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Multiple questions over Brics bank

Multiple questions over Brics bank

New development institution could aid renminbi push

by David Marsh in Beijing

Tue 22 Jul 2014

There are no surprises, but lots of questions, about Beijing’s espousal of the Brics bank, launched last week by China as well as Brazil, Russia, India and South Africa. The freshly-named New Development Bank (NDB) is designed to provide both development finance and balance of payments funding on a grand global scale – a clear potential rival to the International Monetary Fund (IMF) and the World Bank.

The enterprise can be viewed on several levels. At the most sweeping, it represents the biggest challenge to the world monetary establishment since the creation of the Bretton Woods institutions 70 years ago in the final year of the second world war. Seen through the prism of international politics, the Brics initiative is the most significant sign yet of developing countries’ rebuttal of Washington-led policies on many issues ranging from tough conditions on international payments and development assistance through to reform of the IMF’s voting structures. 

At a more practical level, the plan may run into significant headwinds as a result of the basic failure of these five distinct but very different emerging market economies to agree on fundamental issues over the running of a new international institution. Controversy over Russia’s role in last week’s downing of a Malaysian airliner over disputed areas of Ukraine hardly forms a propitious backdrop to the creation of a new element in the world monetary order.

Here are 10 questions hanging over the Brics bank.

  1. Where will it be based? Last week’s announcement named Shanghai as the headquarters, after the resolution of a last-minute location wrangle between China and India.
  2. How will it be run? The president will be named on a revolving basis, with the first head coming from India. Brazil will lead the board of directors, with the chairman of the board of governors coming from Russia, and a regional base to be established in South Africa. The NDB is being created on the basis of parity between the five members, but geopolitical differences as well as the sheer 24 to one gap between the weight of the top economy, China, and that of the smallest, South Africa, are bound to complicate implementation of this principle.
  3. What will it do? The institution will have initial capital of $100bn to fight financial crises, of which $50bn will be subscribed capital. The money can be used in a mixture of longer-term loans and currency swaps for shorter-term balance of payments financing, incorporating existing pledges by the Brics nations to use their own currencies to shore up economies in case of monetary emergencies.
  4. Will it really challenge the IMF and World Bank? That is certainly the big idea, even though Chinese officials emphasise the intention to work cooperatively with the Bretton Woods duo. There are bound to be complaints that the new body will undercut the Washington-based institutions’ line on global economic governance. However, given the shortcomings of the IMF, in particular in spotting and then curbing the financial crisis that broke out in 2007-08, the NDB will reap natural support from those who question the legitimacy of the Bretton Woods twins to lecture the world over financial oversight.
  5. How will it work with private sector institutions? The great strength of the IMF and World Bank has been that they habitually provide a signpost to guide commercial banks and asset management houses to direct funds to countries that gain lending approval from Washington. That tradition took a knock during the euro turbulence, when IMF-led funding for peripheral European countries provided the excuse for private creditors to get their money out of troubled euro members rather than sending more in. With much financial clout moving to Asian banks as European and US banks rein in operations in international trade and project finance, the Brics bank could have considerable influence in catalysing new areas of finance for developing nations.
  6. Which currency will the NDB use? This looks like a renminbi-based institution. The credo will no doubt be that ‘all currencies are equal’ – but the renminbi will be more equal than others. Beijing’s long-running efforts to optimise cross-border use of the Chinese currency, especially for trade-linked transactions, and whittle away at the dollar’s ‘exorbitant privilege’, will gain a further boost. On the other hand, the IMF’s Special Drawing Right (SDR) – supplemented perhaps by inclusion of the renminbi as well as some of the other countries’ currencies – may well be given a role. A hotly-contested redrawing of the currency weightings in the SDR – at present limited to the dollar, yen, euro and sterling – is due next year, with Washington likely to bend the rules a little to allow the renminbi, on certain conditions, to join the currency basket. One thing is certain: the dollar will not be given any prominence in the bank’s balance sheet and operations.
  7. How will China and its allies handle a mass of competing initiatives? The international development area is increasingly crowded. China is heading an initiative to set up an Asian infrastructure bank, which will probably be headquartered in Shanghai, and where the Chinese are likely to play an overtly leading role (also to counter Japan’s perceived dominance of the Manila-based Asian Development Bank). A big question for China is how the Brics bank will coexist alongside its own heavyweight lending institutions, the Exim Bank and China Development Bank. Cooperation with Brazil’s massive development bank BNDES will be an additional issue to resolve.
  8. What about plans for an Asian monetary fund? Exactly how the Brics bank will fit in with existing programmes developed by the Asean group of southeast Asian countries together with Japan, China and South Korea (Asean plus 3) to activate currency swaps and multilateral assistance to combat short-term monetary shortfalls in the regional grouping is far from clear. In view of political tensions between China and Japan, Beijing regards any means of sidelining Tokyo and gaining extra influence in the region as potentially advantageous, even though this could mean destabilising existing initiatives. 
  9. Where does this leave the developing countries and the IMF? Quota and voting reforms are still becalmed by US congressional intransigence. The Brics countries have just over 10% of votes at the Fund in spite of a share of 24% of the world economy. With emphasis now on the NDB and other new institutions, China and the other developing countries will have less interest in pooling forces to propel a new representative to head the Fund when Christine Lagarde, the managing director, steps down in two years. 
  10. Will Congress now sit up and take notice that developing countries are taking the offensive on international monetary matters? That seems highly unlikely. A few experienced international heads in Washington may turn at the sign that the Brics economies are more than a marketing slogan for fund managers. But in view of the peculiar US combination of antagonism and indifference to the Bretton Woods institutions, as well as the very real political differences among the Brics that could impede the new body’s operations, the most likely response is that Washington collectively will continue to sit on its hands.
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