(Updates with bond ratings in sixth paragraph.)
May 12 (Bloomberg) -- On the first evening of the Asian Development Bank’s annual meeting in the capital of Kazakhstan this month, delegates from 16 countries skipped the scheduled Romeo and Juliet ballet for dinner at the Great Wall restaurant to talk about forming a totally different lender.
They dined on Peking duck and tofu as China’s Finance Minister Lou Jiwei led discussions about the creation of the new $50 billion Asian Infrastructure Investment Bank, to be mostly funded by China. Left out from the feast, however, were regional rivals Japan and India, as well as the U.S.
China’s proposal is viewed privately by officials and diplomats as a challenge to the regional role of the ADB, a Manila-based multilateral lender founded in 1966 that is dominated by the U.S. and Japan. It’s one of a number of moves by China to promote its influence in the region, from the suggestion of a “mega free-trade area” in Asia to promoting a regional security summit hosted by President Xi Jinping this month with at least 14 state or government leaders attending, including Russian President Vladimir Putin. Japan and the U.S. are observers to the 24-member body.
“China wants to play a more pivotal role in these kinds of organizations -- so the best way is to establish an organization by itself,” said Oliver Rui, a professor of finance and accounting at the China Europe International Business School in Shanghai. “This is another way to think from a broad perspective in order to counterbalance Japan and the U.S.”
China is seeking a more assertive international role as it tussles with neighbors such as Japan over maritime territory, and faces a U.S. that is shoring up its alliances in the region. The Chinese government is embroiled in disputes with the Philippines, which arrested Chinese fishermen near the disputed Spratly Islands, and Vietnam, with which it traded accusations after boats from the two countries collided near the site of a Chinese exploration rig in contested waters.
The new bank, put forward by Xi during his visit to Indonesia in October, will initially be less than a third of the size of ADB, which has $174 billion in total capital, according to its 2013 report. The ADB is rated AAA by Standard & Poor’s, its top credit rating, compared with the AA- the company gives to China’s sovereign government.
“China’s expanding footprint in Asia might be perceived as less threatening to other countries if projects involving Chinese firms are funded by the AIIB instead of” policy lenders such as the China Development Bank or the Export-Import Bank of China, said Erica Downs, a fellow at the Brookings Institution in Washington D.C.. “China could use AIIB to legitimize its economic expansion.”
China plans to pay a “relatively big portion” of the $50 billion but doesn’t necessarily have to own a controlling stake, Finance Minister Lou said in April. The working group for the establishment of the bank is based in Beijing and is headed by Jin Liqun, chairman of China International Capital Corp., one of the country’s leading investment banks.
“Asia is in dire need of investment, especially in infrastructure, but ADB’s current capacity is really insufficient,” Lou said at a gathering of all ADB members on May 4 that included Japan, India and the U.S. “By comparison, the China Development Bank has been doing commercial infrastructure loans and its business size is far bigger than the ADB and World Bank combined - and that happened in less than 20 years.”
Japan hasn’t been approached by China about the bank, Finance Minister Taro Aso said at a press conference in Astana. India, which has a disputed border with China, also hasn’t been invited to join, India’s Finance Minister Palaniappan Chidambaram said in a May 3 interview with Bloomberg.
“I don’t know much about the Chinese proposal, the Chinese have yet to speak to us or discuss it with us,” he said. “What I know is what I read from the newspaper.”
The delegates who attended the eight-course dinner included representatives from Pakistan, South Korea, Kazakhstan, Mongolia and Sri Lanka, according to a statement on the website of China’s Ministry of Finance.
Japan and the U.S. are the two largest shareholders of the 67-member ADB, with 15.7 percent and 15.6 percent respectively. The two countries also have a combined voting power of 26 percent, compared with China’s 5.47 percent, according to the bank’s website.
“The ADB is mainly led by Japan, and the World Bank is mainly led by America,” said Qi Jianguo, Director of Asia- Pacific Studies at the China Foundation for International Studies in Beijing. “And so the AIIB is mainly led by China.”
Demand for infrastructure in the region means there’s room for coordination among different institutions, Indonesia’s Finance Minister Chatib Basri said in an interview on May 2.
“It’s not like whether we should take the China side or the ADB side,” he said.
Officially, the ADB welcomed China’s plan as well as another $50 billion development bank proposed by the BRICS countries. ADB President Takehiko Nakao told a press conference in Astana that his bank can provide about $13 billion in new lending every year, while Asia needs to spend around $8 trillion on national infrastructure over the next decade to sustain its growth trajectory.
“I understand the reason behind these banks, so they should be welcomed,” Nakao said. The creation of the Chinese- led bank will mean the ADB has to “think more innovatively” how it can strengthen its capacity, he said.
The AIIB will differ from the ADB by focusing on building infrastructure rather than prioritizing poverty reduction, Lou said at the Boao Forum in April. The bank is unlikely to attach political conditions to its loans due to Beijing’s policy of not interfering in other countries’ internal affairs, according to Zhao Jianglin, a researcher with the National Institute of International Strategy at the Chinese Academy of Social Sciences in Beijing.
“As China’s economic power grows, it’s a natural process for China to play a bigger role in the region and to give more support to other countries,” Zhao said by phone. “Now China has the ability to show the real money.”
China’s soft power push is driving other multilateral initiatives. It has proposed studying a “mega free-trade” agreement in the Asia-Pacific region and has submitted plans for a working group, Wang Shouwen, assistant commerce minister, told reporters in Beijing last month, according to the official Xinhua News Agency. Xi will preside over a summit starting May 20 in Shanghai of the Conference on Interaction and Confidence- Building Measures, a body first mooted by Kazakhstan in 1992 to promote peace and security in Asia.
The organization has a clear “Asian-led identity,” upholds China’s principle of non-interference in the internal affairs of other countries and has “enormous development potential in the future,” Cheng Guoping, Vice Minister of Foreign Affairs said at briefing last week.
The infrastructure bank is part of efforts by China to reshape the global financial architecture to ensure its power and interests are reflected, according to Downs of Brookings.
“It’s not surprising that a country that has emerged as a major sovereign lender would want to use its newfound status to help create new international financial institutions,” she said.
--With assistance from Karl Lester M. Yap in Manila and Nariman Gizitdinov in Almaty.