AIIB President Jin Liqun and Suma Chakrabarti, the president of the European Bank for Reconstruction and Development, signed an agreement for cooperation on May 11. The two institutions have recently started their first joint project, a road linking Dushanbe, Tajikistan, with the Uzbek border.

 

The Asian Infrastructure Investment Bank (AIIB) will fund infrastructure construction in Asia and other regions while contributing to the reform of the international financial system, according to an article by Christophe Destais, deputy director of the French Center for Studies on International Prospects and Information (CEPII).

The demand for infrastructure financing in Asia has exceeded the capacity of existing multilateral institutions, Destais said. The AIIB will effectively circulate the capital from surplus areas to areas where the existing financial market has failed, he said.

Brusil Miranda Metou, a professor at the University of Yaounde II of Cameroon, said existing international financial institutions lack efficiency and capacity, and regional banks like the AIIB will create necessary competition in international lending while improving international financial governance.

The AIIB takes the form of a multilateral development bank, following the model of banks like the Inter-American Development Bank and the Asian Development Bank. The total voting power of the AIIB comprises basic votes, share votes and founding member votes, of which basic votes and founding member votes together account for about 15 percent. The percentage of the capital stock held by Asian members can only be reduced to below 75 percent of the total subscribed capital stock by a super majority vote in the Board of Governors. Developing and emerging countries have lacked a voice in multilateral development banks for a long time, and all these rules in the AIIB represent a step toward changing the status quo, Destais said.

Although the bank’s rules have been criticized for not meeting the existing requirements of the World Bank or other multilateral banks, the announced rules of the AIIB on issues like employee conduct and procurement are impressively strict, Destais said. If all these rules are followed and strict auditing work is conducted, the AIIB will respond to all these criticism with practical performance, he said.

Commenting on the AIIB’s decision to use the US dollar rather than RMB as the currency for accounts and the repayment of loans, Destais said that the AIIB in its early stages will mostly target Asian countries, where the US dollar is the dominant currency for export settlement. Repayment of loans in US dollars would be more convenient, and exchange rate risks associated with using the RMB can be avoided.

The influence of international credit-rating agencies should be taken seriously if the AIIB plans to establish international creditability in the future, Destais said. The AIIB will have to raise funds in the international capital market for sustainable development, and a higher credit rating will reduce financing costs. In addition to this, the AIIB’s ability to win the confidence of potential clients will also be affected by international ratings, he said.

Francoise Lemoine, a senior researcher at CEPII, said enterprises and countries that apply for loans from multilateral banks usually complain about the red tape and harsh requirements. One of the challenges the AIIB faces is striking a balance between due diligence and simplifying the process for efficiency.

The AIIB should not be the focus of strategic games between certain countries nor should it be over-politicized, Metou said, emphasizing that it is a normal commercial bank. The AIIB should maintain its independence and uniqueness and be a beneficial supplement to the international financial system, he said.

 

 

Yao Xiaodan is a reporter at the Chinese Social Sciences Today.