China's AIIB: a surprisingly normal bank

The Asian Infrastructure Investment Bank (AIIB) is still in its infancy, but its record so far suggests that it may turn out to be very similar in form to that of other multilateral financing institutions. In its current scope, the bank may therefore reassure those concerned about the disruption it might cause in the global development financing landscape. At the same time, however, it disappoints by failing to provide a different voice in the market.

The idea to create a China-led AIIB was first introduced two years ago by the Chinese president, Xi Jinping, and it officially commenced business on

January 16th 2016, with 57 founding members. So far, the AIIB has concentrated primarily on setting up its administrative and operational structure, including senior management, a board of directors, a board of governors and a team of around

100 people. But the bank is still very much in the making, with a goal of reaching 500 employees by the end of 2018. A permanent headquarters is under construction in the Chinese capital, Beijing.

A cautious start

The AIIB has opened up avenues for co-operation with other multilateral financing institutions, signing a co-financing framework agreement with the World Bank and three non-binding Memoranda of Understanding with the Asia Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB).

At its first annual meeting in June, AIIB leadership sought to encourage new members, with 24 non-members participating. The AIIB president, Jin Liqun, said that the bank hopes eventually to gather more than 100 members. Additional interest has come from all sides of the globe, with a surge from countries outside Asia. From Latin America, Chile, Colombia and Venezuela have expressed interest in joining; from Africa, so have Algeria, Libya, Nigeria, Senegal and Sudan; Europe's Greece, Ireland and Cyprus might also become new members. In late August Canada also officially applied to join.

This new intake might change the structure of the bank quite dramatically. Non- Asian members might be able to apply for AIIB loans, for example, hence modifying its geographical scope. However, in its current form, the institution remains China- dominated. At end-September China had a 33.4% share of the AIIB's subscribed capital (currently a total of US$89.1bn) and a 28.8% share of voting rights, a proportion large enough to give it an effective veto over major decisions. China is followed by India, Russia and Germany, with voting shares of 8.3%, 6.6% and 4.6% respectively.

Project financing has begun

The bank has started actual lending operations this year, and is well on its way to fulfilling its objective of investing US$1.2bn by the end of 2016. As at

September 29th the AIIB's board of directors had approved six loans, for a total of US$830m. Five out of the six projects are to be co-financed by other development institutions. Two more projects are still pending confirmation.

The AIIB's emphasis on joint projects to date is probably the result of its staffing constraints, as it still relies on a partial team for its operations. It might also be a show of goodwill—a way to reassure those that saw the Chinese initiative as competing with other institutions—and an opportunity to build up experience through co-operation.

In any case, this has meant that, despite worries expressed when the AIIB was first announced, a majority of its projects are de facto meeting world-class standards in terms of development financing. The EIB made clear that working alongside it would mean respecting EU standards. The EBRD-AIIB project in Tajikistan is to be run under EBRD standards—and so will other co­financed projects. Going even further, the AIIB has announced that it will set up a special compliance-and-integrity unit supervising the bank's management. Overall, the AIIB has so far shown a determination to comply with existing multilateral financing standards, as suggested by its promise to be "lean, green and clean".

Projects financed or co-financed by the AIIB

Source: Asian Infrastructure Investment Bank.

More of the same

The AIIB's determination to follow global standards comes at the cost of offering something different. Despite the intense debate that accompanied its creation, which sparked diplomatic spats between the US and its European allies that wanted to join the bank, the AIIB seems unlikely to revolutionise the global development financing landscape. Its target sectors and lending procedures are very similar to that of other development banks, most probably because the AIIB was conceived and set up from their model and by their practitioners, although there is some evidence that its peers have also adjusted their approaches to align themselves with those of the AIIB.

Besides, despite its Asia-centrism and Chinese presidency, its senior management is mostly composed of developed-country executives with long experience in multilateral financing institutions (only two senior managers are from developing countries). As such, the AIIB misses one of its main objectives, namely to create a new type of development bank, for developing countries, by developing countries.

Finally, in its current form, the AIIB is clearly under Chinese leadership. Although this might change, this follows a largely criticised pattern of pre-existing development banks, in which major stakeholders wield disproportionate influence. As a result, the AIIB so far appears merely as an addition to the existing web of development institutions—with little done to reform and propose an alternative to the current model.

A drop in China's ocean of financing

The AIIB is unlikely to improve negative perceptions and unease around China's global financing patterns. Indeed, it only makes up a tiny proportion of China's international infrastructure or development financing. With a likely US$100bn in authorised capital in the near future, and a target of US$4bn–5bn in yearly lending, the AIIB struggles to compete with other sources of Chinese financing, notably from its leading policy banks, China Development Bank (CDB) and Export-Import Bank of China (China EXIM Bank).

CDB, for example, has a balance sheet of over US$2trn and its annual international lending has exceeded US$20bn on average over the past seven years. In 2015 it received an injection of US$48bn, specifically for investments in infrastructure alongside the Chinese government's Asia-centered "One Belt, One Road" initiative, with a further US$45bn going to China EXIM Bank. Bundled together, the two institutions actually lend much more than all other multilateral development financing institutions combined.

Although not all restricted to Asia or infrastructure, these figures show how limited the AIIB's capitalisation is compared with other, traditional means of Chinese international financing. As a result, even though the AIIB's respect of global standards in terms of lending might be welcome, the amount of Chinese financing operating outside of them means that China's opaque pattern of investment will continue to characterise its overall approach. In this sense the AIIB might be best understood as China's effort to showcase its global governance capabilities, rather than a game-changing contribution to the landscape of global development financing.