infrastructure Investment Bank (AIIB) Jin Liqun greets to journalists as he arrives at a news conference in Beijing on January 17, 2016. Photo: Reuters

The formal inauguration of the China-led Asian Infrastructure Investment Bank (AIIB) on Saturday heralds what Chinese President Xi Jinping called a "historic moment" to create an additional driving force for the Asian economy.

The AIIB will "channel more resources into infrastructure projects and create a better investment environment and more job opportunities in Asia" in an attempt to realize the medium to long-term development potential of the developing countries in the region, Xi said at the opening ceremony of the international bank, which has 57 founding members including several US allies such as the UK, Germany and Italy.

The opening of the AIIB shows China is aiming for a bigger role in the international economic and financial system currently dominated by the United States, as the world's second-largest economy is seeking an equal footing with the US economically and politically. The US and its major Asian ally Japan have refused to join the bank.

In October when the US, Japan and 10 other Pacific Rim countries signed the Trans-Pacific Partnership (TPP) agreement, US President Barack Obama candidly said that America will not "let countries like China write the rules of the global economy" when over 95 percent of the country's potential customers live outside its borders.

Financing infrastructure projects

The $100 billion AIIB, headquartered in Beijing, will initially focus on investment in the industries of energy, transportation, telecommunication, agricultural infrastructure, urban construction, logistics, environmental protection, healthcare and sewage disposal, with the first batch of loans valued at $1.5-2 billion to be issued within this year.

From 2010 to 2020, the total infrastructure investment demand of developing Asian countries is estimated at $8 trillion, which means that an average $730 billion of infrastructure investment is needed every year, according to statistics from the Asian Development Bank (ADB). Currently, Asian governments and multilateral development banks including the World Bank and the ADB can annually offer lending worth some $230 billion to the region, the statistics show.

Under the circumstances, the AIIB, with a mission to promote regional infrastructure construction and connectivity, will fill the large gap, serving as an impetus for the economic growth in the region and even the rest of the world.

Data from McKinsey & Company shows that as of March 2015 Asia already had 1,300 known large infrastructure projects valued at $4 trillion.

Due to the lack of fund contributions at the early stage, the AIIB and the ADB will work together to finance several infrastructure projects related to transportation and renewable energy in Asia in 2016, said ADB President Takehiko Nakao.

"The AIIB will financially, socially and environmentally promote the sustainable development of the infrastructure projects in the region," said Jin Liqun, president of the AIIB, adding that his bank has been keeping a close contact with the ADB and the European Bank for Reconstruction and Development (EBRD) over project financing.

In terms of the credit rating, Jin said that the AIIB's financial team had held talks with third-party credit rating agencies including Standard & Poor's, Moody's Investors Service and Fitch Ratings. But he said he was not concerned about a possible unfair rating by these Western firms, as the financially strong shareholders of the bank and China's large capital market can ensure the supply of funds.

The emergence of the AIIB comes as China is proceeding with the "One Belt, One Road" national strategy, which is widely seen as a response to the US-led TPP, especially at a time when China is facing an economic slowdown, a plunge in the share market and excessive production capacity.

On the one hand, the AIIB can function as a global investment and fundraising platform for the countries along the Silk Road Economic Belt and the 21st Century Maritime Silk Road, where capital resources are unreasonably allocated; on the other hand, the AIIB can channel more capital resources from outside the region into the infrastructure projects of those countries.

Governance, transparency to be enhanced

Chinese Finance Minister Lou Jiwei, who is also the chairman of the AIIB council, said in an interview that the opening of the AIIB marks a milestone in the reform of the global economic and financial governance system.

Previously, there were reports saying that its great contribution to the $100 billion authorized capital and its 26 percent voting right at the AIIB could drive China to use the bank as a tool to expand its own economic influence in the region.

In response to the skepticism, China has vowed to implement high standards of governance and transparency at the AIIB. Jin, the AIIB president, has pledged that the bank's lending will adhere to tough environmental and social standards, while being faster and more nimble than the World Bank.

A Wall Street Journal report published on January 15 said that the AIIB must adjust its financing procedures and enhance transparency and credibility if it wants to deliver on the promise of being more efficient than the World Bank in lending business.

Analysts say that the AIIB has to prove that its operation can be independent from the Chinese government as the projects could favor Chinese companies or serve a diplomatic purpose.

In 2009, the Chinese government tried to prohibit the ADB from funding an Indian water conservancy project in a border area near southern Tibet. China and India have territorial disputes in that area.

David Dollar, an expert on the Chinese economy at the Brookings Institution and an AIIB advisor, hailed the opening of the AIIB as a victory for China, but he stressed that the things it has done for the bank so far are much simpler than the things it will have to deal with.

"Setting up a development bank is relatively easy, running a bank is hard," said David Loevinger, a former Chinese expert at the US Treasury. If China fulfills the promise of holding the AIIB to high standards of governance and transparency, its position as a global leader will be enhanced, said Loevinger.

"They have talked the talk. Now they have got to walk the talk," said Loevinger.

Will the US join AIIB?

In an interview, Jin said that he welcomes the joining of any country which accepts the rules and responsibilities set by the bank.

"It is a basic principle for us (when approving a country's membership). We attach great importance to communication with the US and Japan, the two great powers," said Jin.

The banker also said that the AIIB will recruit excellent professionals from around the world including those from the US and will open project bidding to American enterprises.

After many of its European allies agreed to join the China-led multilateral financial institution, despite previous objection, President Obama changed his tone, saying that the US is not opposed to other countries to join the AIIB and looks forward to cooperating with the bank as long as it runs in a way that leads to good infrastructure and its transparency and governance can ensure the proper utilization of the funds.

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