New Development Bank forging ahead despite challenges

By Xu Xiujun
0 Comment(s)Print E-mail China Today, September 13, 2017
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The New Development Bank opens in Shanghai on July 21, 2015. [China Today]

Since it officially opened in July 2015, the New Development Bank (NDB) has been working towards its goals of raising funds for infrastructure construction and sustainable development projects in BRICS countries, other emerging markets, and developing countries. It has lent itself to global growth and development, acting as a supplement to existing multilateral and regional financial institutions. As investment projects are carried out in succession, the New Development Bank has overcome a range of obstacles encountered at the preliminary stage, and is forging ahead.

Operation on track

The year 2016 marked the official start of business for the new bank. Investment and financing have developed along the right track. Regarding investment, in 2016 the New Development Bank approved loans for seven projects which conformed to its standards on sustainability and efficiency. These projects involve US $1.5 billion and cover all five founding members (see Table 1). Ten to fifteen new projects are likely to be approved in 2017, with funds totaling US $2.5 to 3 billion.

As planned, infrastructure and sustainability have been the NDB's top priority. Six of the seven loan projects approved in 2016 focused on renewable energy, and it was estimated that these could cut a total of 4.8 million tons of carbon dioxide emissions. In addition, the New Development Bank outperforms other development institutions with a concise organizational structure and efficient workflow. As an illustration, it takes only six months to run through all procedures to approve a loan, allowing projects to get started as soon as possible.

The NDB's financing work also utilizes innovative concepts. In July, 2016 the NDB issued the first green financial bond with an issue size of RMB 3 billion, and a tenor of five years. It was the NDB's debut on the world capital market, and the first case of a multilateral development bank being approved to issue RMB green financial bonds on China's interbank bond market.

What's more, the NDB set up its regional office in Johannesburg, South Africa, laying a foundation for the expansion of its business in the African market.

Opportunities amid challenges

As a new multilateral development-oriented financial institution, the New Development Bank has to confront a slew of challenges in internal management and business expansion.

One of the most acute challenges is obtaining favorable ratings with international credit-rating agencies, which is crucial to reducing financing costs and attracting capital. In 2016, both the NDB and its green bonds received AAA ratings with a stable outlook from two major Chinese rating agencies – China Chengxin International Credit Rating Co., Ltd. and China Lianhe Credit Rating Co., Ltd. In the international credit-rating market dominated by developed countries, however, it is difficult for the NDB to secure a high rating, considering that none of the NDB founding members are rated AAA.

Another challenge lies in the later-stage supervision and risk management of loan programs. Compared to the World Bank, the Asian Development Bank, and other longstanding multilateral development institutions, the New Development Bank has no experience to draw on in this regard. The NDB's loan projects, either in sustainability or infrastructure, feature long investment periods of around 15 to 20 years, and lower rates of return. However, the floundering world economy, as well as the political volatility and economic recession some countries are facing, all highlight the importance of risk control in the later stages of loan projects.

One more concern for the new bank is how to deal with competition-cooperation relations with existing multilateral financial institutions. Though targeting different business objectives and areas, the NDB will inevitably compete with these institutions as business interests overlap. It urgently needs to build up its own advantages to offset its lack of operation experience, and carry out effective cooperation with other financial giants. Existing global development financial institutions, and most regional ones, are led by developed economies which have reason to stand in the way of the new bank to prevent a potential shock to the current global financial structure.

At the same time, the New Development Bank is backed by many governments and markets, with bountiful opportunities created by the economic growth of BRICS nations and the huge financial demands from developing countries.

In the last few years, the growth rate has slowed in BRICS countries, but this has not impaired their status as leaders of the world's economic growth. According to the International Monetary Fund, in 2016, the BRICS nations reached the five percent mark in terms of their economic growth rate – calculated with the economic aggregate weighted index – which was 0.9 percent higher than that of emerging markets and developing countries, and 3.3 percent higher than that of developed countries. That year, BRICS countries contributed more than half of the world's economic growth, as strong supporters of the New Development Bank.

What's more, developing countries have a huge demand for investment in such fields as infrastructure and sustainability, but face big financing gaps. In infrastructure construction alone, developing countries need about US $2 trillion a year, and only half that amount can be sourced. In other words, the scale of loans within the original multilateral financial system obviously couldn't meet the rising demands. Since the UN 2030 Sustainable Development Goals were adopted, demands for capital in the sustainability sector also soared. From this perspective, the establishment of the New Development Bank merely reflects the current trend.

Bright prospect

In last two years, the New Development Bank completed its preparatory start-up stage, and reached full development with accumulated experience.

Regarding loan projects, both the quantity and the scale will be increased. The bank has 23 potential projects lined up for 2017-2018, reaching US $6 billion in total capital scale. Among them, five are located in China, with a total investment of US $1.7 billion. According to the NDB's General Strategy 2017-2021, the bank plans to grant loans to 50-75 projects by 2021.

On the financing side, the bank will proactively exploit the international market. It plans to continue the RMB 10 billion bond issue portfolio in light of its own financial demands as well as the market situation. At the same time, the bank will issue bonds in Rupees, as well as seek opportunities to sell bonds in Brazil and Russia.

The New Development Bank plans to attract new members, so as to solicit support and participation from more emerging market countries. The NDB's General Strategy 2017-2021 states that by 2021, "countries in different stages of development and of different sizes will have joined the Bank, extending its reach to all regions of the world in a balanced manner."

Regarding management, the bank will acclimatize itself to the changing situation to maximize efficiency. In terms of its loan application procedure, the bank will further streamline the process of project evaluation and approval, aiming to shorten the entire process to within six months.

In conclusion, since its establishment, the New Development Bank has operated in a practical and efficient manner, and has produced an abundance of fruit for BRICS countries and the world at large. Looking to the future, the NDB will continue to focus on infrastructure and expand its scale and scope of cooperation, aiming to usher in a brighter prospect for future development.

Xu Xiujun is a senior research fellow and executive director of Center for BRICS Studies, Institute of World Economics and Politics, Chinese Academy of Social Sciences.


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