In our previous blog, we discussed AIIB’s origin, goals, its management and membership structure. In this blog, we will look at AIIB’s financial resources, voting right structure and lending capacity. We will also examine China’s intention of creating such economic infrastructure and its relation with India.
Financial Resources of AIIB
- The AIIB's initial total capital is USD 100 billion divided into 1 million shares of 100000 dollars each, with 20% paid-in and 80% callable.
- Paid-Up Share Capital: It is the amount of money that has already been paid by investors in exchange for shares of stock.
- Called-Up Share Capital: Some companies may issue shares to investors with the understanding they will be paid at a later date.
- This allows for more flexible investment terms and may entice investors to contribute more share capital than if they had to provide funds upfront.
- China is the largest contributor to the Bank, contributing USD 50 billion, half of the initial subscribed capital.
- India is the second-largest shareholder, contributing USD 8.4 billion.
- China is the largest shareholder with 26.61 % voting shares in the bank followed by India (7.6%), Russia (6.01%) and Germany (4.2 %).
- The regional members hold 75% of the total voting power in the Bank.
- The AIIB has a governance structure similar to other MDBs (multilateral development bank), with two key differences:
- it does not have a resident board of executive directors that represents member countries' interests on a day-to-day basis; and
- the AIIB gives more decision making authority to regional countries and the largest shareholder, China.
- The recipients of AIIB financing may include member countries (or agencies and entities or enterprises in member territories), as well as international or regional agencies concerned with the economic development of the Asia-Pacific region.
- The AIIB has signed a co-financing framework agreement with the World Bank and three nonbinding Memoranda of Understanding (MOU) with:
- the Asian Development Bank (ADB),
- European Bank for Reconstruction and Development (EBRD),
- and the European Investment Bank (EIB).
- The bulk of AIIB’s operations are in South Asia.
- The Bank can lend outside Asia provided that it supports connectivity with Asia or it is for the global public good and that the loan significantly benefits Asia.
- The ceiling for non-regional loans is 25%.
- The key sectors for the Bank are Energy, Transport, Water and Urban development.
- About two-thirds of the loans approved by the bank have been co-financed with other multilateral lending institutions, including the World Bank and the ADB.
- The triple-A ratings from Standard & Poor’s, Moody’s and Fitch, reflect the Bank’s commitment to the highest standards of governance, enhanced transparency and accountability.
- Approved investment operations of AIIB reached USD 7.94 billion in April 2019.
China’s Motivation for Creating the AIIB
- The creation of the AIIB is part of a broader reorientation of Chinese foreign and international economic policy that has taken place since Xi Jinping became Chinese Communist Party General Secretary in 2012 and the President in 2013.
- “One Belt, One Road” (OBOR) Initiative
- It identified 65 countries that will be participating in the initiative, which aims to use trade promotion, infrastructure development, and regional connectivity, to boost economic linkages between China and dozens of countries along a land route (the Silk Road Economic Belt) and a sea route (the 21st Century Maritime Silk Road).
- To realize this vision, China is investing in a range of institutions and initiatives, including the AIIB, and other funding mechanisms such as the Silk Road Fund (established in 2014) and the New Development Bank (also known as the BRICS Bank established in 2014), a collective arrangement with Brazil, Russia, India, and South Africa.
- China also seeks to influence the emerging structure of regional trade and investment relations.
- By helping to finance OBOR, AIIB may influence these relationships. It may also reinforce a regional infrastructure that has China as its hub.
- As a result, regional economies may be more inclined to augment trade and investment relations with China rather than with other economies, such as Japan, South Korea, Taiwan, and the United States.
AIIB and India
- There are various issues between India and China:
- Indian membership in the Nuclear Suppliers Group (China maintains that it will not support India’s entry until there is a universal formula to accept applications from all countries that haven’t signed the Non-Proliferation Treaty- indirectly pursuing a case for Pakistan),
- territorial disputes in the Himalayas,
- concerns over the China-Pakistan Economic Corridor’s traversal of disputed territory in Kashmir.
- India has serious concerns over Chinese foreign policy in its region generally and the OBOR initiative specifically, regarding Beijing’s attempts to seek influence in its immediate neighbourhood with great interest.
- Despite aforesaid issues between India and China, the AIIB plays a crucial role in implicitly in the consensus-building process:
- The AIIB has acquired the status of a plurilateral lending initiative, so there is no problem for either India or China, in overlooking bilateral differences and working together at the AIIB.
- India can open up investment opportunities in the region through AIIB.
- By hosting the AIIB’s third annual meeting (2018, Mumbai) under the theme of “Mobilising Finance for Infrastructure: Innovation and Collaboration”, India has reiterated its openness to infrastructure collaboration.
Economic Contribution of AIIB
- India is the largest beneficiary of AIIB financing for infrastructure projects. The AIIB has approved five projects in India. These are —
- Bangalore Metro Rail Project (USD 335 million),
- Transmission System Strengthening Project,
- Gujarat Rural Roads (MMGSY) Project (providing USD329 million through a 13 - year loan to provide all-weather connectivity to 4,000 villages in the 33 districts of Gujarat state),
- India Infrastructure Fund
- and Andhra Pradesh 24×7 – Power For All project.
- The total loan sanctioned by AIIB to five Indian projects is USD 1.074 billion. This accounts for almost 28% of the total money the bank has lent to 24 infrastructure projects worldwide. The AIIB has approved for lending USD 200 million to National Investment and Infrastructure Fund (NIIF).
- NIIF is an Indian-government backed entity established to provide long-term capital to the country’s infrastructure sector. Its portfolio includes investments in ports and logistics, real estate and renewables.
- In Feb 2019 the AIIB and the Government of India signed a USD 455 million loan to finance the Andhra Pradesh Rural Roads Project, which will connect some 3,300 habitations with a population of more than 250, and benefit around two million people.
The AIIB Concerns
- The United States has opposed the AIIB and considers AIIB as an unwanted intrusion in the multilateral financial system.
- The emergence of AIIB, largely funded by China, poses a threat to the monopoly of the United States on the world's financial system for over half a century
- The world's leading industrialized economies, Japan and the U.S. are not members of the AIIB because of following expressed concerns:
- There is no certainty that the bank will maintain its rigorous loan-screening practices or keep its funding operations separate from China's political ambitions.
- Joining the AIIB would require making a huge financial contribution to the entity.
- Asia's infrastructure investment needs are so vast that no single institutional lender can meet that demand on its own.
- The U.S. government is seemingly intent on pursuing inward-looking policies through protectionism and trade war.
- The bank is concerned with the predicted downward trend in project finance because of the slow global economy and trade war.
- Slowing economies can lead to governments failing to meet contractual obligations towards AIIB and trade frictions may erode the potential of infrastructure projects.
- AIIB’s non-resident board inhibits transparency and accountability.
- It reinforces the perception that the AIIB will be much more centrally controlled by the Chinese government.
- It is well proved throughout the history of economic growth & development that the creation and development of robust financial institutions will make market forces more competitive leading towards comprehensive growth and development of society.
- The AIIB can create their own space by contributing to sustained economic growth leading towards the improved living standard of millions of poor people across Asia and other regions.
- The AIIB is still in its evolutionary phase that must be nurtured with democratic principles avoiding single-country dominance (Chinese dominance) like that of USA in IMF and World Bank.
- India as an emerging economy can play a vital role in shaping the foundation of AIIB for the cause of poor people spread across developing countries.
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