China shows economic clout with push for new banks

Ananth Krishnan Beijing | Updated on November 25, 2017 Published on July 16, 2014


As the BRICS countries (Brazil, Russia, India, China and South Africa) on Tuesday firmed up plans to set up a New Development Bank (NDB), China is also pushing for a separate Asia Infrastructure Investment Bank (AIIB). The two projects underline Beijing’s intent to spread its economic clout in the region.

The NDB, to be headquartered in Shanghai, will have an initial authorised capital of $100 billion and an initial subscribed capital of $50 billion equally shared by the five member-countries, according to Tuesday’s Fortaleza declaration.

Different tenor

While India and the three other BRICS nations had, ahead of the summit, made clear that a prerequisite for the BRICS bank to go ahead would be ensuring equal voting rights among the five founding members — a condition enshrined in the declaration — the discussion in China in the lead-up to this week’s meeting had a different tenor.

Here, analysts generally see the NDB and the AIIB as vehicles for China to enhance its economic presence. And if China contributes the most capital, they say, Beijing should be able to dictate how the institutions will be run.

“If the five countries have an equal share in the same entity, there will be coordination problems,” said Zhu Ning, a professor at the Shanghai Advanced Institute of Finance. “So I think it is better to have the leading country [China] to have a role in this institution,” he told State broadcaster China Central Television (CCTV), pointing out that China’s economic relations with the other BRICS countries were unique in both scale and depth, and could not be compared with the other countries’ relations with each other.

Ultimately, the four other members’ insistence on equal rights held sway. The five countries also decided that the first president of the bank would be from India, with the first chair of the board of governors from Russia and the first chair of the board of directors from Brazil.

While the Fortaleza declaration managed to resolve the main points of contention in the lead up to the summit — the location of headquarters and the voting rights issue — what has clouded the bank’s future in recent months is the unexpected move by China to push forward the setting up of another financial institution for the region — the Asia Infrastructure Investment Bank (AIIB), first announced in October last year when President Xi Jinping toured Southeast Asia on a charm offensive, offering billions of dollars in trade deals.

The bank will be as big as the BRICS effort, with an initial capital of $50 billion and room for expansion as China moves to court other countries as founding partners.

Xi invited India to join the effort as a founding member, when he met Prime Minister Narendra Modi in Fortaleza on Tuesday.

The AIIB move is being seen as an effort by China to challenge the influence of Japan in the region, as seen in Japanese influence in the functioning of the Asian Development Bank (ADB).

Economic initiatives

The new bank, Chinese officials hope, will also tie in with two major economic initiatives announced by Xi in October when he visited Southeast Asia — the building of a Silk Road economic belt to connect China with Central Asia and a Maritime Silk Road to link China with South-East Asia and the Indian Ocean Region.

Finance Minister Lou Jiwei said the AIIB would focus on building infrastructure in the region, and not prioritise poverty reduction as the World Bank and ADB do.

“The planned bank will focus on building infrastructure in Asia,” he said at a meeting in April. “The bank will be more of a commercial entity than an inter-government entity.”

As in the case of the BRICS proposal, countries in the region have already raised questions on whether or not China plans to acquire a controlling stake by virtue of fronting most of the capital.

Lou said China would “purchase more shares in the bank” but “won’t hold the controlling stake.” “If other countries want to contribute more to the bank, China is willing to reduce its share,” he said.

The AIIB is expected to focus on China and Southeast Asia, Chinese officials said, and would hence complement — rather than contradict — the BRICS bank effort which would emphasise projects in the member-countries and in Africa.

The official Xinhua news agency said in a commentary on Wednesday the initiative would be “a blessing for cash-strapped developing countries, whose funding applications to boost their poor roads and railways have been repeatedly rejected by international lenders which attach strict loan conditions.”

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Published on July 16, 2014
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