President Xi Jinping and representatives from the 21 countries involved in setting up the Asian Infrastructure Investment Bank meet at the Great Hall of the People in Beijing on Friday. Each nation's stake in the lender has been generally allocated based on its GDP. WU ZHIYI / CHINA DAILY??

Regional lender with Beijing HQ set to start work before end of 2015

A milestone agreement has been reached on setting up the Asia Infrastructure Investment Bank, but the absence of some major economies underscores the difficulty China faces as an emerging power in making global governance initiatives.

Twenty-one Asian countries signed an intergovernmental memorandum of understanding on the bank in Beijing on Friday.

This paves the way for the formal establishment of the bank, proposed by China, which will be tasked with funding regional infrastructure projects.

In October last year, President Xi Jinping put forward a proposal on setting up the bank. Since then, five rounds of talks with countries interested in the proposal have been held on establishing the multilateral lender and achieving its reported capital target of $100 billion.

Xi met with delegates from the 21 initial participants after Friday's signing ceremony. A news release said the signatories decided the bank's headquarters will be in Beijing and they expect it to become operational before the end of 2015.

Finance Minister Lou Jiwei has said that the planned start-up capital is $50 billion, with China set to be the largest shareholder, with a stake of up to 50 percent. Each nation's stake has been generally allocated according to its GDP.

But observers are disappointed by the absence of some major economies, such as Japan, Australia, South Korea and Indonesia, among the signatories.

Australia and South Korea had previously expressed their interest in joining the bank. However, this does not rule out the possibility that they will join later.

The signatory nations will take part in negotiations on the new bank's Articles of Agreement. Countries that sign and ratify the articles will officially become founding members of the bank.

Xi said,"The AIIB should adhere to the principle of open and inclusive regionalism. Any country that is interested (in joining) is welcome."

Despite the progress made, the bank is seen as a challenge to the World Bank and Asian Development Bank, both multilateral lenders that count Washington and its allies as their biggest financial backers.

The Australian Financial Review reported on Friday that US Secretary of State John Kerry had personally asked Australian Prime Minister Tony Abbott to keep Australia out of the AIIB.

A US State Department spokeswoman said, "Secretary Kerry has made clear directly to the Chinese as well as to other partners that we welcome the idea of an infrastructure bank for Asia, but we strongly urge that it meet international standards of governance and transparency."

Chinese officials, including Finance Minister Lou, have said repeatedly that the bank will not compromise on standards.

They have also made it clear that it will complement, rather than rival, established organizations such as the World Bank and Asian Development Bank.

Takehiko Nakao, president of the Asian Development Bank, said on Thursday that setting up the new bank is "understandable" because regional financing requirements for infrastructure are considerable.

"If it's established, we're prepared to consider cooperating with the new bank," Nakao said.

World Bank President Jim Yong Kim has said that the bank welcomes the AIIB and that the two banks should be complementary partners rather than competitors.

Chen Fengying, director of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations, said, "It is naturally difficult for China, as an emerging power, to do something that is considered a challenge to the No 1 power.

"But despite controversy, China has to do its part and come up with concrete results. I believe such results will persuade more countries to join."