June 15, 2017 2:19 pm JST

AIIB future rests on shedding Beijing influence

Bank to hold 2nd annual meeting in South Korea

SHIGERU SENO, Nikkei senior staff writer

Asian Infrastructure Investment Bank President Jin Liqun says membership could grow to 85 or 90 within the year. © Reuters

TOKYO -- The China-led Asian Infrastructure Investment Bank will hold its second annual general meeting between June 16-18 on South Korea's Jeju Island. The bank, which has stuck to careful driving in its first year, looks ready to gain speed in year two, supported by a steady increase in membership.

AIIB President Jin Liqun in May said he envisioned total membership rising to "85 to 90" by the end of the year. That is a significant increase from the 57 inaugural members of January 2016.

That figure would make it larger than the Asian Development Bank -- led by Japan and the U.S.-- which has 67 members.

Despite the two development banks being seen as a rivals, they have signed an agreement to strengthen cooperation. As of the end of May, the AIIB had approved loans for 13 projects, three of which will be cofinanced with the ADB. Those include a road construction program in Pakistan and a natural gas infrastructure development in Bangladesh. The other seven will also be joint-financed with bodies such as the World Bank and European Bank for Reconstruction and Development.

In its sophomore year, the bank's focus will shift to raising its profile as an international financial institution.

For many, the solution is clear -- removing Beijing's political intentions from the banks operations.

The AIIB has approved 20 new members so far this year. They include Canada, Belgium, Hong Kong and Bahrain. A total of $2.175 billion in loans will be provided to the 13 projects -- not a huge amount compared with the $100 billion it has in capital.

At the time of the bank's founding, it was initially viewed as a vehicle to advance China's Belt and Road Initiative.

In December last year, the AIIB approved loans totaling $265 million for a port infrastructure development project in Oman. As the country lies outside the main Asian region targeted by the bank, the decision caused alarm in Tokyo and elsewhere.

Many in government circles see it as an attempt to secure strategic areas along shipping lanes linking China, the Middle East, Africa and Europe for the initiative.

While the AIIB cannot hide the fact it was established under Chinese leadership, the bank needs to eliminate as much of Beijing's influence as possible if it is to gain credibility as an international institution.

There have been some efforts in that regard. By and large, it follows the same procedures for social and environmental impact assessment as the World Bank, and three of its five vice presidents are from Europe.

Citing these moves, Jin has repeatedly claimed that AIIB is not a tool to further Belt and Road.

India, one of the bank's founding members, is willing to actively solicit AIIB support for infrastructure development. New Delhi, however, declined to send any senior government officials to the Belt and Road Forum for International Cooperation in Beijing on May 14-15 in objection to infrastructure projects that run through Kashmir, a region claimed by India and Pakistan.

Of the 13 unapproved projects currently undergoing the screening process, seven are in India.

Indian Finance Minister Arun Jaitley will take the initiative in holding a seminar to ensure that some of the projects are approved during the second annual meeting.

There are two main challenges that lie ahead for the AIIB.

The first task is to reinforce its fundraising capacity. The ADB and the World Bank have received the highest Triple-A credit ratings.

The credibility of the two institutions has helped raise large amounts of funds for financing programs at global financial markets through bond issuance.

It is believed the AIIB is intent on receiving a credit rating as early as the end of September.

In addition to not having Japan and the U.S. on board, Moody's Investors Service downgrading of China's long-term government bond rating in late May could have a negative impact for some time. China is the largest fund provider for the bank.

Another task is to increase staff numbers at the bank from the current 100 or so.

Eiichi Sekine, the chief representative of Nomura Institute of Capital Markets Research's Beijing office, said that problems include the air pollution in Beijing where the bank is headquartered and an inability to raise salaries amid soaring wages in the area.

If the personnel shortage persists, it will be difficult for the bank to conduct the process of selecting projects.

The ADB estimates that infrastructure demand in Asia will total $26 trillion in the 15 years from 2016.

For the AIIB to play a bigger role in financing projects, it needs to improve discipline as an international institution and further pursue independence from Beijing. The results would likely have a major impact on the debate on the Japan's entry in the bank.

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