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Economy

Asia's development banks talk up cooperation, jostle for dominance

Jin Liqun of the Asian Infrastructure Investment Bank, left, and Takehiko Nakao of the Asian Development Bank signed a memorandum of understanding to strengthen cooperation, on May 2.

FRANKFURT, Germany   The Asian Development Bank is facing stiffer competition from the Beijing-based Asian Infrastructure Investment Bank, even as the two step up cooperation on key infrastructure projects.

At its annual meeting through May 5, the ADB appeared unfazed by the AIIB, despite the China-led bank's growing regional presence since its formation in December. "Even if other institutions take on the same role as the ADB, the bank will remain as important as ever," President Takehiko Nakao, formerly of Japan's Finance Ministry, told a news conference on the meeting's final day.

Yet Nakao also noted the ADB could raise capital in the future by increasing emerging economies' stakes in the bank. While based in the Philippines since its establishment in 1966, the ADB has always been led by Japan, its largest shareholder.

Japan's nod to emerging nations signals growing awareness of China. The ADB still operates as it did in the 1990s, and its structure does not reflect current economic affairs, Chinese Finance Minister Lou Jiwei told a meeting of his peers on May 4. Indian Finance Minister Arun Jaitley called for the bank to increase its capital in a way that would give emerging nations a greater say.

The two development banks appear ready to team up, at least at first glance. The ADB and AIIB on May 2 signed a memorandum of understanding to strengthen cofinancing and other cooperation. The agreement includes a $273 million project to build a 64km stretch of highway in Pakistan's Punjab Province.

"I am very pleased to have this framework of collaboration with a new and strong partner in Asia," Nakao said. Drawing on the AIIB's resources will help supplement ADB funding, he added.

AIIB President Jin Liqun noted that partnering with the ADB would enable the development of infrastructure stretching all the way to Europe. "I am delighted to take a further step forward in our partnership with ADB," he said.

LEADERSHIP STRUGGLE   Yet beneath the surface, the two institutions appear to be stepping up their battle for regional dominance in the development bank sector.

The ADB is beefing up operations and forging new partnerships, leading to record financing last year. The bank intends to expand its funding capacity 50% to $20 billion by 2017. Japanese Finance Minister Taro Aso indicated his country will push for greater funding to high-quality infrastructure projects as the bank's largest investor. The AIIB is unlikely to become a significant rival to the ADB, he told a news conference, noting that the banks' "creditworthiness is on very different levels" and that "the ADB can lend more cheaply."

The AIIB, meanwhile, looks to cofinance transportation infrastructure and water projects in Asia with global banks such as the European Bank for Reconstruction and Development. The region's infrastructure demand stands at $800 billion, providing investment targets for massive Chinese capital. The U.S. and Japan have decided against participating in the AIIB, citing such factors as a lack of transparency in project screening.

The AIIB is part of China's broader plan to develop Asian trade and infrastructure under President Xi Jinping's "One Belt, One Road" initiative. The bank's closeness to Beijing has led many observers to question its independence and the amount of scrutiny it will receive.

"China is using every available policy instrument it has to further 'One Belt, One Road,'" said David Arase, professor of international politics at the Hopkins-Nanjing Center. "The AIIB, from their point of view, is just another instrument."

China's capacity to fund expensive projects could deteriorate going forward. The nation's current-account surplus has fallen from 10% of gross domestic product before the 2008 financial crisis to around 2% in the last few years. Enormous amounts of currency reserves have been burned up defending the yuan during periods of market volatility. The AIIB itself employs only a few dozen people at present, and lacks experience raising funds on the market or screening projects.

Nevertheless, the China-led multilateral bank has captured the imagination of governments, analysts and media worldwide. While it may only lend $10 billion to $15 billion annually, "symbolically and psychologically it looms much larger," Arase said.

Nikkei staff writer Rintaro Tobita contributed to this article.

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