AIIB spells out conservative approach

By:
Sid Verma
Published on:

New Asia lender caps lending at $100 billion; dollars, not RMB, will fund projects.

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Jin Liqun, AIIB: duty is to safeguard the bank’s triple-A rating


Jin Liqun, president designate of the Beijing-backed Asian Infrastructure Investment Bank (AIIB), has sketched out the most detailed vision yet of the new lender’s financing and investment ambitions.

Market realities – the need to attain a high credit rating and issue dollar-denominated bonds – will initially constrain the AIIB’s leverage ratio and project selection, he says.

At the Boao Forum for Asia-Europe Co-operation in London in November, Jin revealed for the first time that the loan book of the AIIB, which has a capital base of $100 billion, will be capped at $100 billion. He says the budding lender’s need to attain and maintain a top-notch credit rating limits it to a gearing ratio of one.

"My duty is to safeguard a triple-A rating [though the AIIB is not yet rated] so I need to be pretty conservative because of the mentality of the ratings agencies," he says.

"After one or two decades", the AIIB could lend up to $250 billion once it has proved to markets it has strong shareholder support and governance-structure that will allow it to increase its gearing ratio to 2.5 times, akin to the European Investment Bank, he says.

"When the bank has a strong pool of assets and financial soundness it can go from a 1 to 1 [equity to asset] ratio to 1 to 2.5. So we can do a maximum of $250 billion of lending without a capital increase from shareholders." 

Open for business

The idea for a China-backed infrastructure lender in Asia was conceived three years ago, and is due to be formally open for business in December. The AIIB, and to a lesser-extent the Brics-led New Development Bank, will be integral to China’s 'One belt, one road’ strategy, and will finance projects at the construction stage in frontier regions, in particular, in the under-developed central Asian region and regional railway networks. Efforts to boost connectivity in Eurasia and beyond are backed by a $40 billion Silk Road Fund and China’s policy banks.

Encouraging Chinese banks and Sino-backed lenders, such as the AIIB, to extend credit to infrastructure project participants in renminbi – using the currency to buy capital goods, construction materials and services from the mainland – would increase demand for RMB settlement for Chinese trade and prove key to the country’s out-bound strategy, say analysts.

But despite speculation to the contrary, the former Chinese vice-finance minister has given little indication that the AIIB will prove a key role in facilitating a renminbi-led monetary bloc. Jin confirms to Euromoney that the AIIB’s funding currency will be in dollars, quashing hopes among Sino bulls that the AIIB would boost local-currency long-term financing for infrastructure.

He downplays fears the institution will be a tool for Beijing’s foreign policy and, instead, says it will focus on the micro business of infrastructure financing, with day-to-day operational control in the hands of technocrats. He says the bank is open to private-sector participation in projects. "We are willing to work with anybody, on the condition that these companies... must have a very good reputation." 

Despite conciliatory remarks, Jin, a former vice-president of the Asian Development Bank, gives a strong indication that the AIIB will compete with the World Bank in certain sectors and could be used to promote China’s soft power. On the former point, he says the AIIB would interpret its infrastructure-mandate liberally and could invest in health, education, and technical assistance – traditional areas of focus for the World Bank – citing the example of a lack of harmonization in customs policies in cross-border central Asian trade.

Beacon

Jin also says the AIIB wants to promote the virtues to neighbouring states of China’s infrastructure-investment-heavy development model that has boosted real incomes over the past 15 years. 

"Infra investment is crucial for broad-based development," he says. "This will help in poverty reduction. We [China] borrowed for investment, not borrowing for consumption and we managed to lift 600 million people out of poverty."

Earlier this year, the UK’s unexpected dash to join the institution – motivated out of fear Luxembourg, another member, would out-compete London as an RMB trading hub – helped to transform the AIIB from an Asian initiative into a global multilateral, bringing the founding membership tally to 57. This will eventually rise to between 80 and 90, Jin says, which would dilute China’s voting share further.

He reveals the new lender was established, in part, by frustration over the World Bank’s bureaucracy – he says the latter’s resident board structure imposed excessive financial costs – which has slowed down project financing. By contrast, he vows the AIIB, whose day-to-day operational language will be English, will be a "lean" institution with a staff of around 700 initially. The bank has 30,000 square metres of office space sufficient for the "next four or five years" after which the current residence could be expanded to provide 230,000 square metres of space that would be "good for this bank for the next 100 years". The staff would eventually rise to 5,000 in contrast to the World Bank’s current 17,000-strong workforce. Jin, a former World Bank official in the 1990s, recognizes the challenges facing president Jim Yong Kim as he seeks to revamp and streamline the lender.