China is working diligently to expand its global economic and political footprint. Two critical pieces of the puzzle for Beijing are the $40 billion Silk Road Fund and the $50 billion AIIB.
As a refresher, The Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. This failure has been exemplified of late by Washington’s steadfast refusal to reform the IMF in order to ensure the Fund reflects the economic clout of its members. Although the failure falls largely at the feet of Congress — US lawmakers’ utter inability to legislate has left reform measures stalled — it recently manifested itself at the Presidential level when President Obama had an opportunity to change the structure of the IMF (for the better) without congressional approval but chose not to do so [15]. Importantly, Obama’s decision not to act was not made out of reverence for Congress. Rather, The White House believed that supporting the reform agenda would have jeopardized the US veto, which US officials at all levels view as sacrosanct.
As China builds its own multilateral institutions, Beijing has been keen to dispel [16] the notion that it seeks to supplant the Bretton Woods order with its own brand of Eastern hegemony and although one can certainly question the degree to which China’s aims are rooted purely in an inclination to be benevolent towards nations in need of fixed asset investment, Beijing is making an effort to distance itself from the way the US governs the institutions under its control. WSJ has more [17] on the structure of the AIIB:
The bank’s voting structure means that China will retain the upper hand as the largest shareholder, according to its articles of incorporation and people close to the bank. China has offered to forgo outright veto power in day-to-day operations, which helped win over some key founding members.
The articles, agreed to at a meeting of the bank’s 57 founding member countries last month, call for the Asian Infrastructure Investment Bank to be overseen by an unpaid, nonresident board of directors, unlike the World Bank and the Asian Development Bank. The new bank, which will be based in Beijing and use English as its operating language, will open bidding for projects to all, unlike the ADB, which restricts contracts to member countries, according to a copy of the articles reviewed by The Wall Street Journal.
[18]
The new Asian bank also gives a bigger voice to developing nations—a turnaround from the International Monetary Fund and World Bank, which China lobbied for years for greater representation.
“China benefited a lot from existing multilateral organizations, but it was also frustrated in a lot of ways that they didn’t increase the weight of China and other developing markets, that they are often slow and bureaucratic,” said David Dollar, a senior fellow at Brookings Institution and former World Bank and U.S. Treasury official in China who has done unpaid consulting for the new bank...
Voting shares are apportioned according to a complex formula that factors in each member’s capital contribution, the size of its economy, basic votes each member receives equally plus another 600 votes allocated to each founding member.
At least 75% of share votes are reserved for members located in the Asia-Pacific region, giving smaller Asian countries a greater say than they have in other global organizations.
“They will try and increase the efficiency of investment compared to other development banks with long approval procedures,” said Cui Fan, a professor with Beijing’s University of International Business and Economics.
The bank is expected to maintain a lean staff, according to analysts and those close to the bank, compared with the World Bank, which has over 12,000 staff and consultants. Doing without a resident board of directors should save the bank money and friction in decision-making.
Mr. Dollar, of Brookings, said the resident board costs the World Bank some $70 million annually. When he worked at the bank, “There was often a certain tension between the management and the board members whose resident staff wanted to find out about projects at an early stage.”
Germany, one of the European nations which signed on after the UK spurned Washington and opened the AIIB membership floodgates by pledging to join the bank, will become the fourth largest shareholder, demonstrating the degree to which Western powers believe the new institution will be far more influential than some US commentators have led the world to believe.
Via Reuters [19]:
Germany plans to take a 4.1 percent stake in the new China-led Asian Infrastructure Investment Bank (AIIB), making it the fourth-biggest member, according to a finance ministry draft document seen by Reuters on Tuesday.
A total of 57 countries, including Britain, France and Iran, have joined the AIIB, which is seen as a rival to the Western-dominated World Bank and a major plank in spreading China's "soft power".
It was launched in Beijing last year to support investment in Asia in transport, energy, telecommunications and other infrastructure. The articles of agreement are expected to be ready for signing at the end of June.
Germany will be the fourth-biggest shareholder in the $100 billion lender after China, India and Russia. It plans to contribute around $900 million in the period 2016-2019 and take on $3.6 billion in guarantees from 2016, according to the document.
In the AIIB, the US faces a far greater threat to its position in the global economic order than anyone in Washington dares to admit. The smear campaign (that's really the only way to cast it) aimed at painting the new bank as relatively small and meaningful only to the degree that it symbolizes China's global and regional ambitions is profoundly misleading.
This is not a pet project for Beijing and the founding members are not pledging hundreds of millions so they can play a part in petty Chinese theatrics. The bank is real. The sooner Washington recognizes and accepts this, the better off it will be in terms of helping to repair the reputational damage the IMF and ADB have suffered as a result of American and Japanese belligerence.
