AIIB charter on governance issues to be signed today

Chinese President Xi Jinping (centre) with guests, including Singapore's Deputy Prime Minister Tharman Shanmugaratnam (front row, fourth from left), at the Asian Infrastructure Investment Bank launch ceremony in Beijing last October. China is expecte
Chinese President Xi Jinping (centre) with guests, including Singapore's Deputy Prime Minister Tharman Shanmugaratnam (front row, fourth from left), at the Asian Infrastructure Investment Bank launch ceremony in Beijing last October. China is expected to have a de facto veto on major issues, allowing it to influence decisions involving structure, membership, capital increases and other issues that require at least 75 per cent of the votes.PHOTO: REUTERS

But key areas, like direction of China-led bank, still unclear: Experts

AS THE Asian Infrastructure Investment Bank's (AIIB) 57 founding members put pen to paper on a document outlining its governance today, the China-led institution will move closer to its goal of being established by the end of this year.

But while the articles of agreement, details of which will be revealed today, will shed light on how the new international bank will be run, experts say key questions, such as the direction of the bank, that could determine its success remain unanswered.

The charter sets forth, among other provisions, the purpose and main powers of the entity and the voting rights of its members.

China is expected to have a de facto veto on major issues.

According to media reports, it will have an estimated 25 per cent to 30 per cent of the votes after providing about US$30 billion (S$40.5 billion) of the AIIB's capital base of US$100 billion.

This will allow it to influence decisions involving structure, membership, capital increases and other issues that require a "super majority" of at least 75 per cent of the votes.

Beijing, however, is expected to forgo outright veto power in day-to-day operations.

But while governance issues have been ironed out, many others such as the AIIB's operational guidelines, the projects and lending it undertakes, the staff it hires and how China eventually wields its de facto veto are yet to be confirmed during its nascent phase.

"The AIIB remains an idealistic project now with many of its practical aspects not worked through yet," Dr Hilton Root, a public policy professor at George Mason University in the United States, told The Straits Times. "These will only be developed as professional people are brought in."

The key to the bank's success, he added, will be in its human resources: how it plans to attract top talent to ensure high standards of professionalism.

"Running the AIIB is not about who has veto but about designing a rigorous managerial structure that is not easily influenced politically and can ensure professional performance," Dr Root said.

"The quality and experience of the staff will be the single most important thing to note - whether the people China puts in place are critical thinkers with independent judgment and stature or just political appointees."

Dr Robert Wihtol, a former Asian Development Bank (ADB) country director for China, said the AIIB will also need to "strike the right balance (in its operations) between high standards of due diligence, social and environmental safeguards and transparency on the one hand, and efficiency on the other".

These high standards are important as there are concerns the AIIB might fail to keep global standards in environmental, labour and anti-corruption protection, given that China's bilateral lending programmes across Africa, Asia and Latin America have been tainted by controversial projects.

The AIIB will also need to select its first projects carefully as this will signal its initial operational priorities to both the international community and financial markets, experts say.

Said Dr Wihtol: "It will be important to select projects that reinforce its image as a multilateral bank with broad international membership."

In general, the AIIB should not be restricted to the promotion of China's self-interest but also push the region's wider interests, especially of the smallest and poorest nations that often struggle to finance public spending and long-term projects, others add.

The bank will also have to manage its risks well.

Dr Yukon Huang, a former World Bank country director for China, noted in an interview published on the Beijing-based Cheung Kong Graduate School of Business Knowledge website that a critical test of the bank will be who its clients are and what they want.

"Whatever its cost of raising capital, the AIIB will have to cover that margin (so) the quality of the loans and the borrowers needs to be carefully considered," Dr Huang said. "Institutions like the World Bank and the ADB essentially never have a default, so the AIIB has to make sure that its loans will be repaid. If it doesn't, it would have a hard time borrowing on capital markets and the interest rates of the bonds it sells would be too high."

China's use of its de facto veto will also be of interest, although experts say Beijing is likely to wield this power lightly.

Professor Zhao Xijun from Renmin University's school of finance said China has never had the desire to dominate the bank and has always stressed the AIIB's multilateralism and inclusiveness.

"We don't have this type of hegemonic mindset," he told The Straits Times. "China will not use its veto unless as a last resort, if it thinks the fundamental interests of the AIIB are at risk."

esthert@sph.com.sg

A version of this article appeared in the print edition of The Straits Times on June 29, 2015, with the headline 'AIIB charter on governance issues to be signed today'. Print Edition | Subscribe