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AIIB: China’s new ‘World Bank’

Russia has become the third largest shareholder in the China-led Asian Infrastructure and Investment Bank (AIIB), with 5,93% voting rights, while the top shareholders, China and India, will have 26,06% and 7,51% in voting rights respectively.

Nesbert Ruwo,Jotham Makarudze

The signing ceremony of the AIIB articles of agreement which took place in Beijing last Monday, was attended by 300 delegates from 57 founding member countries of the new bank. The delegates determined the total share capital, each member’s voting share of capital, the governance structure, decision-making mechanism, and operational business procedures. China has subscribed to an initial stake of 29,78% in the bank’s authorised shares, India 8,37% and Russia 6,54%.

AIIB was established as China’s initiative in October 2014. The number of countries that applied for participation in the bank as founding members reached 57 by April 2015. The bank has initial subscribed capital of $100 billion, of which 75% is available to the Asian regional countries. South Africa and Egypt are the only African founding members with 0,595% and 0,605% shareholding in the bank respectively.

AIIB’s purpose will be to “foster economic development, create wealth and improve infrastructure connectivity in Asia . . . and promote regional co-operation”.  AIIB will provide infrastructure funding for the development of transport, telecommunications and other projects within the poorer regions of Asia.

AIIB is set to rival the US and Europe-led International Monetary Fund (IMF) and the World Bank, and the Japan-led Asia Development Bank (ADB). USA and Japan have declined to join the Chinese-led AIIB in an apparent show of their disapproval of Chinese growing power in the global geopolitical space.  

Although China is the largest economy in Asia, it has half the voting rights that Japan has in the ADB. While China may officially point to the wide infrastructure funding gap, it is clear that its initiatives in the AIIB and the newly penned BRICS (Brazil, Russia, India, China and South Africa) bank, the New Development Bank (NDB), are set to increase China’s influence globally. Efforts by emerging economies to get more say in the IMF and World Bank have been delayed for years.

It can now be viewed that the AIIB and NDB initiatives are China’s way to get its voice outside of the US and Japan-led structures.

The BRICS signed an agreement to create the NDB during the bloc’s sixth summit last July. The agreement will become effective only when all BRICS countries have submitted documents of acceptance, ratification or approval. The Shanghai-based NDB, which will have initial authorised capital of $100 billion and its initial subscribed capital of $50 billion, will have an NDB African regional centre in South Africa. The NDB is expected to launch late this year or early next year. 

The formation of the AIIB places it among the international development banks, which include African Development Bank (AfDB), Asia Development Bank (ADB), Development Bank of Latin America (CAF), Development Bank of Southern Africa (DBSA), the European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), the Inter-American Development Bank (IADB), the Islamic Development Bank (IsDB), and the World Bank.

The World Bank’s shareholders constitute 188 member countries who have subscribed to $223,2 billion of capital (paid in capital plus callable capital).  The largest shareholders include the United States (16,05% of total subscribed capital), Japan (8,94%), China (5,76%), Germany (4,73%), and France and the United Kingdom (with 4,22% each). It has a gearing ratio limit of 100%, which gives it a potential to hold assets double its capital base.  

As of December 31 2014, ADB’s five largest shareholders are Japan (with 15,7% of total shares), the United States (15,6%), China (6,5%), India (6,4%), and Australia (5,8%). ADB’s current subscribed capital base stands at $162,8 billion.

The AfDB, whose largest shareholders include Nigeria (9,3%), USA (6,6%), Japan (5,5%) and Egypt (5,4%), has subscribed capital of $94 billion.

The World Bank, which indicated that the developing economies require between $1 and $1,5 trillion in infrastructure investment per annum, will find “innovative” ways to work with the AIIB as the existing development institutions combined do not have enough resources to fill in the infrastructure funding gap.

ADB estimates that Asia has an infrastructure funding gap of $8 trillion between 2010 and 2020. According to an Africa Infrastructure Country Diagnostic (AICD) report, Sub-Saharan Africa requires infrastructure investment of at least $93 billion annually, and that is 15% of African GDP. To date, less than half that amount is being provided for, thus leaving a financing gap of more than $50 billion to fill.

While the need for infrastructure investment is huge for any one institution to fund, the AIIB will, to some extent, be a game changer in the world’s development finance dynamics.
 
Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on media@opportunvest.co.za

One Response to AIIB: China’s new ‘World Bank’

  1. Dr Ben Kirat July 6, 2015 at 1:48 pm #

    Il faut retenir que l’AIIB rejoint, comme un acteur majeur de développent et d’infrastructure, les autres institutions majeures: FMI, IBRD (World Bank), AfDB, ADB, CAF (Banque de Développement de l’Amérique Latine), DBSA (Dev Bank of Southern Africa), EBRD, EIB, IADB (Inter-American Development Bank), et IsDN (Islamic Development Bank)

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