Handelsblatt Exclusive

The Global Face of Chinese Banking

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AIIB President Jin Liqun says he wants European members to provide assistance and oversight.
  • Why it matters

    Why it matters

    The AIIB, a project initiated by China and rejected by the United States, is hoping to establish itself as a bona fide development bank that can improve the economies of Asia-Pacific nations.

  • Facts

    Facts

    • The Asian Infrastructure Investment Bank became operational in December 2015, with 57 countries signing its founding charter.
    • China holds veto power and the United States and Japan are not members. Germany is its fourth-largest shareholder.
    • AIIB president Jin Liqun says that the institution will approve its first three to four projects in June.
  • Audio

    Audio

  • Pdf

The cufflinks of his blue and white striped shirt prominently show the name of his new employer, AIIB, the development bank that marks China’s most ambitious effort yet to inject itself into the global debate.

But Jin Liqun, president of the Asian Infrastructure Investment Bank, has a tough hill to climb if he wants to prove to western nations that he will not be doing China’s bidding.

The AIIB, a project initiated by China, opened its doors in December 2015 with 57 members having signed its initial charter. The bank plans to spend up to $15 billion a year in its first five years.

Conspicuously absent from its membership list are the United States and Japan, which play a lead role in the rival Asian Development Bank. Both have viewed the new AIIB and China’s founding role in it with some skepticism.

Many European countries, however, chose to back the institution against the express wishes of their transatlantic ally. Germany, Europe’s largest economy, is the AIIB’s fourth-largest shareholder.

Mr. Jin knows he still has some convincing to do. In an exclusive interview with Handelsblatt, he said that European countries will play a key role in enforcing high standards at the development bank and stressed that China would not be able to “dictate” the bank’s strategy.

“China is going to play an important role. But China is not going to dictate. It is not going to dominate because this bank will be run by international standards.”

Jin Liqun, President, AIIB

Mr. Jin also announced that the bank will approve its first three to four projects in June, with more to come in September. From the start, the bank will have its own “free-standing” projects in addition to co-financed initiatives with the World Bank and Asian Development Bank, Mr. Jin said.

The interview coincided with the AIIB giving details of its likely first co-financed project – a $273-million plan to build a highway in Pakistan, jointly funded with the ADB.

Mr. Jin has an interesting biography: A member of the 1960s student paramilitary Red Guard movement, an English literature student, many years at the Asian Development Bank and stints at two private Chinese investment banks. Now, he represents China’s biggest play yet for strategic clout in global finance.

 

Mr. Jin, in 10 years, will we look back to the founding of the AIIB as the launch of a new World Bank and China cementing its status as a global super power?

AIIB is a multilateral development financial institution. Our members represent the interest of both developing and developed countries. This is the first multilateral institution in Asia in which the Asian developing countries are the majority shareholders. That is new. It is a bank initiated by China. China is going to play an important role. But China is not going to dictate. China is not going to dominate because this bank will be run by international standards.

There are still worries that China will dominate the AIIB.

For any institution to work well, you must have a major member playing a leading role. The World Bank and the International Monetary Fund have the United States as the biggest shareholder. The ADB has the United States and Japan as biggest shareholders. But all these institutions are multilateral institutions.

China should be playing a big role for this bank. Germany, France, Italy: some European countries should also have a major role, as should other countries in Asia. The bank will focus on infrastructure investment and thereby help international development. The key is how the bank will be managed. I am a Chinese national. But as the president I will run this bank according to international standards and on the basis of the policy documents that the board approved.

And which have received a positive echo…

Over the period preparing the establishment of this bank, some people questioned the way the bank would be run. There were concerns about protecting the environment, about climate change and whether it was going to be a ‘China-Bank’. All this kind of nonsense was silenced. Because we formulated policy papers regulating topics like the environmental social framework, financial policy, operational policy, procurement. Now the question is, if we are going to implement these policies.

Are you? What first projects will you choose to prove how you implement your standards and when will they be clear?

In late June we have the third board meeting, in which the first batch of three or four projects will be determined.

Are they all co-financing projects, like the just announced $300-million road project in Pakistan that you will run with the Asian Development Bank?

We will have our own free standing projects prepared by our own professionals and also co-financed projects. But I cannot give you information before the projects are confirmed. And maybe in September we will have another batch of projects, from which you can see where we put our priorities.

What sectors will they be in?

For instance we have experts focusing on transportation, water, power and power distribution, etc. We have a large number of people in Asia who will be lifted out of poverty and will have a great demand for electricity. We think it is important to improve the power grid system.

Are you thinking about renewables?

Renewable energy certainly should be part of projects for the future, but at this stage renewables cannot be relied on as the major source of power. It is not possible. People are concerned about nuclear energy. And even hydropower can create environmental problems. This is a dilemma. Our idea is to improve the transmission system. In many Asian countries the outdated transmission system results in high efficiency losses of up to 30 percent. In developed countries like Germany the systemic loss can be as low as 3 percent. Upgrading the power system and cutting systemic losses will have a direct positive impact on climate change.

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Mr. Jin with IMF chief Christine Lagarde. Source: Bloomberg

 

Development and environment are sometimes conflicting goals for development banks…

We did not respond when people claimed we would not be paying attention to the environment and the enforcement of our standards. You cannot talk people into believing you. You have to earn trust and credibility by your performance.

That is your business right now, earning trust?

That’s right. We see that step by step more and more people are persuaded that this bank really will be a great institution. When I invited Germany, France and others, they asked me why they should join?

What did you answer?

When Japan decided to set up the ADB 50 years ago, it knocked on the door of all of these European countries because they lacked money. We invited you to join because we believe that European countries can play a big role in making sure that this bank will be adopting and enforcing very high standards. You will be the best guardians of this institution, because of your high standards of virtually every aspect of infrastructure investment, because you have expertise and discipline.

What is the benefit for Germany and other European countries of joining? Will European companies benefit with contracts or will loans be granted, for example, to projects in southern Europe?

We mainly finance infrastructure projects in developing and emerging countries.

Greece could perhaps be seen as an emerging country…

If you redefine Greece as an emerging country, we will be happy to finance infrastructure in Greece (laughs). Maybe in the future we should cover more countries. European countries such as Germany can contribute and also benefit from this institution. A more developed Asia means more business opportunities for European companies.

Will the focus be Asia or will you also finance projects in other regions in the world?

We will also finance projects in other emerging market economies. It is good to be a truly international institution. We expect more African countries to join as shareholders, particularly North African countries in addition to Egypt. Brazil is currently the only Latin American member. We expect more countries from Latin America to join as well.

European countries such as Germany can contribute and also benefit from this institution. A more developed Asia means more business opportunities for European companies.

But the majority of the borrowers will be Asian countries. A stronger Asia will also be good for Africa and Latin America. Europe and other regions can also profit from connectivity. The huge land mass of Eurasia has never been truly connected. Poland is a member. Some other Eastern European countries are interested in joining. If we have railroads linking Europe and Asia, it will create huge opportunities.

Are you a sort of financial arm for implementing China’s one belt, one road strategy?

People are hypersensitive to topics like the plan of “One Belt, One Road” and afraid of China dominating the projects. China proposed the one belt, one road initiative in response to the needs of the countries along its path. But these countries along the road will only do the projects if they believe in them. AIIB will also cover other countries which are not along the one belt, one road.

Regarding the membership of the AIIB, are you still open to the United States and Japan joining?

We have invited the United States and Japan from day one. The door is flung open and it will remain open. I have said: If you think you are ready, you just pick up the phone, give me a call, and we will handle it. Now we’re three months into operations, more people are convinced that the AIIB follows the highest possible international standards. This is truly going to be a great institution. Now we have more countries firmly determined to join this bank.

Do you see any changes in the mood of the U.S. towards AIIB?

The United States is more positive about this bank. We worked out our policy papers and they reached a very high standard. They are being watched, as a way to see how we manage this bank. But it is not for me to speculate if the U.S. will join or not. Regardless of membership we are willing to work together with the United States, with Japan and other countries that are currently not members for various reasons.

But U.S. and Japanese membership would remove much of the talk about the competition between AIIB and other multilateral organizations.

I don’t think so. Even if the U.S. and Japan do not join, we can work perfectly well with the World Bank and the ADB. I have signed an MOU with President Kim of the World Bank and one with President Nakao of the ADB. And I am going to London to attend the annual meeting of the European Bank for Reconstruction and Development to sign an MOU. We are all part of the family of multilateral development institutions. The approach and focus may be a little bit different, but we share the broad objective of promoting economic and social development.

But competition could occur…

I don’t see why competition should occur. We will not fight for one project. We all accept a benign competition: For instance, when we work together in financing one project, we certainly try to be cost-effective and responsible and less bureaucratic. And we can help each other there to both be more cost-effective and responsive. Like a couple of fellow students working in the same class: You do well, that does not hurt me. We can encourage each other.

The shortfall of infrastructure in Asia is immense. You will start with up to $2 billion this year and want to reach $10 billion in 2018. Aren’t the expectations of the AIIB too high?

There is much talk about the demand for infrastructure investment. We need maybe $10 trillion in the next 10 years. But I don’t think that we can meet that kind of financial gap. Nobody can. Even with combined resources and private sector resources, there is no way we can meet that gap. And even if we had the means to fill it, this wouldn’t necessarily be good, because there would not be any selection. Given the limited resources, you have to be more careful in prioritizing and selecting. It is not true that it is always good if you finance infrastructure, you must have a very good approach.

So far, China still has a veto power in the AIIB. With new members coming in this is about to change. When do you think the veto power will end?

In the Bretton Woods institutions, the biggest shareholder’s veto power is maintained regardless of the periotic dilution of its own shares. With each new membership the special voting right of the biggest shareholder goes up. China does not seek veto power. The AIIB has the GDP formula and China’s voting power as it now stands is a result of that: 25 percent from non-Asians, 75 percent for Asian countries – and among those a GDP formula. That is why China is number one and its voting power is at 26.06 percent. If some new members join, particularly large economies, China’s voting power will be diluted.

Let me tell you this: Veto power looks very good for the country which holds the power, but does not come in very handy. If you really want to play an important role as a major shareholder you should not use this veto power to urge the member countries into something they hate anyway. So we would go by consensus in this institution, not majority voting.

Will you still be AIIB president in 10 years?

The president term is five years, one extension is possible. As the president, I want to set up this bank to very high standards. Priority one: Setting up a very good corporate culture. Priority two: To recruit over the next five years professionals of the highest caliber. My concern is to make the AIIB a first class multilateral development institution. It is not my concern if I should serve one or two terms. I hope I will live up to the expectations of the governments. And I am sure that we can do it.

 

Nicole Bastian is currently Handelsblatt’s coordinating editor of foreign affairs. Stephan Scheuer is Handelsblatt’s China correspondent, based in Beijing. Hans-Jürgen Jakobs is a senior editor at Handelsblatt and a former editor-in-chief of the paper. To contact the authors: bastian@handelsblatt.com, scheuer@handelsblatt.com, jakobs@handelsblatt.com

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