ISE13/14-15

• In his visit to the Southeast Asian countries in October 2013, President Xi jinping proposed to set up the Asian Infrastructure Investment Bank ("AIIB"), a new multilateral development bank dedicated for infrastructure financing in developing places. The initiative was met with a favourable response, with as many as 57 countries across five continents confirmed to be prospective founding members as of 15 April 2015. These prospective founding members will soon decide the management structure and Articles of Agreement of AIIB by around June 2015.
• The Hong Kong Government is actively pursuing the possibility of joining AIIB, in view of its potential significant benefits to the local economy. It is expected that AIIB will discuss the issue of Hong Kong's membership shortly after its Articles of Agreement are endorsed by its prospective founding members by around June 2015.
• This issue of Essentials takes stock of the latest developments of AIIB and discusses a few issues relating to Hong Kong's participation in AIIB. This may be read jointly with a related piece entitled "One Belt One Road".

Mission and developments of AIIB

• Mandate: In a nutshell, AIIB is a multilateral development bank akin to the World Bank and Asian Development Bank ("ADB"). While the existing multilateral development banks have various policy objectives including also poverty reduction and social development, AIIB focuses more on infrastructure financing in developing places, with a view to accelerating economic development and deepening connectivity in the region.
• Capital size and mode of operation: The authorized capital size of AIIB is set at US$100 billion (HK$775.4 billion).^{1Legend symbol denoting In the earlier discussion, it is noted that the initial capital size of AIIB would be set at US$50 billion (HK$387.7 billion), and increase to US$100 billion (HK$775.4 billion) eventually.} The Mainland has already committed to contributing half of the capital, while the other half will be apportioned amongst members in accordance with the size of the respective economies. Leveraging on this capital, AIIB may issue bonds to expand its financing capability by several times. AIIB can then use these proceeds to finance infrastructural projects in various forms like long-term loans, public-private partnership, provision of guarantee and direct equity investment.
• Founding membership: In line with the practice of other multilateral development banks, AIIB adopts an "open regionalism" principle and its membership is open to any place, including those outside Asia. As of 15 April 2015, there were 57 prospective founding members of AIIB, with 32 from Asia and 20 from Europe. Indicative of its economic strength, AIIB's prospective founding members include eight of the 10 largest economies in the world, namely the Mainland, Germany, France, the United Kingdom, Brazil, Italy, Russia and India. The United States and Japan are the two exceptions, citing their concerns of corporate governance of the new institution (Table).

• Ordinary membership: The prospective founding members will soon negotiate and decide the structure and standard of corporate governance of AIIB. Once the Articles of Agreement are finalized by June 2015, other places from any continent can apply for ordinary membership. At this juncture, it is not clear whether ordinary members would have the same rights (e.g. voting rights) as the founding members. AIIB is scheduled for formal establishment by the end of 2015.
• Corporate governance: In response to the concerns over the standard of corporate governance, the Multilateral Interim Secretariat of AIIB states that AIIB is run on the basis of "lean, clean and green" principles and its governance and accountability will draw upon global good practices.
• Relationship with existing multilateral development banks: There are also concerns whether AIIB will undermine existing multilateral development banks. The Multilateral Interim Secretariat explains that AIIB will "complement and supplement the efforts of existing multilateral development banks". Reciprocally, the top management of World Bank and ADB has all declared publicly in April 2015 that they would work with AIIB in the future. Given the colossal demand for infrastructure in Asia averaging at US$730 billion (HK$5,660 billion) each year, any new source of money should narrow part of the financing gap only, but would not crowd out the work of other multilateral development banks.^{2Legend symbol denoting According to ADB, Asia needs to invest US$730 billion (HK$5,660 billion) in overall national infrastructure each year. However, annual lending from ADB averaged at only around US$13 billion (HK$100 billion) during 2010-14, representing just 2% of annual demand.}
• Relationship with Silk Road Fund: The Silk Road Fund was set up by the Mainland in November 2014, with an initial capital of US$40 billion (HK$310 billion) wholly funded by the Mainland, although it could be open to other countries upon request. While AIIB functions more like a lender, the Fund acts like an investor similar to private equity fund. The Fund will operate on market-based principles, seeking reasonable returns from the infrastructural projects in the longer term. Hence, AIIB and the Fund play a complementary role in fostering infrastructure connectivity in the region.

Participation of Hong Kong

• The establishment of AIIB appears to have addressed the issue of acute shortage of infrastructural financing in developing world especially in Asia. The new institution provides a new platform to channel global savings for infrastructural investment and generate new business opportunities for both developed and developing places. The following are some issues concerning the participation of Hong Kong in AIIB:
  
  

  •	Form of membership: The Hong Kong Government has indicated its interest in joining AIIB. Since the eligibility requirement for membership of AIIB is to be determined, Hong Kong's participation in other multilateral development banks may shed some light on how Hong Kong may participate in AIIB. Hong Kong has been a member of ADB since 1969. After 1 July 1997, Hong Kong continues to participate in ADB under the name "Hong Kong, China". While Hong Kong is not a member of World Bank, Hong Kong participates in the activities of this multilateral development bank as part of the Mainland delegation.
  •	Capital contribution to AIIB: Should Hong Kong be accepted as an ordinary member, it needs to make contribution to the capital of AIIB. It is noted that the authorized capital size of AIIB is quite large at US$100 billion (HK$775.4 billion). While the membership and composition of AIIB are not yet finalized, some ADB statistics may provide a crude guesstimate of the possible capital contribution from Hong Kong. By end-2014, 67 members have contributed a total subscription capital of US$153.1 billion (HK$1,186.8 billion) to ADB since its establishment in 1966. For Hong Kong, it has altogether contributed US$0.84 billion (HK$6.5 billion) to the subscription capital of ADB over the years, accounting for 0.55% of the total. Its voting right is 0.74%. Should Hong Kong participate in the activities of AIIB as a part of the Mainland delegation, it may need to share some of capital contribution made by the Mainland to AIIB. It is noted that the Mainland has committed to contributing half of the authorized capital of AIIB, i.e. US$50 billion (HK$387.7 billion). The amount of contribution to be borne by Hong Kong would then be a subject of discussion between the Central Government and Hong Kong Government.
  •	Regional office: According to the official website of AIIB, Beijing was already selected "to host Bank headquarters" by the first batch of 22 prospective founding members in the Memorandum of Understanding signed in October 2014. Yet it is likely that AIIB may set up a few regional offices, and some prospective founding members have reportedly expressed keen interest to host such offices in London, Singapore and Jakarta. There is a view that Hong Kong should have strong competitiveness in hosting such regional offices as well, leveraging on its position as the largest centre for offshore renminbi business in the world.

Prepared by Kari CHU
Research Office
Information Services Division
Legislative Council Secretariat
20 May 2015