Research on the Governance,Innovation and Reform of AIIB

Lai Sixing

（School of Law of Guangdong University of Foreign Studies,Guangzhou 510799）

Abstract:Financial governance is part of global governance,and multilateral development banks play a key role in global financial governance.The existing multilateral development banks cannot better reflect the interests of developing countries.The infrastructure construction in Asia is lagging behind,while China’s economic strength has significantly enhanced and it is willing to export public goods for the financial governance.The Asian Infrastructure Investment Bank(AIIB) was born in this context.The AIIB does not deviate from the design of traditional multilateral development banks,but it has made innovations in key investment areas,board of directors and voting.Although a rising star in the field of financial governance,AIIB faces doubts from developed countries,mainly from two aspects:political ideology and specific operation mechanism.At present,China should clarify the proposal of AIIB establishment,carry out partial reform of AIIB,and initiate the cooperation between AIIB and existing multilateral development banks and private entities,so as to better face doubts and serve its purpose.

Key words:AIIB;Financial governance;Multilateral Development Banks

1 Background and Introduction of AIIB

In order to have a better understanding of how the AIIB was born and how it operates,this part presents the background of the establishment of AIIB and a brief introduction of the purpose,functions and organization of AIIB.

1.1 Background of the Establishment of AIIB

The rationale of the establishment of the AIIB is mainly three-fold.Firstly,from the perspective of the initiator itself,China,with its growing economic strength,large foreign exchange reserves and huge investment potential,is able to take on more responsibilities.China’s economic policies have some form of spillover effect on other countries.Likewise,regional and global economic developments have had a significant impact on China.China is willing to provide the public good for the world.

Secondly,from the perspective of the Asian region,the lack of infrastructure investment is the fundamental reason why the AIIB was established.Asia is the region with the highest economic dynamism and growth potential in the world today,and is also an important engine of recovery and growth of the world economy.However,due to the lack of infrastructure fund,the economic development and integration of Asia is restricted.

Thirdly,from the level of global financial governance,the existing multilateral development banks exhibit more deficiencies,the voice of developing countries in the financial field is insufficient.In terms of institutional design and power distribution,the existing multilateral development system is dominated by major developed countries,and the rapidly growing economic power of emerging countries does not match their decision-making power voice within the system.

Against the above background,President Xi Jinping proposed the establishment of the AIIB during his visit to the South Seas in October 2013.After more than two years of planning,the AIIB was formally established on December 25,2015 and then launched its operations.

1.2 Overview of the Purpose,Functions,Organization and Voting of AIIB

According to Articles of Agreement(AA) of the AIIB,the primary purpose of the AIIB shall be to foster sustainable economic development and create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors.In order to realize its purpose,the AIIB have mainly four functions,including to promote investment in the region of public and private capital for development purposes,to utilize the resources at its disposal for financing such development in the region,to encourage private investment in projects,enterprises and activities contributing to economic development in the region and to undertake such other activities and provide such other services as may further these functions.

AIIB shares its overall governance structure with many other MDBs,with a common hierarchy of three governance levels:Board of Governors(BG),Board of Directors(BD) and President.The BG is the Bank’s highest authority,composed of one governor appointed by each member,meeting annually,and its terms of reference include approval of new members,capital increase or decrease,amendment of agreements,election of directors and president.The BD is responsible for the direction of the general operations of the bank and is composed of directors elected by one or more governors representing particular members,meeting at least quarterly.The president,elected by the BG,conducts the current business of the bank,under the direction of the BD.

For the voting,according to Article 28 of AA of the AIIB,the total voting power of each member shall consist of the sum of its basic votes,share votes and,in the case of a Founding Member,its Founding Member votes.And except as otherwise expressly stated in this Agreement,all matters before the BG shall be decided by a majority of the votes cast.China,as the largest member country with the largest GDP in the region,is the largest shareholder of the AIIB,with a 30.77% capital share and 26.57% voting power,with one veto.In terms of capital share and the voting power it determines,China’s dominant role in the AIIB is greater than that of the Japan and US-led ADB and the US-led WB.

2 The Innovation of AIIB

The design and operation of the AIIB is not very different from traditional multilateral development banks in terms of innovation,since the AIIB needs to be consistent with the mainstream system in terms of institutions,rules and norms to ensure legitimacy and internationalism.However,as an emerging system,the AIIB has still achieved a certain degree of innovation.These innovations are mainly in three areas:investment areas,lending conditions and organizational mechanisms.

2.1 Investment Areas

The most significant and distinctive feature from traditional multilateral development banks is that the AIIB focuses on infrastructure development,which is demanded by Asian countries,and makes up for the shortcomings of the original system in terms of business focus.In the original system,developed countries often attached environmental protection and good governance-related requirements to multilateral development banks’ assistance,and multilateral development banks,dominated by developed countries,often reject infrastructure loans from developing countries.

As shown in the previous background section,the AIIB initiative was originated from the huge infrastructure gap in the Asian region.The AIIB is the first multilateral development bank in the world whose major purpose is to promote infrastructure connectivity,and it is also the first bank to include “infrastructure”in its name.Therefore,the AIIB is innovative in terms of its original purpose and its focus on investment areas.

2.2 Lending Conditions

In terms of financing and lending conditions,the AIIB draws on the experience and lessons learned from traditional multilateral development banks and commits to lending from the ground up without attaching any political conditions to financing and lending.According to article 31 of AA of AIBB,only economic considerations shall be relevant to the decisions.In fact,political interference in a borrower country undermines the credibility of the MDBS and hinders effective decision-making[1].The AIIB,on the other hand,has strict rules and regulations to avoid this problem as much as possible by not attaching political factors to the loan conditions.

In addition,in terms of financing sources,the AIIB’s funding sources are not limited to developed countries,and the flow of bank equity investments and savings surpluses from developing countries can realize financing loans from developing countries to developing countries,providing developing countries with options that differ from those of traditional development banks and more respectful of the real needs and autonomy of developing countries[2].

2.3 Organizational Mechanisms

Most incumbent MDBs have a BD who resides at the bank’s headquarters and exercises a regular check on loans,borrowing,and “other bank operations”.However,resident boards have been criticized for delaying decision-making and increasing overhead costs.By contrast,the AIIB’s directors meet only quarterly,otherwise functioning on a nonresident basis (unless the governors decide otherwise by Super Majority).And the BD directly supervises management in which work is divided clearly for efficient operation.Only a few branches outside China will be set up,apart from the headquarters in China.The measures above cure the malady of over staffing in MDBs,while reducing the operational cost of the AIIB.

At same time,the AIIB will simplify its loan-review process.When the AIIB was initially established,it was fully aware of the negative impact of complicated bureaucracies of international financial institutions.Therefore,reform of the project-review process will be carried out,entailing shortening the process of reviewing projects and improving their efficiency,so that the AIIB can become an institution with a simple and efficient structure[3].

3 Questions and Challenges on AIIB Governance

From preparation,establishment to operation,the AIIB has faced a number of questions and challenges.At the macro level,the US-led countries see the AIIB as a political and strategic tool of China to overthrow the existing international financial order and establish a new international financial order.At the micro level,the AIIB has been accused of deficiencies in matters such as organization and voting.

3.1 Whether the AIIB is China’s Political and Strategic Tool

There are two major types of assertions made by skeptical scholars about the AIIB:one is that the AIIB is a political tool controlled by China,contrary to the principles of economic openness and market orientation under current neoliberal policies,and would constitute a subversion and threat to the Bretton Woods system and to U.S.leadership[4].Second,it is concerned that the AIIB exacerbates the risk of fragmenting global economic governance and eroding long-established best practices of traditional multilateral development banks[5].

The first view,also advocated by leading U.S.think tanks,is that China may use the AIIB as a “strategic tool” and an alternative to the Bretton Woods system to expand its international influence against the U.S.-dominated hegemonic system[6].This view is an overly political interpretation of China’s leadership in building the AIIB,which is unfair and biased.With regard to the second view,it cannot be denied that there are indeed differences in lending conditions and criteria,but this does not mean that the AIIB will lead to uncontrolled and vicious competition in the multilateral development bank system.In addition,the best practices of traditional multilateral development banks are far from perfect[7].

It is not nonsense for other countries to question the establishment of the AIIB as a political strategic tool,as Chinese leaders have previously expressed the view that the AIIB could better serve the “Belt and Road” Initiative.Therefore,some hold the opinion that It is uncertain how China will balance its stated goal of “establishing an independent and high-standard MDB” with pursuing its own economic and national security priorities for the region[8].In recent years,China has gradually distanced the AIIB from the “Belt and Road” Initiative (BRI).However,the BRI itself can be understood as an international public good designed to advance the common development of countries along the route,and even though the AIIB started out as a service to the BRI,it should not be over-interpreted.

3.2 Whether the AIIB’s Operation System is Criticized

Specific accusations against the AIIB from countries such as the US and Japan cover the levels of organizational design,voting system and international standards.Three main aspects are presented as follows.

First of all,the AIIB’s decision to employ a “nonresident” board of directors was decried by some as a weakening of oversight and embraced by others as the useful rejection of an anachronistic governing model at the other MDBs.Japanese scholars believe that without the presence of the board,there is potential danger that the financing operations will strongly reflect the opinions of the AIIB president and executives,dominated by China[9].However,in today’s world,extremely well-developed ways of communications–video conferences,e-mails and phone calls–are effective ways to communicate apart from face-toface interactions.Directors can convene speedily from around the world when a problem arises.This way,negative effects can be minimized.

What’s more,China,like the United States,enjoys a veto in multilateral development banks.This is one of the reasons for the criticism.The AA has stated that the Board of Directors needs 75 % of total voting power of the members to ‘take decisions on major operational and financial policies and on delegation of authority to the president under bank policies’,which means that China will have the single unilateral veto power in the bank’s major policy making,just like what the US has in the IMF.However,Beijing suggests that the successive entrance of new members will dilute China’s voting power in the institution and that China will not use its veto power.Compared to the United States,China has shown the image of a responsible power by being able to make such a commitment and being willing to accept the constraints of international public opinion,and there is indeed room for diluting China’s voting power in the voting mechanism.

In addition,some scholars argue that while the AIIB may not impose conditions similar to those of the IMF,there are still potential political implications for the AIIB to provide collateral for certain loans.China has the largest stake in the AIIB and would therefore have a tangible bargaining chip to use in political negotiations[10].Other scholars believe that Chinese projects also disproportionately employ Chinese construction companies and laborers[11].NGOs also have criticized the AIIB’s environmental and social framework(ESF) for lacking clear and mandatory implementation rules.In fact,The AIIB’s ESF updated in 2019,is key to gauging the AIIB’s approach to the environmental and social due diligence of projects as compared with its peers,particularly the ADB and the IBRD[12].The issues above require further clarification and response.

4 The Direction of AIIB Reform

According to AIIB’s website,as of January 20th,2022,it has grown to 105 approved members worldwide,has approved 159 projects and financing of $32 billion,and has achieved fruitful results in infrastructure development and energy construction in developing countries,and has been rated triple-A by major international credit rating agencies.No reform is perfect,and there have been questions and challenges in the establishment and operation of the AIIB,but on the whole,the support for the AIIB has outweighed the opposition.China should continue reform in the following directions.

4.1 Clearly Express China’s Proposal on the Establishment of AIIB

In the face of the outside world’s doubts about AIIB,the most critical issue is not how to reflect on the voting mechanism of AIIB’s organizational structure,but how to alleviate the international community’s misunderstanding of China and distortion of China’s policies from the political dimension.Some people consider the AIIB as a political and strategic tool of China because of China’s growing power and the parallel operation of the AIIB with the “Belt and Road” Initiative.

On the one hand,China should continue to advocate peaceful development,build a community with a shared future for mankind,and dispel the theory of China threat.Based on its experience and achievements in fighting COVID-19 in recent years,China should improve multilateral diplomatic relations,so that the world can learn more about its peaceful development through China’s foreign aid strategy.Multilateral actions demonstrate China’s amity and point out the historical inevitability of joint development between China and the world.

On the other hand,China should clarify the relationship between the “Belt and Road” Initiative and AIIB.It should be pointed out that the establishment of AIIB does help to serve the BRI,but that is not its sole purpose.The “Belt and Road Initiative” itself is also an international public good,aiming to provide a platform for the joint development of countries along the routes.The AIIB focuses more on infrastructure in developing countries and intersects with the “Belt and Road” Initiative,but neither is aimed solely at the interests of China.

4.2 Fine-tuning the Operation Mechanism of AIIB

The operation mechanism of AIIB is established based on the experience of existing multilateral development banks.It is not appropriate to make major changes in the operation mechanism.The current voting power setting is relatively ideal,but further efforts could be made on non-resident boards,China’s veto power,and environmental demands.

First of all,a non-resident board of directors can economize on costs and boost efficiency,but it tends to be criticized for transparency.Online meeting frequency of the board of directors should be strengthened,professional ability of the board of directors should be enhanced,and supervision mechanism should be perfected.Secondly,China has promised that it will not easily apply veto power,and is willing to give up veto power when new members join in.Therefore,the current voting ratio can remain unchanged,or China’s voting ratio can be reduced to 20%.Finally,as for environmental protection requirements,AIIB should set higher requirements for environmental protection standards in project operation,but also pay attention to the actual situation of developing countries,and set flexible environmental protection conditions for different borrowers.

4.3 Strengthen Cooperation with Other Multilateral Development Banks and Private Actors

For the investment banks,strengthen the cooperation with existing multilateral development banks to boost its legitimacy and recognition,but at the same time,focus on the public and private cooperation mode,enhance the contact between the private subject,and broaden the financing channels,better achieve the investment banks’ goal of increasing investment in infrastructure among developing countries.

First of all,AIIB has been actively cooperating with existing multilateral development banks.Although Asian countries are still the main members of AIIB,the representation of its members has expanded to the whole world,which in fact proves the inclusiveness of AIIB system.In the process of cooperation with existing multilateral banks,represented by the World Bank,the first cooperation framework agreement on co-financing was signed in 2016.Since then,the two sides have provided co-financing for five projects.In April 2017,the two sides signed a framework memorandum of cooperation.AIIB also carried out joint venture projects with the World Bank.

What’s more,in order to better serve the purpose of AIIB,cooperation with non-state actors,including private actors,should be continuously promoted.Although AIIB has made a large amount of financing and investment in the field of infrastructure in recent years,there is still a large gap between supply and demand.Therefore,AIIB also needs to initiate cooperation with commercial financial institutions to amplify the leverage effect through PPP mode and more effectively mobilize and allocate market resources.The world bank’s international finance corporation,the European investment bank’s loan business around the world,are both examples of successful cooperation models,which offer ample experience for AIIB to draw on.Through expanding cooperation partners and financing channels,capital shortage will be greatly alleviated.

5 Conclusion

The AIIB has made several innovations and is able to fully reflect the urgent needs of developing countries in the field of infrastructure and does not interfere politically with borrowing countries,which win international recognition and securing legitimacy.No organizational reform is perfect,although it has met with skepticism,the AIIB has received more support from the international community.The AIIB should continue to uphold the purpose of service,strengthen cooperation with other entities and broaden financing channels.