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China’s Influence Grows With New Infrastructure Bank

Delegates pose for a group photo at the signing ceremony for the Articles of Agreement of the Asian Infrastructure Investment Bank (AIIB) at the Great Hall of the People in Beijing, June 29, 2015.

The multibillion-dollar China-backed Asian Infrastructure Investment Bank (AIIB) was launched Monday in Beijing, with founding members signing an agreement that gives the clearest signals to date about how the bank will operate. Among them was the confirmation that China will hold the largest block of voting rights of 26 percent.

Members of BRICS – Brazil, Russia, India, China and South Africa – will hold a significant chunk of the voting shares as well, with nearly 50 percent. This has given rise to fears that AIIB could not only challenge long established institutions such as the World Bank, but also the recently created BRICS Bank.

The AIIB has pledged that its work will complement, not compete with, other existing multilateral institutions. This may be a tall order, not just because they would operate in the same market, but also because leaders of emerging markets have repeatedly expressed their dissatisfaction with institutions like the World Bank and International Monetary Fund.

“To some extent this reflects what emerging economies, including China, India and Russia, they are redeeming what they should have got in international organizations,” said Raymond Yueng, a senior economist with ANZ in Hong Kong.

At the same time, Yeung said the bank’s Articles of Agreement highlight China’s effort to keep the bank non-exclusive and not turn it into a close-knit club of allies. He noted that articles for procurement do not limit participation in projects or for the providing goods and services.

“So it’s not only these 57 members. I don’t think that they are going to create a closed economy in infrastructure spending and infrastructure projects,” Yeung said. “They are also open to other countries that are not founding members.”

That includes countries such as the United States, Canada and Japan, who so far have kept out of the bank. The bank’s authorized capital is $100 billion, of which nearly $98 billion has been divided among what the bank calls its “regional” and “non-regional” founding members.

Veto power

Another widely debated issue about the bank's agreements shed light on is whether or not China will have veto power in the AIIB's decision making.

The agreement released on Monday did not use the word veto, but it said for most of the major decisions the bank will make, a “super majority” is essential. With 26 percent of the voting shares, China would have a decisive voice in every decision. China has said that it is not seeking veto power at the bank. Analysts argue it is only natural for top investors to have more say that the rest.

“I would not be surprised if China has an indirect veto power. We know the developed countries often exercise an indirect veto power at the World Bank and IMF,” said N.R. Bhanumurthy, a professor of economics at the New Delhi’s National Institute of Public Finance Policy.

One of the first tests of that power will be when bank chooses its first president in the coming months. According to the agreement signed Monday, the president must be a person from a “regional” founding country.

The bank is expected to become officially operational by the end of this year.

Breaking BRICS

The AIIB is not the only multibillion-dollar bank that China has recently played a part in forming. It also has the BRICS bank, which is based in Shanghai and now headed by India. But some wonder whether the two banks could become rivals.

“There are high expectations from AIIB. But there is a risk of competition between the AIIB and the New Development Bank of the BRICS nations,” Bhanumurthy said.

He adds that what the developing world does not want is two competing institutions.

“They should make sure there is no overlapping in their activities. The New Development Bank can focus on social development issues and leave infrastructure areas to AIIB,” Bhanumurthy said.

China says the bank will not only help promote development in the region, but aid in the global economic recovery.

All aboard

Monday’s signing ceremony was held at the Great Hall of the People. Almost all of the bank’s 57 founding members signed the agreement. Seven are still seeking approval at home.

China has led the campaign to garner support for the AIIB after it first proposed it two years ago. Some analysts regard its ability to attract more than 50 countries, despite the reluctance of Washington to join, as a foreign policy success. Many U.S. allies, including Australia, Britain, Germany, Israel, and South Korea, have joined.

Nearly half of the members of the North Atlantic Treaty Organization are founding bank members.

One of the key reasons the United States and others have held off is because of questions they have about the bank’s ability to uphold high standards of governance and accountability. This is because some analysts say many major projects financed by Chinese banks overseas are seen to be motivated more by political considerations than return of investment criteria. But some experts in developing countries see it differently.

“There is no reason to think that AIIB would not be professionally managed or fail to abide by international standards. Some of the major financial markets like Singapore, Hong Kong and London are involved in its making,” Bhanumurthy said.