BRICS creates bank in bid to counter West's influence

Development bank to be based in Shanghai, crisis fund also planned
The Straits Times, 17 Jul 2014

RIO DE JANEIRO - The leaders of Brazil, Russia, India, China and South Africa (BRICS) have announced that they are establishing a development bank to challenge the influence of venerable institutions such as the World Bank and the International Monetary Fund.

The New Development Bank, which will be based in Shanghai, will open with an initial capitalisation of US$50 billion (S$62 billion).

India will name the first president, according to a statement from the leaders of the BRICS group of nations who had gathered in the north-eastern Brazilian city of Fortaleza.

The first chairman of the board of governors will be from Russia, while the first chairman of the board of directors will be Brazilian.

South Africa will establish an African regional centre for the bank, which is scheduled to start lending only in 2016 as its establishment must first be ratified by each BRICS country's legislature.

The five-nation bloc also said that it would create a US$100 billion fund of currency reserves for members to use during balance of payment crises.

Each member country has the right to withdraw different amounts from the joint currency reserves, according to a statement from Brazil's central bank.

Unlike the IMF and World Bank, which are managed by Europeans and Americans, the BRICS bank "is quite democratic", Brazilian Finance Minister Guido Mantega told reporters on Tuesday following the announcement.

Pointing to concerns that the US Federal Reserve was stepping back in its efforts to stimulate the US economy, Brazil's President Dilma Rousseff said the new fund could mitigate the volatility that could emerge from such shifts.

The move coincides with a slowing of economic growth in the five member countries to about 5.4 per cent this year from 10.7 per cent in 2007.

Taken together, the New Development Bank and the contingency fund reflect ambitions of forging a new global economic framework.

China's official news agency Xinhua cited Western dominance of the international financial system as the motivation.

Hong Kong's pro-China Wen Wei Po newspaper said the BRICS choice of China's commercial hub for the headquarters symbolised the rise of the country, now the world's second-largest economy.

Leaders of the BRICS group held a summit yesterday with South American presidents in Brasilia, bringing together nations seeking alternatives to US influence in the region.

"It's an opportunity for Brazil to show that it's not just interested in BRICS but that it is betting on integration and what benefits the region," said foreign relations professor Oliver Stuenkel of the Getulio Vargas Foundation.

For Chinese President Xi Jinping, the meetings represented a new push by Beijing to gain clout in a region traditionally seen as a US backyard.

The new financial mechanisms created by BRICS could benefit Argentina, which is at risk of defaulting on US$1.3 billion in debts after losing a US Supreme Court battle with hedge funds seen as "vultures" by Buenos Aires.

NEW YORK TIMES, AGENCE FRANCE-PRESSE, BLOOMBERG

Balancing act for China with birth of new BRICS bank
It needs to play leader without dominating
By Rachel Chang In Beijing, The Straits Times, 17 Jul 2014

CHINA has scored a big geopolitical win in its drive to rebalance the global playing field with the establishment of the new BRICS development bank this week.

But with the counterweight to Western-dominated global financial institutions now a reality, China faces the tough balancing act of asserting leadership of the new bank while reassuring its BRICS partners that they have not swapped one hegemon for another, said mainland analysts yesterday.

Already, domestic pressure in Brazil - where the deal to establish the long-awaited New Development Bank (NDB) was signed on Wednesday - has built on President Dilma Rousseff to extract significant concessions in bilateral talks with Chinese President Xi Jinping this week, in exchange for its diplomats having delivered the NDB agreement.

The other BRICS countries are India, Russia and South Africa.

"In negotiations over the bank, China made significant concessions because it did not want its partners to worry that it will be too dominant," noted Shanghai Institute for International Studies research fellow Liu Zongyi.

While the NDB's headquarters will be in Shanghai, an Indian will be its first president and the rotating role will not go to China for at least 15 years. In addition, China has contributed the lion's share of US$41 billion (S$51 billion) - out of its almost US$4 trillion in foreign exchange reserves - to the NDB's US$100 billion joint currency reserves. Brazil, India and Russia will each give US$18 billion, while South Africa will contribute US$5 billion.

The joint currency reserves can be drawn on by member nations to combat balance of payment crises that could arise when the United States raises its interest rates, causing an outflow of global funds from their financial markets.

Separately, the NDB will have a fund of US$50 billion - made up of US$10 billion from each BRICS nation - to lend out to other countries for development projects.

"China can actually do all of this - spend its foreign reserves, lend money to other countries - by itself," said academic adviser Shen Dingli of Fudan University's Centre for BRICS Studies. "In getting the rest on board and giving them equal voting shares, it is showing that it is sincere about wanting a multilateral world. What can the US say now?"

Still, analysts said the NDB will have to tread lightly in its initial days, given the strategic and political differences that still exist among the five BRICS nations.

"The initial projects must be minor, politically neutral ones like infrastructural projects in small, developing countries," said East Asian Institute analyst Chen Gang.

"The real political tension will emerge when the member countries borrow from the NDB to finance major, strategic projects in their territories, as they still view one another as strategic threats."

Besides, each BRICS country has the right to veto major decisions at the NDB. But mainland observers were confident that the BRICS' over-arching goal of diluting Western influence in the global financial architecture and over their own emerging economies is a big enough shared priority that would outweigh their differences.

After all, the catalyst to realise the new bank this year, after negotiations since 2012, was the refusal of the US Congress to ratify changes that would more fairly distribute voting rights at the International Monetary Fund, said experts. Designed in the post-war period before the emergence of the BRICS nations, the IMF currently allots only 10.3 per cent of votes to them in total, although they account for a quarter of the world economy.