May 29, 2014 7:52 am

Japanese head of ADB welcomes rival Chinese fund

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Beijing plans $50bn Asian-wide infrastructure fund

The president of the Japan-dominated Asian Development Bank has cautiously welcomed a proposal by China to set up a rival $50bn infrastructure fund, but warned that the new institution should not disregard environmental and other safeguards.

At the ADB’s annual meeting, held in Astana, Kazakhstan, earlier in May, Beijing began to flesh out plans for an Asian Infrastructure Investment Bank to promote closer regional ties.

Beijing said the new regional bank, which is strongly backed by Xi Jinping, China’s president, would be less bureaucratic than the ADB and more focused on physical infrastructure than on poverty reduction. In Astana, China discussed its plans with 15 Asian countries but did not talk to either Japan or the US, the ADB’s two leading shareholders, nor India, Asia’s other would-be superpower.

China and Japan have sparred bitterly over disputed islands in the East China Sea. Some observers see Beijing’s proposal for an infrastructure fund as an attempt to outflank Tokyo in the field of regional institutions by challenging the ADB’s hegemony.

Takehiko Nakao, the latest in a long line of Japanese ADB presidents, said there was room for a new institution given the region’s huge infrastructure shortfall.

“It is understandable to think this way because of the very large financing needs for Asian countries and the wish of China to play a larger role in the region,” he said.

However, Mr Nakao highlighted what he called the ADB’s “constructive role” in building safeguards into its projects, for example by including rules governing the resettlement of people. “The new international bank should also respect these standards,” he said. China has sometimes been criticised for ignoring safeguards in the name of non-interference in the affairs of other countries.

Mr Nakao said he was also open to the idea of Beijing playing a bigger role in the bank, which was founded in 1966 when China was poor and isolated. “I don’t want to say Japan’s dominance of the ADB will continue forever,” he said. “China is a growing country and its contribution in terms of capital is still limited.”

Japan and the US are by far the biggest shareholders in the ADB with 15.7 per cent and 15.6 per cent, respectively. China, whose economy in dollar terms surpassed Japan’s in 2010, has just 5.5 per cent. Mr Nakao offered no timeline for reform, saying there was “no consensus at the moment”.

Lou Jiwei, China’s finance minister, has said the “voice and representation” of emerging countries “need to be increased through reform of [the] ADB’s governance structure”. Both China and India have pressed for a special capital increase, which would boost their shareholding and voting rights at the bank.

Mr Nakao instead has proposed an alternative means of increasing the bank’s financial firepower. He wants to merge the balance sheet of quasi-commercial loans – the so-called Ordinary Capital Resources – with that for grants and concessional loans, known as the Asian Development Fund. Under the bank’s statutes, the ADF, which has paid-in capital of $33bn and outstanding loans of $28bn, cannot borrow. The OCR, on the other hand, with paid-in capital of just $16.4bn and loans of $53bn, can leverage its funds.

By merging the two, Mr Nakao argued, the bank could expand its reach without raising fresh capital or incurring more risk. Poor countries, with the exception of Afghanistan, had what he said was an “impeccable” repayment record.

The ADB estimates that Asia has annual infrastructure needs of $750bn. This year, the bank expects to extend loans of about $13bn.

Mr Nakao stressed that his proposal did not imply a shift of emphasis from poverty alleviation. “The idea is to strengthen lending to poorer countries,” he said.

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