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Opinion
A Growing Family
New development lender in Asia assists with regional infrastructure connectivity
By Liu Ying | NO. 18 MAY 4, 2017
Nepalese Prime Minister Pushpa Kamal Dahal (left) and Asian Infrastructure Investment Bank President Jin Liqun (center) attend the Nepal Investment Summit 2017 in Kathmandu, Nepal, on March 2 (XINHUA)

The Asian Infrastructure Investment Bank (AIIB) announced on April 6 that it had admitted 13 new members, bringing its total approved membership to 70. The new AIIB members come from Asia, Africa, Europe and the Americas. They include five regional members—Afghanistan, Armenia, Fiji, Hong Kong of China and Timor-Leste—and eight non-regional members—Belgium, Canada, Ethiopia, Hungary, Ireland, Peru, Sudan and Venezuela. Widely recognized for its professional, international and standard operations, the AIIB is attracting members from more and more countries.

The AIIB has been improving its organizational structure since its inauguration in January 2016. Focused on financing infrastructure construction across Asia, the multilateral development financial institution has brought something new to the international financial environment and raised expectations.

Greater needs

The global financial crisis which broke out in 2008 has brought prolonged economic stagnation to many parts of the world, and the recovery of the world economy has been slow. Subsequently, the international political landscape has become increasingly complicated as a result of rising protectionism and populism.

The United States adopted a monetary policy of quantitative easing (QE) to stimulate the economy after the crisis and then quit QE after its economy resumed growth. However, such measures intensified fluctuations in the value of the U.S. dollar, and other countries, both developed and developing, are at a loss over what measures to take, increasing disequilibrium and potential risks in the world economy.

Against the backdrop of isolationism, terrorism and protectionism gaining ground once more across the world, Asian economies are more reliant on infrastructure construction as a major growth driver. But they are also suffering great deficiency of funds. The Asian Development Bank (ADB) estimated that Asia needs to invest $730 billion each year from 2010 to 2020 in infrastructure to maintain the present level of economic growth. However, as the major provider of funds for Asian countries in infrastructure construction, the ADB offered only $21 billion of loans in 2013. It is obvious that existing financial institutions in Asia cannot meet the financing demand of the continent.

In the post-financial crisis era, boosting investment in infrastructure is of great significance to stimulating world economic growth. According to the World Bank, 1 percent of growth in the accumulated investment in infrastructure will translate into an equal increase in a country's GDP. Currently, developed economies such as the United States and the United Kingdom pin high hopes on infrastructure investment-driven growth. For developing countries and regions along the China-proposed Silk Road Economic Belt and 21st-Century Maritime Silk Road, improving infrastructure will not only accelerate economic growth, but also improve local people's livelihoods.

A meeting of G20 finance ministers and central bank governors in 2014 set a target to lift the group's collective GDP by more than 2 percent above the trajectory implied by current policies over the following five years. To realize the objective, G20 members must enhance coordination of their macroeconomic policies and strengthen control of economic risks. More importantly, they agreed that investment expansion, especially by emerging economies, is essential to fuel economic growth in all member states.

Infrastructure in the Asia-Pacific region is still underdeveloped, leaving huge potential for investment. The AIIB will help coordinate financing for regional infrastructure construction.

The entire Asia-Pacific region seems not short of funds because regional countries, especially those in East Asia, have high savings rates and foreign exchange reserves. For instance, China has $3 trillion of foreign exchange reserves, and its outbound investment is likely to hit $120 billion this year. It has become the second largest outbound investor in the world and is turning into a net capital exporter. A major concern, though, has been the lack of financing for infrastructure projects.

Laurel Ostfield, spokesperson for the Asian Infrastructure Investment Bank (AIIB), speaks to the media after a press conference in Beijing on March 23 after the AIIB announced that its Board of Governors had approved 13 applications to join the bank, bringing its total approved membership to 70 (XINHUA)

The AIIB's role

The AIIB is primarily a development finance institution. Development finance refers to investment and financing activities based on special credit support and serving national strategic industries and sectors. It doesn't pursue high financial returns and focuses on maintaining financial sustainability in the medium and long terms.

Integrating policy-based finance with market operations, development finance can both make up for market failure and provide public goods. It combines advantages of policy-based finance and commercial financial services and is helpful for maintaining financial stability and enhancing international competitiveness.

The concept of development finance coincides with the AIIB's purpose, which is to foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors. It also aims to promote regional cooperation and partnership to address development challenges through collaboration with other multilateral and bilateral development institutions.

To implement this purpose, the AIIB's Articles of Agreement identifies the bank's foremost function as promoting investment of public and private capital in Asia for development purposes, in particular for the development of infrastructure and other productive sectors. The bank will utilize the resources at its disposal for financing projects and programs which will contribute most effectively to harmonious economic growth of the region as a whole and which pay special attention to the needs of less developed regional members. It will encourage private investment in projects, enterprises and activities contributing to economic development in the region, in particular in infrastructure and other productive sectors, and supplement such investment when private capital is not available on reasonable terms and conditions.

Economic growth booster

The AIIB was set up just as Asian countries began to have increasing demand for investment in infrastructure. It will help make up for the huge deficiency of funds for infrastructure and improve infrastructure connectivity, hence accelerating economic integration and boosting economic growth in the region and the world.

In 2016, the AIIB granted loans of $1.73 billion to support nine projects in seven developing countries in Asia, helping mobilize $12.5 billion of private and public capital. As quasi-public goods, infrastructure can help mobilize more private capital through public-private partnership and other approaches to provide more infrastructure for Asia and the world.

The bank has innovated mechanisms for a multilateral development financial institution. In improving corporate governance, the AIIB has decided that its board of directors will function on a non-resident basis.

The AIIB was established in a spirit of openness and inclusiveness, and it is better able to protect the interests of developing countries. It welcomes all new members equally, regardless of their size, development level and location. The bank currently has 17 new membership applications to approve.

The AIIB aims to promote infrastructure construction with the concept of environmentally friendly growth. It not only helps developing countries improve their urban facilities and transportation, but also strengthens their capacity and efficiency in energy supplies. Through green growth, it focuses on upgrading industrial structures of developing countries, advancing their industrialization and urbanization process, elevating their status in global industrial, supply and value chains, and ultimately improving the well-being of their people.

More partners, of course, mean more expectations and more responsibilities. As its membership grows, the AIIB must assume more responsibilities and will face greater challenges and heavier pressure. It should not only work closely with other international financial institutions, but also strengthen communication with non-profit organizations in sharing its ideas and values, facilitating world economic recovery through boosting infrastructure construction.

The author is a research fellow with the Chongyang Institute for Financial Studies at Renmin University of China

Copyedited by Chris Surtees

Comments to yaobin@bjreview.com

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