Chinese Association for International Understanding

The Asian Infrastructure Investment Bank (the Bank) initiated by China is a multilateral financial institution with its sphere of business focused on promoting the infrastructure construction of member countries. The Bank has attracted wide range of interests and discussions both in China and from the abroad. As the Bank will put into operation in the end of 2015, the effect of its investment projects remain to be observed, and in a certain sense, any comments on the Bank now can only be deemed conjunctures. From the perspective that the cause of the Bank is of transnational nature, it’s a crucial issue that the participating parties come to a maximized consensus.

In the process of Chinese economic development, there are long history and abound stories of money houses, exchange shops as well as modern commercial banks. Like the banks of other regions and countries, these banks also offered service for the transnational investment activities of Chinese firms. The Export-Import Bank of China, established in 1994, was a bank specialized in promoting cross-border investment of Chinese corporations. Nowadays, many Chinese banks have joined in the team of cross-border investment service providers.

Multilateral investment bank—a kind of financial instrument established by the joint efforts of investment institutions from two or more countries—was the consequence of the development of modern international economic relations. The most renowned multilateral investment bank was the World Bank, which was founded in 1944. The mission of the World Bank was to offer financial assistance and professional consulting service for the social and economic development programs of developing countries. After the emergence of the World Bank, a number of financial institutions, with the geological coverage of their service is of regional feature, came into being one after another, such as the Asian Development Bank, Andean Development Corporation, the Caribbean Development Bank, Central American Bank of Economic Integration, East African Development Bank, West African Development Bank, the European Investment Bank, International Fund for Agriculture Development, the Islamic Development Bank, the Nordic Development Fund, the Nordic Investment Bank and the OPEC Fund for International Development, etc.

In the discussion of international economic relations, for the convenience of distinguishing the business focus of different financial institutions, investment bank (also called development bank) was confined to financing institutions willing to offer long-term (usually one year or above) lower rate (lower than the rate of capital market of the same period) loans which are with the nature of donation elements. The other feature distinguishing investment bank from commercial bank lies in its government support: including the essential demands of source of equity capital of the lenders and the credit guarantee of the borrowers. One of the important characteristics of the operation of investment bank or development bank lies in its element of official development assistance.

However, it does not mean that investment banks or development banks don’t cooperate with commercial banks. In fact, under the circumstance of intra-national or international investment, the alliance between the capitals of commercial bank and investment bank has formed a model named public private partnership (PPP).

Taking advantage of multilateral development bank to serve national economic construction was one of the important measures of social and economic development for China over the past decades. In 1980—the second year since the implementation of reform and opening up—China joined the World Bank. In the next year, the World Bank and China agreed to put the first loan from the World Bank into the improvement of Chinese education, include dispatching teachers and professors for overseas study, purchasing books and documents, and improving the management of universities. Many of the beneficiaries of this loan become important figures in the field of China-foreign economic cooperation and worked actively on the stage of international trade and diplomacy later. It was a wide spread story in the history of international development.

In 1986, China joined the Asian Development Bank. Over the past decades, China has been one of the biggest beneficiaries of the loans lent by the Asian Development Bank and the World Bank. From the fields of transportation, energy, telecommunications to education, science & technology, and policy communication, multilateral banks has made a universally recognized contribution to the social and economic development of China.

With the passage of time, in its interaction with multilateral development banks, China has played the role of both beneficiary and contributor. For instance, China entered the African Development Bank in 1985 and by the end of 2011, China has offered a donation of $ 436 million to African Development Fund—the soft-loan window of African Development Bank. As one of the investors, China also joined other regional development banks of Africa and Latin America, such as Banque Ouest Africaine de Developpement, the Eastern and Southern African Trade and Development Bank and Caribbean Development Bank. After a process of 15 years’ negotiation, China joined the Inter-American Development Bank Group in 2008.

Since 2005, China started to offer donations to the institutions which offered multilateral assistance to China in the past, and realized the transformation from the recipient to contributor of capital of multilateral development institutions. During the ninth capital increase of Asian Development Fund (ADF, the soft-loan window of Asian Development Bank) in 2005 to 2008, China contributed $ 30 million for the first time. Afterwards, in the tenth and eleventh capital increase of ADF during 2009-2012 and 2013-2016, China offered $ 35 million and $ 45 million respectively. During the fifteenth and sixteenth capital increase of International Development Agency during 2008-2010 and 2011-2013 respectively, China donated $ 30 million and $ 160 million.

To sum up, the economic achievement of China benefited from the extensive participation and support of multilateral development banks; while the success of these banks in China enriched their experience of promoting global social and economic development. At the same time, with the improvement of the economic strength of China, the identity of China is gradually converting from assistance recipient to assistance recipient as well as provider.

The improvement of the weak infrastructure with the aids like cross-border loans, not only offers convenience to people’s daily life, but also could provide many indispensable conditions for the entrepreneurship of ordinary people. The construction, maintenance and upgrade of transportation, energy, telecommunications and other infrastructures was an indispensible element driving hundreds of millions of Chinese people to get rid of poverty or get rich within a generation. The notion “building road is the first step to get rich” has become a widely accepted consensus in China.

In fact, among the investment projects of the Asian Development Bank to China, transportation and telecommunication projects occupied the largest share of 49 percent, and other important sectors include energy (14%), water service and other municipal engineering (12%), agriculture and natural resources (10%). In the assessment of project success rate, the success rate of transportation projects and projects of municipal engineering and energy reached as high as 96 percent and over 95 percent respectively.

Like any other country of the world, by exploiting the support from multilateral investment banks for the construction of infrastructures, China not only obtained the tangible bridges, roads and wire poles, but also more importantly, the whole industry of infrastructure planning and construction of China, including “soft facilities” from financing mode to project management, has improved dramatically. These “soft facilities” were extremely valuable for the government officials and corporate people of second or third tier cities and remote areas.

The Lubuge hydropower station established in 1981 was the first infrastructure project constructed with the aid of the World Bank loan. Lubuge was the transliteration of the language of the Bouyei nationality—a nationality living in the mountainous region of Southwest China—which means “the picturesque Bouyei village”. It was located in the Huang’ni River on the border of Yunnan and Guizhou Province. In the bidding for the construction of Lubuge hydropower station, engineering contractors from eight countries including China participated in it and in the end a Japanese company won the bidding for the construction of the whole project. Meanwhile, the governments of Norway and Australia offered loans and consulting service to the engineering of the project. The Lubuge project turned the role of Chinese firms in the projects of their mother country to the facilitators of foreign corporations. This project was once called “the Lubuge shock wave” by the construction industry of China for the subversive challenge it posed to familiar behavior modes of Chinese firms. However, since the Lubuge project, the mechanism of multilateral investment has provided beneficial driving for the improvement of management and technology of Chinese engineering companies, thus being helpful for them in obtaining projects via overseas competition.

Today, instead of building another comprehensive development bank, the Asian Infrastructure Investment Bank initiated by China has narrowed its investment focus on infrastructure construction. Such a choice was based on the success of China’s interaction with the existing multilateral investment banks and institutions.

The planners of the Bank have showed their confidence. At the same time, it was apparent that without a new multilateral bank, Chinese firms can also take part in the infrastructure construction of other countries. While with the aid of a multilateral mechanism, Chinese companies could mobilize more resources and come to better consequences.

There are abound comments on the Bank in the globe based on their different perspectives and interests. In the international community, many comments argued that the Bank posed challenges to the existing mechanism of multilateral bank. In fact, from the perspective of the history of surge of cross-border investment activities since the end of the Second World War, especially since the 1970s, such comments are exaggerated.

First, from the perspective of scale of capital, the regulatory capital of the Bank was $ 100 billion, and the initial targeted capital contribution was about $ 50 billion. Among the many multilateral development banks, this was a relatively small amount of capital. For instance, the capital of the World Bank and the Asian Development Bank was $ 800 billion and $ 650 billion respectively. And in the year 2014 alone, the credit granted by the World Bank reached $ 65 billion. In addition, it was a habitual option for multilateral banks such as the World Bank and the Asian Development Bank to increase their capital.

Second, infrastructure construction has always been among the major fields of investment for the World Bank and the Asian Development Bank in history. However, it was especially the case after the broke out of financial crisis in 2008 that the infrastructure investment of the World Bank and the Asian Development Bank to underdeveloped countries became more cautious. Meanwhile, according to the report of Infrastructure for a Seamless Asia jointly launched by the Asian Development Bank and the Asian Development Bank Institute, the gross investment demand for infrastructure construction of Asia in 2010-2020 was predicted to be $ 8.28 trillion, among which national investment demands account for about $ 8 trillion and regional investment demands account for $ 28 million. It is thus clear that the Bank only offers a kind of supplement for the fulfilling of investment demands.

Third, in Asia, the framework of inter-governmental cooperation in terms of infrastructure construction has already existed before China proposed the concepts of “the 21st-century maritime silk road” and “the silk road economic zone”. After years of argument, projects and plans such as the Greater Mekong Sub-regional Cooperation, the network of Asian highways and trans-Asian railways, the ASEAN power grid, the pan-ASEAN natural gas pipeline network and the Singapore-Kunming railway, all obtained the support from ASEAN countries as well as the World Bank and the Asian Development Bank.

The reason why the conversion of these concepts into concrete achievements proceeds slowly not only lies in the shortage of funds or the behavior preference of the existing multilateral investment institutions. Infrastructure investment—whether be it new-build or re-constructing and whether be it inside a country or cross-border interconnection and intercommunication—is of its unique sensitiveness. One of the reasons was that infrastructure construction usually involves demolition, resettlement and compensation of local residences and residents and influences the original local ecological environment. Projects ranging from power supply, telecommunications, road and railway building, irrigation works, hydropower to household garbage and industrial waste disposal, all belong to the scope of infrastructure, and these projects all have an impact on the social or cultural comfort of local areas. In China, the notion “development is of overriding importance” was widely recognized and accepted by the governments, enterprises and the people.

In addition, we should also notice that an investment destination country—whether its overall economic situation being poor or good and whether the status quo of its infrastructure being poor or good—has its own criterion of selecting foreign investments. These countries all have their own potential and wisdom to exert their geopolitical and geo-economic influences. Therefore, we can not take for granted that new investment came from institutions such as the Bank can naturally manage to operate projects well. Why the existing multilateral banks failed in the promoting of some infrastructure projects in some countries? Their experience and lessons should be integrated into the planning and assessment of specific projects of the Bank.

Therefore, the cooperation or competition over the Bank can not be confined to or simply judged by whether or not a country has joined the Bank. It was also a form of competition as to the issues such as how to attract investment projects, how to win the effective cooperation from various vested interests of the investment destinations, and how to promote the infrastructure play its role effectively.

The greater challenge remained to be embraced was how to accumulate the joint efforts of member countries in promoting the Bank play its role of injecting vitality into international economic development both in terms of infrastructure “hardware” and in terms of economic development knowledge “software”. Facing various incredulities and prejudices, the member countries of the Bank is obliged to jointly prove that “he who laughs last laughs best”.