Alex Blomfield, Mona Katigbak
Applications for founding membership of the China-initiated Asian Infrastructure Investment Bank (AIIB) closed on 31 March 2015. The fifty-seven prospective founding members notably do not include the United States (U.S.) or Japan, but do include a broad geographical spread of countries from Europe, Africa, the Middle East and South America, as well as U.S. allies such as France, Germany, the United Kingdom and Australia. These prospective founding members now have the opportunity to shape the rules that the AIIB will use to govern itself, as well as those it will employ in its financing of energy and infrastructure projects in Asia. At this pivotal juncture – prior to finalisation of the bank’s Articles of Association, targeted for June this year – it is timely to reflect on the AIIB’s potential governance, approach and standards, as well as the bank’s likely effect on the financing of infrastructure projects in Asia.
Why a new development bank?
Asia is the growth engine of the world economy but suffers from an infrastructure deficit which undermines both the region’s growth potential and human development outcomes for its people. In 2009 the Asian Development Bank (ADB), a regional development bank based in Manila, estimated that Asia needed to invest approximately $8 trillion over the ten years to 2020 in overall national infrastructure and, in addition, about $290 billion in specific regional infrastructure projects – an average overall infrastructure investment of $750 billion per year. Existing institutions such as the ADB and the World Bank clearly lack the capacity to meet those needs, given that their combined capital base equals less than $400 billion. The mandate of the ADB and the World Bank extends beyond infrastructure to embrace poverty reduction so these funds are stretched even further. Against this background, employing Asian savings for Asian infrastructure in an effort to help plug the funding gap constitutes a key rationale for the AIIB.
China already participates in financing infrastructure on a massive scale globally. According to Fred Hochberg, chairman of the Export-Import Bank of the United States’, Chinese state-institutions have committed to lend $670 billion in recent years. China could go it alone in increasing funding for infrastructure projects in Asia but its mixed experience with some of that lending (including arrears and/or economic stress from Ukraine, Venezuela, Ecuador and Argentina) has contributed to a decision by China to multilateralise its infrastructure lending efforts.1 One reason China does not simply channel additional funding for Asian infrastructure through the World Bank or the ADB is because the U.S. Congress has blocked China’s efforts in recent years to acquire voting weight and influence more commensurate with the size of its economy and its contributions to such bodies. As a result China has followed through on its promise to create a new multilateral institution over which it would have the predominant influence, much as the U.S. has over the World Bank or Japan over the ADB.
The initial subscribed capital of AIIB will be $50 billion, with China having put up most of the initial amount. The initial amount will be increased $100 billion, with rough plans for 75% of funding to come from Asian members going forward. Beijing will host the headquarters of the new bank which will make its own rules, albeit “built on the lessons of experience of existing [multilateral development banks] and the private sector” according to the AIIB web site.
With the establishment of new rules comes the potential to streamline processing procedures for infrastructure finance. Some advocates of the AIIB claim that the new rules will facilitate an increased flow of funds to infrastructure projects in Asia, which constitutes a further rationale for the establishment of the AIIB. Critics of the ADB and the World Bank maintain that excessively costly project preparation and lengthy reporting obligations inhibit efficient infrastructure funding and development. They maintain that the AIIB offers an opportunity to simplify infrastructure funding by adopting a risk-based approach to lending rather than a legalistic compliance-based approach.
Officially, a key objection cited by the U.S. for not joining the AIIB is a lack of clarity about AIIB’s governance. Irrespective of whether one shares those concerns, it is clear that governance standards will underpin the legitimacy of the new institution. Indeed founding members such as the United Kingdom, France, Germany and Australia have stated that they will use their influence to push for transparency in the AIIB’s governance. The Articles of Association, to be finalized by the prospective founding members by the end of June 2015, will decide several important issues, including the distribution of voting rights between members and the structure of the board of directors. Asian members will control 75% of the shares and China has signaled that it will not seek a veto right but will likely hold the highest voting percentage (estimated at 25-30%), which will give it the predominant voice in decision-making. China has also said that the new bank will make board and staffing appointments based on merit rather than political considerations.
Focus and approach
According to the AIIB’s web site, the Board of the AIIB will develop, and approve, a business strategy and policies for all AIIB investments. Such investments will focus on the development of infrastructure and other productive sectors in Asia, which may include energy and power, transportation and telecommunication, rural infrastructure, and agriculture development, urban development and logistics, especially those projects that are able to bring benefits to more than one member in the region. The AIIB will direct its investments through loans, equity investments and guarantees and will likely also have capacity to offer technical assistance.
Some proponents of the AIIB claim that it will offer a more streamlined approach than the existing Bretton Woods institutions such as the World Bank, with less reporting and bureaucracy. However, there are also concerns that China could use its influence over the new institution to advance its own geopolitical strategic interests or commercial interests. Indeed the increased impetus that the bank will give to infrastructure spending in Asia will undoubtedly be viewed as an opportunity by Chinese construction and other firms that are eager to win business abroad. The adoption of rigorous project-screening and approval processes as well as transparent procurement practices will be essential to ensure that the AIIB is not unduly dominated by Chinese interests.
Some have speculated that the AIIB will offer a big boost to the funding of coal-fired power projects and hydropower projects in Asia. Due to concerns over climate change, most multilateral, regional and bilateral development finance institutions and an ever increasing number of commercial lenders no longer lend to, or invest in, coal-fired power and other coal-related infrastructure projects. However, the AIIB has made no public pronouncements about its stance on coal and could well play a significant role in the plans of India, Indonesia, Vietnam, Japan and South Korea to increase their coal-fired generating capacity. Less at odds with efforts to combat climate change, is the likely push the AIIB will give hydropower development in Asia. Chinese companies have particular strength in both coal-fired power and hydropower projects and the multilateral nature of the AIIB offers a chance to legitimise the expansion of Chinese interests in those sectors.
HSES – Health, Safety, Environmental and Social
Another key objection cited by the U.S. for not joining the AIIB has been a concern about whether the AIIB will adhere to strict environmental and labour standards in its operations. President Obama has now stated that the U.S. never opposed the AIIB, and supports it provided that it incorporates strong financial, social and environmental safeguards. Indeed the AIIB itself has stated that it is “committed to the principles of sustainable development in the concept, design, and implementation of its investment activities” and that “building on MDB [multilateral development bank] experience and with the support of international experts”, the AIIB Secretariat has “initiated a process to develop an environmental and social policy framework to assure integration of these concerns in its operations”. The interim head of the new bank, Mr. JinLiqun, has said that it will ensure that people displaced by new infrastructure projects will be taken care of and that local communities and countries interested in projects financed by the bank will have the opportunity to be involved from the projects’ early stages and have a say through their “full life cycle,” he said.
It remains unclear whether the AIIB will adopt existing HSES standards or establish its own. IFC, other multilateral development banks, such as the ADB, and many commercial banks require their clients to apply its Performance Standards to manage environmental and social risks and impacts so that development opportunities are enhanced. Such standards are incorporated by reference in the Equator Principles, a credit risk management framework used to determine, assess and manage the environmental and social risks associated with certain project based financing. While some might presume that the AIIB will not apply IFC Performance Standards or the Equator Principles to its investments, it is worth noting that as long ago as 2007 the IFC and China Eximbank entered into a memorandum of understanding to cooperate on supporting environmentally and socially sustainable Chinese investment in emerging markets and that the Chinese bank Industrial Bank of China has signed up to the Equator Principles.
As noted in by Deborah Brautigam in her book “The Dragon’s Gift – The Real Story of China in Africa”, one of the most enduring criticisms of Chinese engagement in Africa concerns exploitative labour practices. The World Bank, ADB and many other lenders insist on compliance with IFC Performance Standard 2 on “Labour and Working Conditions”. Performance Standard 2 recognizes that the pursuit of economic growth through employment creation and income generation should be accompanied by protection of the fundamental rights of workers. The requirements set out in this Performance Standard have been in part guided by a number of international conventions and instruments, including those of the International Labour Organization (ILO) and the United Nations (UN). It remains to be seen whether the AIIB will adopt equivalent labour standards. China’s record of bringing in its own labour for large infrastructure projects, as well as its ignorance and/or non-observation of local labour laws, can lead to conflicts with local communities and workers. This means that labour standards on AIIB-funded projects will undoubtedly attract close scrutiny.
Bribery and corruption
Mr. Jin, the interim leader of the AIIB, has said that the AIIB will have “zero-tolerance” of graft. However, China continues to suffer from perceptions of corruption with its performance in Transparency International’s Corruption Perceptions Index recently slipping from 80th among 175 countries in 2013 to 100th in 2014. China’s broadening of the AIIB’s membership will see the institution come under pressure to uphold international rules and norms relating to bribery and corruption, such as the OECD Anti-Bribery Convention (1997) – based on the U.S. Foreign Corrupt Practices Act of 1977 – and the IFC Anti-Corruption Guidelines.
The AIIB will contribute to the further internationalization of China’s currency – renminbi (RMB), a key aim for China in the run-up to this year’s special drawing right (SDR) basket review by the IMF. Singapore and London will strengthen their market positions as centres for RMB-denominated offshore transactions by virtue of the membership of Singapore and the United Kingdom in the AIIB. Indeed, it has been suggested that this constituted Prime Minister Cameron’s key motivation for the United Kingdom joining the AIIB; London’s aim to be the first RMB clearing house outside Asia can only be helped by such joining.
Working with other institutions
While some see the AIIB as a threat to the ADB in particular, economist Joseph Stiglitz has pointed out that the ADB has previously “defended the virtues of competitive pluralism”. Indeed ADB President TakehikoNakao has said that he does not see the AIIB as a threat to the ADB, that the ADB will cooperate with the AIIB, and that the ADB could co-lend to projects with the AIIB and assist the AIIB with environmental standards. However, the ADB has also warned that it will find it difficult to cooperate with the AIIB if it fails to adopt high-quality standards. The World Bank President Jim Yong Kim has stated through a spokesman that his staff are in “deep discussions” with the AIIB “on how we can closely work together”. Even the U.S. has struck a new cautiously cooperative tone with Treasury Secretary Jack Lew stating at the recent annual meeting of the World Bank in Washington D.C.: “We are ready to welcome new additions to the international development architecture, including the Asian Infrastructure Investment Bank, provided that these institutions complement existing international financial institutions, including by adopting their high quality standards. Having the AIIB co-finance projects with existing institutions will help demonstrate a commitment to these high standards.” In addition, IMF president Christine Lagarde has also said that she expects that the IMF will cooperate with the AIIB.
The Asian Infrastructure Development Bank follows the establishment of two other China-led institutions over the past year: the Shanghai-based New Development Bank (NDB) that brings together the five BRICS countries of Brazil, Russia, India, China, and South Africa and the Silk Road Fund (SRF). Some commentators see this trio of new institutions as ushering in a new world economic order.
More projects, better quality projects
The AIIB’s new funding for roads, railways, airports and other infrastructure projects in Asia will likely lead to more of such projects being constructed. However, whether the efforts of China and the prospective founding members to establish a new institution lead to an increase in the quality of such projects, and the probity of funding to projects, remains to be seen. The AIIB could drive standards up by competing with the World Bank and the ADB and fulfilling its promise to be “lean, green and mean”. However, the AIIB could also drive standards down. Which direction the AIIB takes, and its influence on infrastructure projects in Asia, will largely depend on the behaviour of the AIIB’s membership in establishing and administering the new institution.
ECB stays put but warns about surge in infections
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.
Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.
Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.
She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.
Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.
Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.
(Editing by Catherine Evans)
Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.
BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.
“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.
As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.
In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.
But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”
While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.
“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.
NO EXIT EYED
Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.
Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.
Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.
He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.
“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”
(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)
World Bank, IMF agree to hold April meetings online due to COVID-19 risks
WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.
The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.
This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.
(Reporting by Andrea Shalal; Editing by Chris Rees
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