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Development finance with Chinese characteristics

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In Brief

After a late flurry of additions to the founding membership of the Asian Infrastructure Investment Bank (AIIB), attention now turns to setting the China-led AIIB’s rules and regulations. But important questions remain — most importantly, whether the AIIB is a potential rival or a welcome complement to existing multilateral financial institutions like the World Bank.


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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 also joined as founding members.

According 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 2015. China will serve as the standing chairman of the negotiators’ meetings, which will be co-chaired by the member country hosting the talks. The fifth of these meetings took place in Singapore in late May. The Chinese economist Jin Liqun has been selected to lead the AIIB’s Multilateral Interim Secretariat, which is 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 2014 that China does not necessarily need the 50 per cent stake that its GDP would imply. And, 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 US$50 billion New Development Bank announced by the BRICS countries (Brazil, Russia, India, China and South Africa) in July 2014, the AIIB has faced considerable scrutiny, with some Western leaders questioning its governance, transparency, and motives. Many in the West have portrayed the establishment of these development banks 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 China’s Vice-Minister for Finance Shi Yaobin pointed out recently, by recognising the need to reform their governance, existing multilateral lenders have shown that there are no ‘best practices’, only ‘better practices’. There is no reason improvements cannot originate elsewhere.

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 US$40 billion Silk Road Fund (SRF) that President Xi Jinping announced in November 2014. The SRF and the AIIB will serve as the key financial instruments of China’s ‘One Belt, One Road’ initiative. This initiative is centred on the creation of two modern-day Silk Roads: the (overland) ‘Silk Road Economic Belt’ and the ‘21st Century Maritime Silk Road’, which stretch 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 projects 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 capitalised by four state agencies. The State Administration of Foreign Exchange will hold a 65 per cent 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 per cent stake; and the China Development Bank (CDB) will hold the remaining 5 per cent. The SRF 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 (PBOC).

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 alluding to the SRF’s ‘just right’ financing features. For example, Zhou indicated that the SRF will adopt at least a 15-year horizon for investments, rather than the 7-to-10-year horizon adopted by many private equity firms, to account for the slower return on infrastructure investment in developing countries.

The SRF could also act as a catalyst for other state financial institutions to contribute to a selected project’s equity and debt financing. The SRF 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 more broadly.

Richard Kozul-Wright is Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD).

Daniel Poon is an Economic Affairs Officer at the United Nations Conference on Trade and Development (UNCTAD).

A version of this article first appeared here on Project Syndicate.

One response to “Development finance with Chinese characteristics”

  1. I think a new governing model for the AIIB could be to seek a balance between economic weights or contributions to the AIIB and sovereignty. Such a governing structure will have more desirable properties than both the current governing structures of the World Bank and the IIMF. For example, it is more objective as opposed to arbitrary nature of the existing ones. Further, it gives an equal weight to each country in the sovereign part of the proposed structure. The objectiveness and fairness are superior to all the current models of governess. If China and other countries are interested in successfully reforming the current international financing bodies, they are likely to have a much stronger argument should they carefully consider and device better governing model and mechanism. The model proposed here can help them to advance their goals and endeavors in seeking to reform both the IMF and the World Bank.

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