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Battle for supremacy rages behind Asian development banks' cooperation

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 Japan-led 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.

Status quo

At its annual meeting through Thursday, 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, an alumnus 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 growing emerging economies' stakes in the bank. For the president to even hint at greater involvement by developing nations is of historic significance for an organization that, while based in the Philippines since its establishment in 1966, 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 Wednesday. Indian Finance Minister Arun Jaitley called for the bank to increase its capital in a way that would give emerging nations a greater say.

Japan and China appear ready to team up, at least at first glance. The ADB and AIIB on Tuesday signed a memorandum of understanding to strengthen co-financing 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 said.

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 are stepping up their battle for regional hegemony.

The ADB is beefing up operations and forging new partnerships as China shakes up the development bank sector, leading to record financing last year. The bank looks 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 co-finance transportation infrastructure and water projects in Asia with global banks such as the European Bank for Reconstruction and Development. The region's infrastructure demands stand at $800 billion and are growing rapidly, 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. But the door remains open, making the chance theirs to lose, Jin said.

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. While the bank has pledged to uphold the same governance standards as other development banks, its closeness to Beijing has led many observers to question its independence and the amount of scrutiny it will receive. The organization's nonresident board will meet periodically by video conference, and its annual meeting is expected to be more about ceremony than decision-making.

"China is using every available policy instrument it has to further 'One Belt, One Road,'" said David Arase, professor of international politics at Nanjing University. "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 several dozen staffers 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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