Takehiko Nakao will be seeing more of Frankfurt soon. The head of the Asian Development Bank, the ADB, spoke with Handelsblatt while on a visit to prepare for the bank’s next annual meeting, to be held in Germany’s financial capital.
Mr. Nakao, an experienced policymaker, has worked in top positions for Japan’s finance ministry and also represented his home country at summits of the Group of Seven and Group of 20 nations. He took over as head of the ADB in 2013.
Development banks like Mr. Nakao’s face huge competition these days. In addition to the World Bank and International Fund, which have existed since the 1950s, this year saw the launch of two rival development banks to serve emerging-market countries, including the China-led Asian Infrastructure Investment Bank and the New Development Bank set up by Brazil, Russia, India, China and South Africa (the so-called BRICS nations).
In an interview with Handelsblatt, Mr. Nakao said he isn’t worried about the new rivals, noting there’s plenty of work to go around. Nor is he particularly concerned about another major development on the horizon – the U.S. Federal Reserve’s first increase in interest rates since the financial crisis.
Handelsblatt: Your bank is celebrating its 60th anniversary next year. It will be a year in which you gain new competition from the China-led Asian Infrastructure and Investment Bank, the AIIB, as well as a new development bank being set up by BRICS countries. Is the market for emerging-market development banks becoming a bit crowded?
Takehiko Nakao: There is a lot of support for these new initiatives because people know we need much more money to finance infrastructure needs, like power. Many countries are still lacking power to develop industry and make their life better. We also need more roads, railways and so on. Power is not just about industry but about how to make the gender issues better; we need a road to go to schools and to go to hospitals. We need more of all these things, and more financing. So, I don’t think it’s too crowded.
Is there enough funding for so many development banks? Or is it becoming tougher for you to gain access to financing?
We are increasing our financing capacities. There is a lot of funding, including for banks like AIIB. The question is more about how we can identify good projects, how we can prepare good projects and how we can implement these projects. The money is there, but how to manage good projects out of that money is a challenge.
There have been concerns about ecological standards and social standards as the new Asian Infrastructure Bank begins its work. Have those been set aside?
I have met President-designate Mr. Jin Liqun already twice this year. We agreed to the importance of safeguard-policies for the environmental impact and the social impact of projects, the importance of international standards for these. What we can do is work together, including through co-financing, and by doing that the AIIB can learn from our experiences. I believe that they will adhere to those international standards. That was the condition for European countries including Germany joining it.
Most economists say that China poses the biggest risk to the world economy at the moment. Would you agree?
We have a new projection for China for this year of 6.9 percent. Originally we were expecting a growth rate of 7.2 percent. So we adjusted the Chinese growth rate downwards. For developing Asian countries – that is, without Australia, New Zealand and Japan – the growth rate will be 5.8 percent this year, instead of 6.3 percent in the spring projection. But generally, Asia has achieved solid growth – even after the global financial crisis – of more than 6 percent. So we are expecting that, even if it is going down, it will be solid growth.
Is that kind of growth rate enough to keep China going?
If China can achieve more than 6.5 percent it will be ok. But growth will be more dependent on domestic consumption.
Is China’s economy undergoing a fundamental change, from an export-led economy to a consumption and service-oriented economy? Do you fear the Chinese economy is headed for a hard landing?
After the global financial crisis started, the Chinese current account balance decreased from 10 percent of GDP to 2 percent. The Chinese economy has become more and more dependent on domestic demand. So it has already not been that export-oriented; instead, it was more investment-dependent, like on equipment and machinery investments, and real estate investments. They now need to promote the consumption side more. There might be an impact on commodity-exporting countries. But I don’t think that there will be a hard landing. China also has the capacity to provide some stimulus if it becomes necessary.
The other big topic for the world economy is the likely rate hike by the Federal Reserve in the United States. Are the Asian emerging markets prepared? Or could such a rise still have a negative impact?
It can have an impact on volatility in the short term, like it did two years ago at the tapering of the quantitative easing. This time, the markets have already incorporated some elements of a tightening monetary U.S. policy. Even if there was some volatility, it wouldn’t be like the Asian crisis of the 1990s because the macro-economic policies are more prudent, and the financial system is more flexible, more capitalized and better regulated. So it should not be too serious a volatility. It will not be a crisis.
Do you expect Asian countries to further deepening their trade ties in the coming years?
One of the reasons for Asia’s success is their integrated investment and trade regimes, so the deepening is already progressing, but because of some new trade initiatives like the Trans-Pacific Partnership and ASEAN, trade integration is making further progress, and it will have a positive impact on the economy. Some finance and labor integration is not proceeding as fast as trade integration or customs reductions, but it also puts pressure on countries to have further trade and investment opening.
India is expected to grow faster this year than China. Are you satisfied with the pace of economic reforms by Prime Minster Modi in India?
In India, we project the growth rate this year will be at 7.4 percent. That is very high growth… but it depends on if they can achieve reforms, which Prime Minister Modi has been making. India has been more closed than other high-growing countries like China, but India is now starting to have a more integrated domestic market and a more integrated economy to other countries. There has been some delay, absolutely, but I still have a very high expectation for Prime Minister Modi’s reforms. Reform is not so easy in many countries.
In September, you just launched a big new initiative on climate finance. Is this the most pressing topic on your agenda right now?
It’s one of the most pressing agenda items, because we now have COP21 [Paris climate summit] meeting, and one of the questions is how to finance the climate actions of developing countries. The developed countries are committed to financing 100 billion dollars by 2020. ADB and other multilateral development banks should be an important part of this $100-billion finance.
Are there enough climate projects to finance with all this money?
There are many projects we can finance. We are even doubling our climate financing from ADB, from $3 billion per year to $6 billion, of which $4 billion will be for mitigation and $2 billion will be for adaptation. We have so many things to do in the Asian-Pacific, because this region is more susceptible to climate change like flooding and droughts and melting of glaciers and high sea levels that affect Pacific island countries. So there are many things to do, like how to make cities more climate friendly and more disaster resilient. And when it comes to mitigation, we are helping support renewable energy like geo-thermal and solar, and improve public transportation and energy efficiency.
Michael Brächer is a financial editor in the investment team in Frankfurt. Michael Maisch is the deputy chief of Handelsblatt’s finance desk in Frankfurt am Main. To contact the authors: email@example.com and firstname.lastname@example.org