China to wield veto at AIIB

A new China-led infrastructure bank aims to differentiate itself from other lenders with a leaner, more efficient structure that ultimately gives Beijing veto power over major decisions, people close to the institution said.

The bank’s voting structure means that China will retain the upper hand as the largest shareholder, according to its articles of incorporation and people close to the bank. China has offered to forgo outright veto power in day-to-day operations, which helped win over some key founding members.

The articles, agreed to at a meeting of the bank’s 57 founding member countries last month, call for the Asian Infrastructure Investment Bank to be overseen by an unpaid, nonresident board of directors, unlike the World Bank and the Asian Development Bank.

The new bank, which will be based in Beijing and use English as its operating language, will open bidding for projects to all, unlike the ADB, which restricts contracts to member countries, according to a copy of the articles reviewed by The Wall Street Journal.

The new Asian bank also gives a bigger voice to developing nations -- a turnaround from the International Monetary Fund and World Bank, which China lobbied for years for greater representation.

Overall, the bank, on paper, attempts to redress perceived shortcomings at the World Bank, ADB and other development institutions that have been criticized by China for being top-heavy and overly controlled by the US and other wealthy nations.

“China benefited a lot from existing multilateral organisations, but it was also frustrated in a lot of ways that they didn’t increase the weight of China and other developing markets, that they are often slow and bureaucratic,” said David Dollar, a senior fellow at Brookings Institution and former World Bank and US Treasury official in China who has done unpaid consulting for the new bank.

The bank, known as AIIB, has been seen as an ambitious bid by Beijing to expand its international influence and challenge US clout while at the same time bolstering opportunities abroad for Chinese construction and engineering companies.

A low key lobbying campaign by China exceeded expectations, attracting 56 other countries, among them US allies Australia and South Korea, which faced pressure from Washington not to join.

“China can’t lose from having an economically rational, transparent governing structure at the AIIB that it can showcase in response to the US,” said Leslie Young, an economics professor with Beijing’s Cheung Kong Graduate School of Business. “This is going to change the game and expand its soft power,” he said.

Negotiators approved the basic framework last month in Singapore and agreed the bank would start with $100 billion in registered capital. A signing ceremony is scheduled for late June, according to people close to the bank. Once 10 members representing at least 50 per cent of the share votes ratify the agreement, the AIIB can start operating, probably by late 2015, according to Chinese media.

Voting shares are apportioned according to a complex formula that factors in each member’s capital contribution, the size of its economy, basic votes each member receives equally plus another 600 votes allocated to each founding member.

At least 75 per cent of share votes are reserved for members located in the Asia Pacific region, giving smaller Asian countries a greater say than they have in other global organizations.

According to the bank’s articles, China is providing $US29.78bn of the bank’s $US100bn capital base. Under the voting formula, that gives Beijing between 25 per cent and 30 per cent of the total votes, enough to block decisions involving structure, membership, capital increases and other significant issues laid out in the articles that require a “super majority” of at least 75 per cent of votes.

Other big prospective contributors among those listed as Asia Pacific members are India at $US8.36bn, Russia at $US6.53bn and South Korea at $US3.74bn. Outside the region, Germany’s allocation is $US4.48bn, France’s is $US3.37bn and Brazil’s is $US3.18bn.

Shareholding and voting amounts could shift if some founding members change their minds. “Willingness will still be decided by the president and the cabinet,” said Philippines national treasurer Roberto Tan, part of his country’s negotiating team, who said the Philippines’s capital share in the bank would be about 1 per cent.

China’s finance ministry, which has been spearheading the initiative, didn’t respond to requests to comment about the bank’s structure.

The Ministry of Foreign Affairs said the bank aims to be “inclusive and transparent.”

“The important idea is to achieve common development and build a new model of international cooperation,” ministry spokesman Hong Lei said.

As one of China’s biggest forays in trying to reshape the global order, the bank aims to set high standards for efficiency and transparency -- and counter criticisms it will be a tool of Chinese foreign policy, the people close to the bank said.

“They will try and increase the efficiency of investment compared to other development banks with long approval procedures,” said Cui Fan, a professor with Beijing’s University of International Business and Economics.

The bank is expected to maintain a lean staff, according to analysts and those close to the bank, compared with the World Bank, which has over 12,000 staff and consultants. Doing without a resident board of directors should save the bank money and friction in decision-making.

Mr Dollar, of Brookings, said the resident board costs the World Bank some $US70 million annually. When he worked at the bank, “There was often a certain tension between the management and the board members whose resident staff wanted to find out about projects at an early stage”.

The bank articles pledge to heed environmental risks and promote transparency, though they don’t offer specific mechanisms to safeguard against bid rigging, environmental degradation and other potential fallout from huge infrastructure projects. These issues were of significant concern to prospective European members facing vocal domestic civic society constituencies, said the people close to the bank.