Info Service on UN Sustainable Development (May15/07)
22 May 2015
Third World Network
No. 117, 21 May 2015
SOUTHVIEWS is a service of the South Centre to provide opinions and
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Finance with Chinese Characteristics?
By Richard Kozul-Wright and Daniel Poon
After a late flurry of additions to the founding membership of the
Asian Infrastructure Investment Bank, attention now turns to setting
the China-led AIIB’s rules and regulations. But important questions
remain – most important, whether the AIIB is a potential rival or
a welcome complement to existing multilateral financial institutions
like the World Bank.
Since China and 20 mostly Asian countries signed the AIIB’s initial
memorandum of understanding last October, 36 other countries – including
Australia, Brazil, Egypt, Finland, France, Germany, Indonesia, Iran,
Israel, Italy, Norway, Russia, Saudi Arabia, South Africa, South Korea,
Sweden, Switzerland, Turkey, and the United Kingdom – have joined
as founding members.
to China’s finance ministry, the AIIB’s founding members are to
complete negotiations on the Articles of Agreement before July, with
operations to begin by the end of the year. China will serve as the
standing chairman of the negotiators’ meetings, which will be co-chaired
by the member country hosting the talks. The fourth chief negotiators’
meeting was completed in Beijing in late April, and the fifth will
take place in
Singapore in late May. The Chinese economist Jin Liqun has been
selected to lead the AIIB’s Multilateral Interim Secretariat, charged
with overseeing the bank’s establishment.
While GDP will be the basic criterion for share allocation among the
founding members, the finance ministry suggested in October that China
does not necessarily need the 50% stake that its GDP would imply.
Moreover, although the AIIB will be based in Beijing, the ministry
has said that regional offices and senior management appointments
will be subject to further consultation and negotiation.
Like the $50 billion New Development Bank announced by the BRICS countries
(Brazil, Russia, India, China, and South Africa) last summer, the
AIIB has faced considerable scrutiny, with some Western leaders questioning
its governance, transparency, and motives. Indeed, many in the West
have portrayed their establishment as part of an effort to displace
existing multilateral lenders.
But the new development banks seem less interested in supplanting
current institutions than in improving upon them – an objective shared
by those institutions themselves. As Deputy Finance Minister Shi Yaobin
out recently, by recognizing the need to reform their governance,
existing multilateral lenders have shown that there are, in fact,
no “best practices” – only “better practices.” There is no reason
improvements cannot originate elsewhere.
In fact, given its experimental approach to development, China is
well-suited – and, as some top officials have hinted, more than willing
– to contribute to this process. If China can help find a way to balance
the need for high standards and safeguards in project lending with
the imperative of rapid loan dispersion, global economic governance
would benefit significantly.
In pioneering a more pragmatic approach to development finance, China’s
institutional model could be the $40 billion Silk Road Fund that President
Xi Jinping announced last November. The SRF and the AIIB will serve
as the key
financial instruments of China’s “One Belt, One Road” strategy,
centered on the creation of two modern-day Silk Roads – the (overland)
“Silk Road Economic Belt” and the “Twenty-First Century Maritime Silk
Road” – stretching across Asia toward Europe. The initiative will
aim to promote economic cooperation and integration in the Asia-Pacific
region, mainly by providing financing for infrastructure like roads,
railways, airports, seaports, and power plants.
Yet the SRF has received scant attention from Western media. This
is unfortunate, because what little is known about it suggests that
it could play an important role in transforming development finance.
According to Chinese media, the SRF will be capitalized by four state
agencies. The State Administration of Foreign Exchange will hold a
65% stake; the China Investment Corporation (CIC, the country’s sovereign-wealth
fund) and the China Export-Import Bank (China Exim) will each have
a 15% stake; and the China Development Bank (CDB) will hold the remaining
5%. The Fund was officially registered in December 2014, and held
its first Board of Directors meeting the following month.
In a sense, the SRF can be considered China’s latest sovereign-wealth-fund
initiative, and some media have even referred to it as
the “second CIC.” But, whereas the CIC is under the managerial
control of the finance ministry, the SRF’s operations appear to
reflect the influence of the People’s Bank of China.
In a recent
interview, the PBOC’s governor, Zhou Xiaochuan, suggested that
the SRF would concentrate more on “cooperation projects,” particularly
direct equity investment, before hinting at the Fund’s “just right”
financing features. For example, Zhou indicated that the SRF will
adopt at least a 15-year time horizon for investments, rather than
the 7-10-year horizon adopted by many private equity firms, to account
for the slower return on infrastructure investment in developing countries.
Moreover, the SRF could act as a catalyst for other state financial
institutions to contribute to a selected project’s equity and debt
financing. The Fund and other private and public investors – would
first make joint equity investments in the project. China Exim and
the CDB could subsequently disburse loans for debt financing, with
the CIC providing further equity financing. When the AIIB is up and
running, it, too, could support this process, by arranging debt financing
alongside SRF’s initial equity investment.
Of course, there is still much to digest in these new financing initiatives.
But one can see the emerging contours of a South-South development-finance
landscape – one with the potential to transform multilateral lending
Source: Project Syndicate: http://www.project-syndicate.org/commentary/china-silk-road-fund-development-financing-by-richard-kozul-wright-and-daniel-poon-2015-05#MKyeYIGjeY0SjQPQ.99.
Authors: Richard Kozul-Wright, Director of the Division on Globalization
and Development Strategies at the United Nations Conference on Trade
and Development, is the author, most recently, of Transforming
Economies: Making Industrial Policy Work for Growth, Jobs and Development；
and Daniel Poon is an Economic Affairs Officer at the United Nations
Conference on Trade and Development.
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