Triple-A ratings are a blow for those who suggested AIIB would merely serve China's global ambitions

By Gu Bin Source:Global Times Published: 2017/9/5 23:48:39

Ratings acknowledge AIIB’s quality of governance


Illustration: Luo Xuan/GT



Summer is an off-season typically for international organizations. But the Asian Infrastructure Investment Bank (AIIB) gained a rich harvest during this summer, by receiving its long-awaited triple-A credit ratings from Moody's, Fitch and Standard & Poor's, the "big three" global rating agencies. Moody's said on Monday that the AIIB credit profile is underpinned by "robust capital adequacy, a strong governance framework, and solid shareholder support, notwithstanding the absence of a lengthy track record of operations."

This suggests high recognition for the AIIB in the global capital markets, allowing the bank to move closer to another milestone - issuing its first bond.

As standard practice, the multilateral development banks (MDBs) normally operate by sourcing funds from international capital markets. They issue bonds at a lower price than private entities, by benefiting from the highest possible ratings. They then transfer the money raised in capital markets to the developing world, and sponsor various projects there with a still lower interest rate than in the market. Credit ratings thus become crucial for the MDBs in achieving their development purposes.

Normally a decision on credit ratings is based upon an MDB's track record of loan repayments, as well as the so-called preferred creditor status as recognized by borrowing countries. However, the AIIB is a new bank, and simply had no footprint in international capital markets. Besides, whether its preferred creditor status will be respected has not yet been tested. Standard & Poor's said its rating for the AIIB was predicated on a prospective view of its profile considering it is just starting its operations.

Generally the big three rating agencies consider three major factors as the basis for a triple-A rating.

First, the AIIB has unparalleled financial strength. It has a strong capital base of $100 billion, among which $20 billion, or 20 percent, will be fully paid around 2020, and the other $80 billion is callable capital. The strong capitalization profile is comparable with most established triple-A MDBs.

The AIIB's liquidity policy is conservative, and more stringent than some highly rated peers. According to Moody's, the AIIB has a liquidity ratio requirement of at least 40 percent of the projected net cash flow requirements for the coming 36 months, plus an additional buffer.

Second, the investment portfolio is sound. According to Fitch, the AIIB will have a loan portfolio of $50 billion by 2027, taking its equity to assets ratio above the 25 percent threshold. Also, 60 percent of the loans will go to sovereign-backed borrowers, and exposure to the private sector will be controlled. Equity investment will be less than 5 percent of the banking portfolio. After all, all investments should benefit from the preferred creditor status of the AIIB.

Currently the bank has committed a total of $2.8 billion for 17 approved projects, mostly in the form of sovereign-backed loans and co-financed with peer institutions.

Third, the bank has a robust shareholder base. Its current 80 approved members include almost all the "AAA" rated sovereigns globally, according to Standard & Poor's. China, as the major economy in the region, also contributes positively to the ratings.

The AIIB's high-quality governance has been acknowledged in the reports by the three rating agencies. This is a slap in the face for those who had suggested that the China-led bank would merely serve China's global ambitions. 

The next step for the triple-A bank is to find a major international capital market for its first bond issuance, in order to pool more resources for Asian infrastructure financing needs. Leading capital markets worldwide are all qualified candidates, but Hong Kong or London are the most likely choices. The denominated currency is likely to be the US dollar, but the Chinese yuan is also possible.

The AIIB has proved to be an open and inclusive bank, based on the nationalities of senior management and staff, as well as the geographic diversity of its lending and investment activities. Its procurement policy levels the playground for enterprises of both members and non-members and the AIIB expects to behave with a similarly open mindset in global capital markets.

The US and Japan, the only two G7 countries outside the orbit of the AIIB, should relinquish their bias against the bank. Standard & Poor's said that the reluctance of the two countries to join the bank may reflect political divergence with China, rather than their professed anxiety about the bank's own governance and standards. As US political scientist Anne-Marie Slaughter put it, "That the AIIB got off the ground was widely seen as a diplomatic fiasco for the US."

Despite that, the AIIB has an interest in the two countries eventually becoming members of the bank, even though this has sometimes led to misinterpretations about the bank's motives. The AIIB should perhaps alter its strategy, and let the two countries come by themselves ultimately. A possible scenario might be that they compete to avoid being the last to join the AIIB club.

The author is assistant professor of law at Beijing Foreign Studies University, and an adjunct researcher at the Center for China and Globalization, a Beijing-based think tank. bizopinion@globaltimes.com.cn
Newspaper headline: Ratings acknowledge AIIB’s quality of governance


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