1050x300-A New Bank for Asia

A New Bank for Asia

Author(s): Mukul Sanwal

Date: Apr 3, 2015

Theme(s): Finance & Macroeconomics

Publications: Opinions & Speeches

India may be unsure about its role in the China-led Asia Infrastructure Bank, but former Indian diplomat Mukul Sanwal points out its participation is a win-win for the country.

On October 24, 2014, 21 countries signed a Memorandum of Understanding to set up the Asia Infrastructure Investment Bank (AIIB), whose goal is to fund infrastructure projects in Asia. The AIIB will kick off with a capital fund of US$50 billion with China set to become the bank’s biggest shareholder, and non-Asian members restricted to owning just 25 per cent of shares. Since the MOU was signed, at least 30 countries were approved as founding members, with a final number to be confirmed on April 15. As China’s news agency Xinhua explains, founding members “have the right to create governance and operating rules for the bank. Countries that join after the deadline will have voting rights only, with less say in the rule-making process. Australia, the UK, Germany and Italy are among those who have signed up to join the bank.

It is not immediately clear how, and what the new bank’s working relationship with established lenders such as the International Monetary Fund (IMF) and the World Bank will be. But IMF Managing Director Christine Lagarde has already said the IMF would be delighted to cooperate with the AIIB, and that there was room for cooperation between the IMF and the AIIB on infrastructure financing. China’s Finance Minister Lou Jiwei has also indicated the new bank’s willingness to cooperate with the Asian Development Bank (ADB).

The bank’s aim is to fund infrastructure projects in Asia, and China has clarified it will not have any veto over projects. Voting rights are expected to be based on a combination of GDP and PPP. After some initial hesitation over fears from its Asian neighbours that China might use the new bank to project its power in Asia, countries like India, along with other countries in Europe and East Asia, are seeing the institution as a way of accessing and providing new economic opportunities. 

Speaking at the Boao Forum in March, President Xi Jinping sketched out China’s vision for a new Asian order, and presented China as a partner willing to “jointly build a regional order that is more favourable to Asia and to the world” and he was careful not to place China at the centre of this emerging order. China also released a blueprint for its “One belt, One Road” initiative, which will include roads, rail, ports, oil and gas pipelines, fibre optic networks as well as funding for information technology, biotechnology and new energy. Customs and other regulations that might impede smooth, cross-border trade and investment are also to be smoothed out.   

As Asia’s urbanization will require more than US$8 trillion to be spent on infrastructure in this decade, countries in the region will welcome all the support they can get, and this bank is one of many steps towards meeting that requirement. Rather than be suspicious of China’s motives and seek to prevent the Maritime Silk Road, countries like India should deal with the strategic concerns by joining in development projects, for example, by providing the software packages required in the management of the ports. A mutual recognition of special interests and a desire to achieve joint strategic objectives should be the key.

From India’s point of view, the new bank can focus on three areas defining”‘infrastructure” broadly to enhance productivity. First, a “Digital Asia initiative” to complement the “One Belt, One Road” initiative. Second, developing Shanghai and Mumbai as truly global cities and financial centres, to leverage capital. Third, it can look to jointly establish a think-tank, on the lines of the OECD, to provide a forum where Asian governments work together to analyse data to predict future trends, develop standards for Asia, seek solutions to improve the quality of life and provide inputs to both governments and to the new bank, which will be based in Beijing.

Future opportunities require a bold new vision. Firms in India and China will have to develop cooperative relationships with new mind sets and business models to make the region more open with integrated investment and trade. Asia is a dynamic and diverse market, and successful companies are already thinking about connectivity across the region. The ability to design, finance, build and implement the big data-technology systems will be the defining comparative advantage in the future, and India and China should work together to make this happen, sharing their respective expertise. The complex interdependencies will be a strong stabilizing force.

According to McKinsey and Company, the services sector will be the real driver of growth in Asia as affluence will be concentrated in cities. Digitization is challenging the way banks operate. A growing number of companies are incorporating payment processing and other financial services that have traditionally been with banks. Establishing secure data networks to enable flows across countries has emerged as a pressing need. India can match China’s expertise in infrastructure with equally important products that an urbanized Asia will need – digital governance implementing Aadhar- type cards linked with government and other services, e-commerce, low cost health treatments and pharmaceuticals, new seed varieties, are examples. India and China have evolved in complementary ways that reduces competitiveness between them.

China’s “One Belt, One Road” initiative is really about the economic integration of China’s economy with the emerging Asian market; and by joining in and shaping the alignment of the rail, road, sea routes and gas pipelines. India can view its own role in this development as a node for Western Asia. Including a services component in projects will add to their productivity and support cooperation between the Asian giants. China is likely to remain the world’s largest producer of goods and India has the potential to be the largest producer of services in the largest consumer market, making trade a win-win proposition.

According to Prime Minister Modi China and India are “two bodies, one spirit” and President Xi has emphasised the “need to become global partners having strategic coordination.” The new bank provides an opportunity for the two Asian giants to work together for their future prosperity, and make the Asian Century a reality. 

The views expressed in this article are the author’s own and do not necessarily reflect Fung Global Institute’s editorial policy.