Screw Asian Dev't Bank: PRC's Asian Infra Invsmt Bank

The PRC looks to storm ADB strongholds.

What's a country to do with (nearly) $4 trillion in FX reserves? To paraphrase Captain Kirk, China has boldly gone where no other country has gone before in accumulating them since Japan at full pomp "only" had slightly over $1 trillion; Japan now has about $1.3 trillion. Obviously, buying friends and subsidizing people is on the agenda--witness China in Africa--but this approach has its drawbacks. First, precisely because they are viewed as PRC-only endeavors, others are suspicious of its motives. Second, there is limited interaction with international institutions China seeks to be more influential with in going it alone.

Hence, China's recently mooted plans to set up an Asian Infrastructure Investment Bank (AIIB) to address both these points. The PRC has made limited inroads at the region's multilateral lending institution, the Asian Development Bank (ADB).  After all, the ADB cast of characters aren't Japan's natural allies: the largest shareholders in the ADB are Japan and the United States. Meanwhile, it is headquartered in the Philippines, the nation that has taken China to  court over its, how should I put this, expansive territorial claims over warnings not to "internationalize" the dispute. So if you can't join 'em, beat 'em by setting up your own regional lender. As for the present ADB ownership structure:

As of 31 December 2013, ADB’s five largest shareholders are Japan (with 15.7% of total shares), the United States (US) (15.6%), People’s Republic of China (6.5%), India (6.4%), and Australia (5.8%). ADB members who are also members of OECD hold 64.6% of total subscribed capital and 58.5% of total voting power.

This Bloomberg article makes much of China having territorial disputes with India, but then again, it has them with a lot of folks--add Brunei, Indonesia, Japan, Malaysia, the Philippines "Taipei," Vietnam and so forth. To ensure this bank is not viewed as someone's pet project--it is, but similar criticisms can be leveled against the ADB--the supposed plan is for China to provide half the $50B over a period of five years with other Asian nations contributing the rest:

The planned bank was first announced by Chinese President Xi Jinping and Premier Li Keqiang during visits to Southeast Asia last October as part of efforts by China to boost its regional clout. The planned bank would have start-up capital of US$50 billion, half of which will be contributed by China and the rest by other Asian countries. China estimates fund contributions would hit $50 billion billion within 5-7 years, and the bank would then be ready to become a channel to fund infrastructure projects with a low [interest] rate.

The Chinese foreign minister proposing the AIIB is none other than the former chairman of the China Investment Corporation (CIC) sovereign wealth fund, Lou Jiwei. CIC started with a cool $200B, but its capitalization has increased to $500B. So, who's to say that AIIB is not going to increase in size over time if it fulfills its role in serving Chinese interests?

When he was appointed CIC chairman, a minister-level post, he was put in charge of investing US$200 billion. The fund is now valued at US$500 billion thanks to additional capital injections from the government and heavy dividend payouts by the biggest state-owned banks, and has recorded an annualised 5.03 per cent return since its inception.

Lou, 62, kept a low profile while CIC chairman, but the sovereign wealth fund became involved in several controversies due to unsuccessful investments and the blocking of some attempts to acquire foreign assets.

Just as China proposes the Regional Comprehensive Economic Partnership (RCEP) to counterbalance the TPP, so does it put forward the AIIB idea to set up an alternate, China-centric group of development and trade institutions. What is its unique selling proposition? Simple: aside from offering substantial fresh loanable funds, it will impose few to no conditionalities and will certainly not insist on Western-style "good governance" so beloved by ADB folks:

The AIIB will differ from the ADB by focusing on building infrastructure rather than prioritizing poverty reduction, Lou said at the Boao Forum in April. The bank is unlikely to attach political conditions to its loans due to Beijing’s policy of not interfering in other countries’ internal affairs, according to Zhao Jianglin, a researcher with the National Institute of International Strategy at the Chinese Academy of Social Sciencesin Beijing.

Territorial disputes aside, the Indonesians are already eyeing it...

China’s recent initiative to establish the Asian Infrastructure Investment Bank (AIIB) is a potential game-changer. Indonesia has welcomed this initiative and stated its intention to participate in the new development bank. The AIIB can be expected to accelerate investment in economic infrastructure to boost Asia’s productivity.

...and so are the Thais for megaprojects:

Thailand can tap the Chinese-initiated Asian Infrastructure Investment Bank (AIIB) as a funding source for its infrastructure megaprojects now that the 2-trillion-baht borrowing bill has been derailed by the Constitutional Court, says a senior Finance Ministry official. Somchai Sujjapongse, director-general of the ministry’s Fiscal Policy Office, said establishing the AIIB, whose function would be to fund infrastructure projects in the region, could be a boon to countries that need funding for their infrastructure developments.

The Chinese are quite canny in focusing on infrastructure. Not only can they (conveniently) claim that they are not in competition with the ADB which is more into poverty alleviation, but they also can tap a widely-shared need throughout the region for infrastructure lending. Heck, even its territorial disputants can probably be swayed by that. If the Chinese can provide technical assistance on top of it all, then AIIB would represent a formidable new international institution in comparison to the ADB which has been around since 1966.