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S. Korea to join China-led infrastructure investment bank

South Korea agreed to join the China-led regional development bank as one of its founding members, the finance ministry announced Thursday, a move that can bolster the Asian neighbor's growing clout in the region as well as further Seoul's own economic interests.

The ministry said the decision to play a part in the Asian Infrastructure Investment Bank has been made to better help provide regional economies with the necessary funds to carry out critical development projects vital for growth. It argued that existing institutions such as the Asian Development Bank and World Bank have not been able to fully meet regional demands for capital.

Data provided by the ADB said infrastructure investment demand among Asian countries will stand at some $730 billion every year at least until 2020.

The foreign ministers of China, South Korea, and Japan are seen after a trilateral meeting last Saturday. From left are Wang Yi of China, Yun Byung-se of South Korea and Fumio Kishida of Japan.(Yonhap)
The foreign ministers of China, South Korea, and Japan are seen after a trilateral meeting last Saturday. From left are Wang Yi of China, Yun Byung-se of South Korea and Fumio Kishida of Japan.(Yonhap)

"Once AIIB begins operations, it will likely spur large scale infrastructure work in Asia that can help South Korean companies with extensive experience in construction, communication and transportation to expand their market presence," the ministry said, making clear that the decision to join had the best interest of the country in mind.

It added that becoming an early member of the AIIB can allow the country to expand its financial influence, and permit it to play a greater role in international affairs commensurate with its economic size. The bank is the first multinational financial institution South Korea will join as a founding member.

On the governance structure and other safeguards that are needed to run a multinational investment effectively, the finance ministry, which has been in close consultation with all interested parties, stressed it joined forces with countries that have opted to join the AIIB to demand the setting up of operational guidelines that reflect best international practices.

"In this regard, considerable headway was made," it claimed, adding that it will continue to work with others to enhance transparency, accountability and sustainability of the new institution so it can meet high international standards and contribute to global economic growth.

The new bank will be tasked with providing funds and consulting expertise to economies that want to upgrade their social and industrial infrastructure, which is vital for creating an environment for sustainable growth.

The move by Seoul, meanwhile, was anticipated as China is South Korea's largest trading partner, surpassing the United States, and a key destination for business investments. The two countries inked a free trade pact, and Seoul is striving to become a leading renminbi hub in the coming years.

China is expected to foot the bulk of the initial $50 billion needed to get the bank started, with other members expected to make donations to increase the size of the authorized capital to reach $100 billion.

South Korea is seen as wanting to better reflect the country's interest in the overall ownership of the investment bank and play a role in the drafting of the organization's charter that is expected to be released in June.

Behind South Korea's decision on the AIIB were complex diplomatic elements, squeezing Seoul between its decades-long alliance with Washington and the reality of Beijing's growing influence. Some observers speculated that it is because of Washington's influence that Seoul had put off joining the investment bank for eight months.

Developed European economies such as Britain, Germany, France and Italy have all announced that they will join the AIIB, with New Zealand following suit. Switzerland and Luxembourg have said they will join.

The move by such countries has upset the U.S., which has been persuading its trading partners and allies to sit out.

Washington had been the first to raise doubts about the China-led institution meeting the rigorous standards of governance the world has come to expect from the World Bank and ADB. It said the new bank must also be clear on what measures it will take on environmental issues such as global warming and social safeguards like people's welfare.

Despite such objections, many local economists said that joining the AIIB makes sense for South Korea because local companies, can undertake AIIB-funded infrastructure building projects.

While the World Bank and ADB do offer funds, they have in the past come under attack for not responding quickly and effectively to growing infrastructure-related demands in the Asia-Pacific region.

"Joining the AIIB will further strengthen South Korea-China economic ties as well as making it possible for the country to directly participate in infrastructure development in developing economies," said Lee Moon-ki a professor of China trade and commerce at Sejong University in Seoul said.

In regards to the future, South Korean officials have said joining the organization is just the start, with the real challenge coming when the country has to secure voting rights that directly impact its role in the bank.

Among Asian members that joined the AIIB, South Korea's economy is the third largest by size after China and India, although all details related to voting rights, including those of China, will be worked out in the next few months.

AIIB participants have generally agreed that voting rights will be proportional with the contributions made, with Asian countries largely expected to get 75 percent of the voting rights and the rest going to other outside partners. The structure of the bank will be made up of Board of Governors and Board of Directors as well as a management secretariat, with China unlikely to demand veto power.

The finance ministry said while it has agreed to join, with its intent being sent via a formal letter, its status as a founding member will be decided after other countries that joined earlier agree to include the country.

Once it becomes a founding member, the National Assembly will be asked to ratify the move, with the AIIB itself to start operation late this year or early 2016. (Yonhap)

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