China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Will the Asian Infrastructure and Investment Bank achieve a successful start?

September 30, 2015

At the end of this year a new International Financial Institution (IFI), the Asian Infrastructure and Investment Bank (AIIB) will become operational. The AIIB is placed in Beijing. It has currently 57 founding members: 37 Asian countries (including Russia, Australia and New Zealand) and 20 outside Asia (17 European countries, two African countries and Brazil). The authorized capital of the AIIB is expected to be US$ 100 billion and will be used for infrastructure projects in Asia. There is a big need for infrastructure financing in a quickly developing Asia. The Asian Development Bank (ADB) estimates that for the period between 2010 and 2020, Asia needs US$ 8 trillion for infrastructure construction.

The founding countries of the AIIB took the decision to participate in spite of concerns raised that the creation of a new international bank would undermine existing IFIs, like the World Bank and the Asian Development Bank. The strong participation of European countries was a major breakthrough for Chinese diplomacy against resistance coming especially from the United States. This success is of importance not only for the development of Asia but it is also an important step for new global governance structures. The reform of the Bretton Woods Financial Institutions is stalled because of the negative attitude of the American Congress. Therefore the correction of the voting rights in the IMF, reducing slightly the dominant US influence and the over-representation of Europe at the benefit of countries in Asia and Africa is still not happening. The AIIB might be able to demonstrate that a new financial institution supported by China will be run on an inclusive pattern, allowing participants to join into the decision-making in a more equal manner.

Challenges

But there are still important decisions to be taken to assure that the high ambition of China becomes reality: to create a new financial institution, which is a best practice case for the 21st century.

This new IFI must find a balance between the different interests of its shareholders. Chinas interest is to use the AIIB for the financing of infrastructure projects linked to its one belt on road strategy. The strategy has two main components a land based Silk Road Economic Belt and the 21st Century Maritime Silk Road. The Silk Road Economic Belt is intended to improve road and rail routes and other means of connection, including oil and natural gas pipelines and IT infrastructure, in an area that stretches from China to central and South Asia, Russia, the Mideast and Europe. The 21st Century Maritime Silk Road is intended to create a network of ports and industrial parks linking South and Southeast Asia, East Africa and the Mediterranean Sea. Chinas big Companies have over-capacities, which can be used for these investment projects. This can help these companies to cob with reduced growth in China. Especially Chinese state-owned companies have privileged access to political decision makers and might hope for a preferential treatment by the AIIB. But also companies from Russia and India might hope for a special treatment.

The European Partners expect to the contrary that an IFI functions without a national preference and that also International companies have a fair chance to participate in AIIB financed projects in open and transparent tendering procedures. European Countries being shareholders of other IFIs, which are also active in Asia like the World Bank, the Asian Development and even the European Investment Bank will underline the need for a good cooperation with these existing IFIs. This implies that the banking activities are based on common standards to facilitate cooperation.

The comments made by the Chinese AIIB-Secretary General Jin Liquin are encouraging: “ I will strive to ensure that the AIIB develops and embodies a corporate ethos that is characterized by transparency, integrity and accountability, and is focused on meaningful and measurable outcomes and results…The AIIB’s assistance to its clients should be technically, financially, economically, environmentally and socially sustainable.”

To implement these laudable objectives in the banking activities common answers amongst the participating shareholders must be found to some difficult questions:

– What is the right balance between high environmental and social standards and timely and cost-effective project implementation?

– How to avoid corruption in countries with weak governance and poor legal systems?

– How to deal with international sanctions against companies and states?

– How to assure open and transparent tendering for all activities?

– How to garanty access for the public to information?

Transparency

If one takes the Aarhus Regulation, which guides the policy of the EIB, environmental and social information held by the Bank and related to projects should be made available. Will the AIIB develop a public register for dissemination of this information to the public? Are environmental and social impact assessments parts of publicly accessible information?

In the remaining months until the start of the operations of the AIIB the shareholders of the bank have to find an agreement about the standards and procedures for the functioning of the AIIB. It is a positive sign that in the preparatory discussions an exchange of view with other IFIs takes place. Hopefully the best international standards will be agreed to make the AIIB really a model for the 21st century.

Chinas active support for high standards of transparency and accountability in the banking activities will be the best answer to the existing doubts about the will and capacity of Chinas leadership to improve governance and eradicate corruption.

 

Gerhard Stahl
Professor, Peking University HSBC Business School, Shenzen

 

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About China: it should be interesting…

September 23, 2015

… but it is (more or less) neglected by the international press and (financial ) analysts. I’m talking about the recent speech of China’s president Xi Jinping in Seattle during his ongoing visit to the U.S. (without having checked myself many American sources). Anyway, financial markets focused at the same time very much on the Caixin PMI (which was considerably below 50 – certainly not an encouraging signal on Chinese industry and GDP growth in reality). For my own analysis, however, I found the president’s exposé more interesting.

Xi told the invited guests that China feels very committed to reform policy and people’s well-being – and also to a policy that “forestalls risks” and keeps the economy at a medium-, high-growth level.

This is exactly the message I like to hear. In theory. Structural reforms and maintaining reasonable GDP growth would be a dream scenario – and particularly the following conclusion that reforms and reformers are still in place.

But there is a catch. We do not know how far the deceleration of the economy already has gone. Probably further than statistical numbers express. Furthermore, it is hard to summarize the reforms that already are taking place and what is to come soon. What has really been done in reform policy since 2014 after the Communist Party’s Third Plenum in November 2013? Transparency is still by far too low. So is the quality of statistics. Consequently, it is still hard to find out what’s really happening in the economy.

It is certainly a pity that China has not been working sufficiently for opening up (economic) information flows. If this had been the case, I certainly would have appreciated president Xi’s speech. Now, I don’t know.

But why shouldn’t Chinese leaders from now on work more ambitiously with economic transparency? It would be a win-win situation for both China and the rest of the world. And it would be much easier to conduct a financial deregulation policy which Chinese leaders put so much (verbal) emphasis on, particularly when it comes to the deregulation of cross-border capital flows.

The decisive question remains: How could China ever successfully open its capital account vis-à-vis other countries and envisage a working full convertibility of its currency yuan without at least having a roughly transparent economy?

 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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The U.S. and China – what does the Fed really mean?

September 18, 2015

Reading the Fed’s press release from September 17 about unchanged short-term rates in the U.S should lead to reflections why the global nervousness about China was not mentioned explicitly. It could have been for diplomatic reasons. But it also could have been the case that the Federal Reserve feels confused about the real China risks. The words being used in the press release from September 17 about the China risks were as follows: “Recent global and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”.

The questions are: do the Fed’s worries about China mainly concentrate on the enormous drop of the stock market in summer and – possibly – on the mini devaluations of the RMB? Or do general fears of a more pronounced economic downturn in China make the Fed particularly nervous about growth prospects, even for the whole group of emerging countries and the U.S. itself? Does the Fed see more deflationary effects that may come from such a possible negative growth development? Or has the Fed – like global financial markets – only recently started to deal with China risks more systematically which may include all the political, social and economic challenges that China will be confronted with in the forthcoming months and years (and which I discussed and also summed up in this blog many times before). Did the Fed finally find out that the uncertainty about China should be considerably larger than assumed before?

We do know by now, however, that the Fed cares about China. We can come to the same conclusion when it comes to the Swedish central bank – at least when reading the comments of some decision-makers during the previous policy meeting on September 2. But what is their real concern about China more concretely? Is it limited to the possible impact on future inflation in the own country, such as Sweden (which would be too simple)?

It would be nice to know somewhat more about this latter issue, both from the Fed, the Riksbank and other central banks. Finally: What can be said about the China expertise in central banks outside China? I know that the Federal Reserve Bank of San Francisco and Finlands Bank (BOFIT) as part of the ECB are doing ambitious research on China. But what about all the other central banks?

 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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