What Is the Asian Infrastructure Investment Bank (AIIB)?

The Asian Infrastructure Investment Bank (AIIB) is a new international development bank that provides financing for infrastructure projects in Asia. It began operations in January 2016.

How the Asian Infrastructure Investment Bank (AIIB) Works

The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank headquartered in Beijing. Like other development banks, its mission is to improve social and economic outcomes in its region, Asia, and beyond. The bank opened in January 2016 and now has 105 approved members worldwide, as of Jul. 30, 2022.

The History of the Asian Infrastructure Investment Bank

China’s leader Xi Jinping first proposed an Asian infrastructure bank at an APEC summit in Bali in 2013. Many observers have interpreted the bank as a challenge to international lending bodies, which some consider too reflective of American foreign policy interests such as the International Monetary Fund (IMF), the World Bank and the Asian Development Bank.

In this bank’s case, China controls half of the bank’s voting shares, which gives the perception that the AIIB will function in the interests of the Chinese government. The U.S. has questioned the bank’s governing standards and its social and environmental safeguards, perhaps pressuring allies not to apply for membership. However, despite American objections, approximately half of NATO has signed on, as has nearly every large Asian country, with the exception of Japan. The result is widely considered in an indicator of China’s growing international influence at the expense of the United States.

The Structure of the Asian Infrastructure Investment Bank

The bank is headed by a Board of Governors composed of one Governor and one Alternate Governor appointed by each of the 86 member countries. A non-resident Board of Directors is responsible for the direction and management of the Bank such as the Bank’s strategy, annual plan and budget and establishing policies and oversight procedures.

The bank staff is headed by a President who is elected by AIIB shareholders for a five-year term and is eligible for re-election once. The President is supported by Senior Management including five Vice Presidents for policy and strategy, investment operations, finance, administration, and the corporate secretariat and the General Counsel and Chief Risk Officer. Mr. Jin Liqun is the current President.

Asian Infrastructure Investment Bank Priorities

The bank’s priorities are projects that promote sustainable Infrastructure and to support countries that are striving to meet environmental and development goals. The bank funds projects linking countries in the region and cross-border infrastructure projects for roads, rail, ports, energy pipelines and telecoms across Central Asia and maritime routes in South East and South Asia and the Middle East. The bank’s priorities also include private capital mobilization and encouraging partnerships that stimulate private capital investment such as those with other multilateral development banks, governments, and private financiers.

An example of an AIIB project is a rural road connectivity initiative that will benefit approximately 1.5 million rural residents in Madhya Pradesh, India. In April 2018, the AIIB announced the project, which is also expected to improve the livelihoods, education, and mobility of the residents of 5,640 villages. The project is a U.S. $140-million jointly financed by the AIIB and the World Bank.

What Is the Asia-Pacific Economic Cooperation (APEC)?

The Asia-Pacific Economic Cooperation (APEC) is an economic group of 21 members, formed in 1989, with the primary goal of promoting free trade and sustainable development in the Pacific Rim economies.

Understanding the Asia-Pacific Economic Cooperation (APEC)

APEC’s principal goal is to ensure that goods, services, capital, and labor can move easily across borders. This includes increasing custom efficiency at borders, encouraging favorable business climates within member economies, and harmonizing regulations and policies across the region.

The creation of APEC was primarily in response to the increasing interdependence of Asia-Pacific economies. The formation of APEC was part of the proliferation of regional economic blocs in the late 20th century, such as the European Union (EU) and the (now-defunct) North American Free Trade Agreement (NAFTA).

Nations Comprising APEC

The founding members of APEC were Australia, Brunei, Canada, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and the U.S. Since its launch, China, Hong Kong, Taiwan, Mexico, Papua New Guinea, Chile, Peru, Russia, and Vietnam have joined its ranks.

APEC refers to its members as economies rather than as states due to the focus on trade and economic issues rather than the sometimes delicate diplomatic issues of the region, including the status of Taiwan and Hong Kong. The People’s Republic of China (PRC) refuses to recognize Taiwan because it claims the island as a province under its constitution. Hong Kong, meanwhile, functions as semi-autonomous regions of China and not a sovereign state.

Official observers of APEC include the Association of Southeast Asian Nations (ASEAN), the Pacific Economic Cooperation Council (PECC), and the Pacific Islands Forum (PIF).

The Asia-Pacific Economic Cooperation’s (APEC) Actions and Goals

At a landmark summit meeting in 1994, APEC announced a lofty goal of establishing free trade and investment regimes in the Asia-Pacific region by 2010 for members with developed economies. The group hoped to achieve those same goals for its developing economy members by 2020.

In 1995, APEC adopted the Osaka Action Agenda, a program designed to facilitate business activities, liberalize trade and investment and promote economic and technical cooperation. However, progress on these efforts has somewhat slowed, due to APEC’s culture of making all decisions by consensus. While some decisions are unanimous, they are not legally binding on the member governments.

Sub-Groups of APEC

APEC maintains a policy support unit to provide research and analysis to support the organization’s goals for the region, as well as special working groups to explore and promote various issues and components of economic development. These groups engage in multiple micro causes that aim to advance policy and awareness. Examples of these sub-groups include:

• Gender Issues: APEC sponsors a policy partnership on women and the economy to advance the economic integration of women. An estimated 600 million women are currently in the region’s labor force.
• Intellectual Property Rights: APEC’s Intellectual Property Rights Experts’ Group (IPEG) studies and exchanges information regarding the enforcement of intellectual property rights protections in the region. It promotes and facilitates cooperation to implement the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
• Emergency Preparedness: APEC’s Emergency Preparedness Working Group (EPWG) promotes business resilience, public-private partnerships, and information sharing among members to help build the region’s capacity to deal with emergencies and natural disasters. Economies along the geologically and climatologically active Pacific Rim are subject to events such as tsunamis, typhoons, earthquakes, and volcanic eruptions.

What Is Anchoring and Adjustment?

Anchoring and adjustment is a phenomenon wherein an individual bases their initial ideas and responses on one point of information and makes changes driven by that starting point. The anchoring and adjustment heuristic describes cases in which a person uses a specific target number or value as a starting point, known as an anchor, and subsequently adjusts that information until an acceptable value is reached over time. Often, those adjustments are inadequate and remain too close to the original anchor, which is a problem when the anchor is very different from the true answer.

Understanding Anchoring and Adjustment

Anchoring is a cognitive bias described by behavioral finance in which individuals fixate on a target number or value—usually, the first one they get, such as an expected price or economic forecast. Unlike the conservatism bias, which has similar effects but is based on how investors relate new information to old information, anchoring occurs when an individual makes new decisions based on the old, anchor number. Giving new information thorough consideration to determine its impact on the original forecast or opinion might help mitigate the effects of anchoring and adjustment, but the characteristics of the decision-maker are as important as conscious consideration.

The problem with anchoring and adjustment is that if the value of the initial anchor is not the true value, then all subsequent adjustments will be systematically biased toward the anchor and away from the true value. However, if the anchor is close to the true value then there is essentially no problem.

One of the issues with adjustments is that they may be influenced by irrelevant information that the individual may be thinking about and drawing unfounded connections to the actual target value. For instance, suppose an individual is shown a random number, then asked an unrelated question that seeks an answer in the form of an estimated value or requires a mathematical equation to be performed quickly. Even though the random number they were shown has nothing to do with the answer sought, it might be taken as a visual cue and become an anchor for their responses. Anchor values can be self-generated, be the output of a pricing model or forecasting tool, or be suggested by an outside individual.

Studies have shown that some factors can influence anchoring, but it is difficult to avoid, even when people are made aware of it and deliberately try to avoid it. In experimental studies, telling people about anchoring, cautioning them that it can bias their judgment, and even offering them monetary incentives to avoid anchoring can reduce, but not eliminate, the effect of anchoring.

Higher levels of experience and skill in a specific field can help reduce the impact of anchoring in that subject area, and higher general cognitive ability may reduce anchoring effects in general. Personality and emotion can also play a role. A depressed mood increases anchoring, as do the personality traits of agreeableness, conscientiousness, introversion, and openness.

Anchoring and Adjustment in Business and Finance

In sales, price, and wage negotiations, anchoring and adjustment can be a powerful tool. Studies have shown that setting an anchor at the outset of a negotiation can have more effect on the final outcome than the intervening negotiation process. Setting a deliberate starting point can affect the range of all subsequent counteroffers.

For example, a used car salesman (or any salesman) can offer a very high price to start negotiations that are arguably well above the fair value. Because the high price is an anchor, the final price will tend to be higher than if the car salesman had offered a fair or low price to start. A similar technique may be applied in hiring negotiations when a hiring manager or prospective hire proposes an initial salary. Either party may then push the discussion to that starting point, hoping to reach an agreeable amount that was derived from the anchor.

In finance, the output of a pricing model or from an economic forecasting tool may become the anchor for an analyst. One possible way to counteract this is to look at multiple, diverse models or strands of evidence. Social psychology researcher Phillip Tetlock has found that forecasters who make predictions based on many different ideas or perspectives (“foxes”) tend to make better forecasts than those who focus on only a single model or a few big ideas (“hedgehogs”). Considering several different models and a range of different forecasts may make an analyst’s work less vulnerable to anchoring effects.

What Is an Automatic Premium Loan?

An automatic premium loan (APL) is an insurance policy provision that allows the insurer to deduct the amount of an outstanding premium from the value of the policy when the premium is due.

Automatic premium loan provisions are most commonly associated with cash value life insurance policies, such as whole life, and allow a policy to continue to be in force rather than lapsing due to nonpayment of the premium.

Understanding Automatic Premium Loans

In order to take an automatic premium loan, you have to have a cash-value life insurance policy, in which every premium you pay adds to the cash value of the policy. Depending on the policy language, life insurance policyholders may be able to take out a loan against the cash value of their policy. This accrued cash value is a value over and above the face value of the policy and can be borrowed against by the policyholder at their discretion.

An automatic premium loan is essentially a loan taken out against the policy and does carry an interest rate. If the policyholder continues to use this method of paying the premium, it is possible that the cash value of the insurance policy will reach zero.

At this point, the policy will lapse because there is nothing left against which to take out a loan. If the policy is canceled with an outstanding loan, the amount of the loan plus any interest is deducted from the cash value of the policy before it is closed.

Special Considerations

Since the accrued value is technically the property of the policyholder, borrowing against the cash value does not require a credit application, loan collateral, or other good faith requirements typically found in loans. The loan is taken out against the cash value of the policy, and the loan balance is deducted from the policy’s cash value if not repaid. The policyholder will owe interest on the loan, just as with a standard loan.

Automatic premium loan provisions help both the insurer and the policyholder: The insurer can continue to automatically collect periodic premiums rather than sending reminders to the policyholder, and the policyholder is able to maintain coverage even when they forget or are unable to send in a check to cover the policy premium.

The policyholder may still choose to pay the premium by the regularly scheduled due date, but if the premium is not paid within a certain number of days after the grace period, such as 60 days, the outstanding premium amount is deducted from the policy’s cash value. This prevents the policy from lapsing. If the automatic premium loan provision is used, the insurer will inform the policyholder of the transaction.