Why AIIB in news?
India and 49 other founding members of AIIB on 29 June 2015 signed articles that determine each country’s share and the lender’s initial capital. The remaining seven founding members can sign the agreement before December 2015.
- Infrastructure investment is needed as per ADB ~$800 billion in Asia alone
- ADB itself can’t lend more than $10 billion.
- Bretton woods organisations will not lend that much to Asia alone.
- in background of above in 2013, Xi Jinping (General Secretary of the Communist Party of China, the President of the People's Republic of China, and the Chairman of the Central Military Commission) came up with idea to setup “multilateral development bank” to lend money exclusively to Asia
But why is China so keen? What are hidden interests of china in setting up AIIB?
- Profits
- China has huge foreign exchange and wants to use it to make profit
- AIIB’s total authorized Capital: $100 billion.
- Chila will give 50% and when AIIB lends money it will earn interest --> China will get maximum profits
- Support China's Maritime Silk road and belt Policy (DETAILS COVERED HERE ONLY)
- AIIB will finance rail-road-ports infrastructure along the ancient silk route.
- Counter US-Japan dominated IMF+ADB
- IMF
- not reforming its governance structure.
- Inspite of having economy size equivalent to USA, China's voting power in IMF is 1/3rd of USA
- Popularise Chinese Yuan than $
- In ADB,
- China's share is about half of share of each one - US and Japan
- HQ: Beijing
- Initial Stock Capital: 100B $
- Regional character of the Bank: its regional members will be the majority shareholders, holding around 75 percent of shares.
- Voting shares are based on the size of each member country’s economy and not contribution to the Bank’s authorised capital. China’s shareholding is 30.34 per cent and it has retained 26.06 per cent of the voting rights with veto powers for certain key decisions.
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| The 20 Largest Countries by Shareholding at the Asian Infrastructure Investment Bank. Source: Wikipedia |
Other members
- Apart from China and India, some of the countries which signed the agreement include Australia, Bangladesh, Brazil, Cambodia, Finland, France, Germany, Italy, Jordan, Nepal, Netherlands, New Zealand, Norway, Pakistan, Portugal, Republic of Korea, Russia, Saudi Arabia, Singapore, Spain, Sri Lanka, Sweden, Switzerland, and the U.K.
- Colombia, Japan, and the United States have no immediate intention to participate.
- North Korea and Taiwan were rejected by China to join as a Prospective Founding Members (PFM).
- Hungary and Taiwan are applying for ordinary member to join AIIB.
Structure (3 tier)
- Board of Governors
- Highest Decision Making body.
- Voting power according to share holding
- Shareholding according to GDP
- Board of Directors
- Elected by Board of Governors
- Decide budget and submit reports to Board of Governors
- President
- He is the president of Board of directors.
- Person with long experience and ethical integrity in banking /economics / finance and be selected on “merit”.
- Responsible for Day to day administration, hire and fire staff.
- He can appoint VP to reduce work load.
What has World Bank got to say about AIIB?
- The President of the World Bank, Jim Yong Kim, has said that the need for infrastructure in developing countries is great so that the activities of new organisations would be welcome
- Pro arguments
- “The AIIB is an example of constructive cooperation among emerging economies to increase the space available for infrastructure financing"
- "It is a regional initiative and, therefore, fully complements global initiatives such as the New Development Bank [set up by the BRICS nations]"
- 12th Five year plan says we need $1 trillion dollar investment in infrastructure.
- Voting power
- India will be the 2nd largest subscriber to AIIB.
- Besides we have good relations with other asian countries that are in AIIB but are not “best friends” of China.
- So collectively, we’ll have sufficient voting power in the board, to counter any moves hurting Indian interest.
- Benefits to Africa
- Since AIIB will loan to Asian countries, it’ll slightly reduce world bank’s pressure to finance Asian projects. Then World bank can divert more funds to Africa.
- African development is also in India’s best interest because:
- Indian exports will increase
- Terror networks will weaken
- Sea-piracy will decrease.
- Cheaper loans and catalysation of reforms because of competition
- ADB often accused of a “slow-moving bureaucracy”- gives loans too late and with too many strings attached.
- China brags that AIIB will have a clean, simplified and efficient bureaucracy.
- The entry of AIIB will further increase the competition, catalyze the reforms in other Multilateral banks- perhaps they’ll reduce interest rates.
- Cons
- In past, China loaned to countries without good-governance or respect for human rights or functional democracy or environmental safety: Pakistan, Myanmar and many African autocracies to name a few.
- Using AIIB, China will try to legitimize such funding in the name of infrastructure development.
- Counter argument: in past even ADB loans to Cambodia and Laos have been misused, ethnic minorities were displaced for infra-projects.
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- like in 2014, July: South Korea proposed to setup AIIB Headquarter in Seoul or Songdo- to reduce the fears of US, Japan and Western powers. But Jinping rejected the idea and setup HQ in Beijing.
- China may use the same strong-arm tactics in future as well e.g. AIIB giving loan to project in PoK and India protests.
- CHALLENGES;
- Geopolitical:
- Japan has chosen to stay out of the Beijing-initiated AIIB.
- The Philippines, which has territorial issues with Beijing in the South China Sea, has held itself back from signing, for now.
- And Indonesia has sought to have the bank housed in Jakarta.
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