Foreign ministers from the Brics countries – Brazil, Russia, India, China and South Africa – met in June along with ministers from other countries, including Iran, Egypt, the United Arab Emirates and Saudi Arabia. On the agenda was the possibility of expanding membership of the group to include these countries, and Russia added urgency to the proceedings because of the impact of western sanctions.
But the main topic of discussion was the creation of a common Brics currency. The New Development Bank, rather than the International Monetary Fund, was tasked with finding ideas for how to achieve this. It was hailed by some as a major step towards the demise of the dollar.
Russia, Brazil and China are already using their own currencies for bilateral trade payment settlement. However, such a payments system runs into problems once imbalances arise. The comments by Russian Minister of Foreign Affairs Sergei Lavrov that the country is sitting on billions of Indian rupees which it cannot use is a case in point. Brics countries have to find a solution to the perennial problem: how to move from bilateral to multilateral clearing and to a common currency.
Creating a common currency is not a new idea. But if such a currency is ever achieved, it is unlikely to replace the dollar – it would exist in addition to the established dollar-based global monetary system. It will be a regional initiative rather like the euro. In the case of Europe, the process from bilateral settlements to a common currency took close to 50 years.
The main institutional achievements were the establishment in 1950 of the European Payments Union, the provision of funds from the US Treasury to cover liquidity shortages as all settlements were in gold or dollar, the establishment of the European currency unit clearing system and the introduction of the euro – first as a clearing currency and later for general public use. Even at that late stage, proponents of the euro were accused of leapfrogging political agreement by member states. The Bank for International Settlements acted as clearing agent for the EPU as well as for the ECU.
All Brics member countries have China as their main trading partner and little trade with each other. Pegging to the renminbi and aligning their bilateral exchange rates would be the first major step. At the same time, a mechanism would have to be set up to provide credit in renminbi to countries that run trade deficits, such as India and South Africa. An organisation similar to the EPU and a management agent like the BIS would have to be established.
China would have to shoulder the burden to keep such a clearing system afloat. This means setting up the mechanism and institutions, providing sufficient funds to support a liquidity shortfall and providing a reserve facility to deposit surplus funds. In addition, it would need to remove obstacles to the fungibility of the renminbi as surplus supply of other currencies should be freely converted into renminbi and used by other countries, eliminating the problem highlighted by Lavrov.
All this would boost the internationalisation of the renminbi and increase the pressure on China to liberalise its financial account. Both have major ramifications for the country’s domestic monetary policy. China is already coming to terms with the fallout from using its currency swap agreements to prop up countries in payments difficulties. So far, China is a long way from the benign neglect which the US adopted to help the Europeans establish their own multilateral clearing system and currency.
Herbert Poenisch is Senior Fellow, Zhejiang University, and former Senior Economist, Bank for International Settlements.
These themes will be further explored in OMFIF’s forthcoming Global Public Investor 2023. Find out more and register to attend the launch here.