Last week, Brazil, Russia, India, China, and South Africa (the ‘BRICS’) approved the creation of a new development bank during a two-day summit in Fortaleza.
The BRICS Bank will fund infrastructure projects in developing countries; the goal is to lend money at lower rates and with fewer preconditions than the International Monetary Fund (IMF).
The five nations also agreed on the creation of a Contingent Reserve Arrangement with US$100bn initially. China will contribute the most with US$41bn. Brazil, Russia and India will put up US$18bn each, while South Africa will give US$5bn.
A New International Financial System
The creation of the BRICS Development Bank is a concrete step towards a new international financial system, in which emerging markets clamour for a bigger say.
It could even be hailed as the birth of a structure comparable to what was created at Bretton Woods in 1944, when the framework to establish the IMF and IBRD – today part of the World Bank group – was agreed upon.
The BRICS gather 43% of the world population and 21% of the planet’s gross domestic product. They have combined foreign reserves of about US$4.4 trillion. The total trade within the bloc stands at US$6.14 trillion—nearly 17% of the world’s total.
By creating an alternative to existing institutions, the BRICS will offer a counterweight to the United States’ tightly-held grip of the global financial system.
Each BRICS member was compelled, at some point, to make budget cuts so as to meet the strict conditions to qualify for IMF loans. China’s president Xi Jinping thus contended that, with the new bank, the BRICS are improving global economic governance and promoting the democratisation of international relations.
“We need to adjust our economic structure, achieve development of better quality, build closer economic partnership, boost the building of an open world economy and establish a global development partnership,” Xi said during the summit.
Under China’s helm?
Aside from challenging the existing economic setup, the new bank also offers China an opportunity to extend its own global influence.
Despite Brazilian president Dilma Rousseff’s assertion last week that: “I don’t believe the format of the new BRICS bank will promote a new hegemony,” the Development Bank is emblematic of Beijing’s increasing clout in the world — and especially in Latin America.
The Fortaleza Declaration set out that Shanghai will be the headquarters of the new bank. This move is expected to bolster the city’s bid to become an international financial center by 2020.
Notwithstanding that China’s economy has slowed in recent years, it remains the world’s second economy and the main engine of growth. In fact, China’s economy is larger than that of all the other BRICS combined.
The timing of the BRICS summit is significant too. Xi has embarked on a Latin American tour until 23rd July to consolidate China’s relations with key allies like Venezuela, Cuba, and Argentina – all have shunned Western international financial organisations.
On Friday, Xi and Argentina’s president Cristina Fernández de Kirchner inked 19 agreements related to infrastructure, agriculture, finance trade and cooperation, while the Chinese leader is now in Venezuela.
The United Nations’ Economic Commission for Latin America and the Caribbean expects China to become the region’s second largest trade partner by 2015. The report also forecasts that China will buy more than 19% of the region’s total exports in 2020, up from about 8% in 2009.
China interests include securing diversified sources of commodity imports in order to feed 1.3 billion mouths and soothe its massive demand for growth. In this regard, Latin America represents a key supplier of natural resources – soybeans from Argentina, energy from Venezuela for instance – for the world’s second-largest economy.
Bonding with “Pariah” States
Chinese banks already offer an interesting alternative to Latin American states deemed pariahs by international financial organisms because they refuse to bow to creditors. The establishment of the BRICS Development Bank could further strengthen China’s role as a strategic source of financing for less creditworthy nations in the region.
For instance, since the last decade, Argentina has shifted its foreign policy from dependence to the United States to a progressive rapprochement with China and Russia.
Since 2001, international financial markets have shunned Buenos Aires for defaulting on about $100bn of debt. This left the South American country starved of foreign capital from developed nations, allowing China to step in.
“South America, in general, and Argentina in particular, are examples – with the developed world affected by the worst crisis of capitalism – of how it is possible, with policies opposite to those of the neo-liberal block, to advance development processes with economic growth and social inclusion,” explains Fernanda Vallejos, adviser to Argentina’s Ministry of Economy and Finance.
“The BRICS Development Bank will allow the financing of major infrastructure projects that will consolidate the development processes underway, detached from the functioning of traditional organisms,” she says.
China has also contributed to diversifying Venezuela’s international economic relations. Whilst the United States has considered Venezuela a significant challenge to its interests in the Americas, Beijing has become Caracas’ second commercial partner. In March 2014, China agreed to lend Venezuela US$5bn, the third tranche of the China-Venezuela Fund.
Figures from the 2013 China-Latin America Finance Database set out that China lent almost US$100 billion to Latin America between 2005 and 2013. More than half of it was directed to Venezuela.
Similarly, the United States remains deeply distrustful of Cuba since Fidel Castro marched victoriously into Havana in 1959. The island has been absent from leading international financial institutions, like the IMF and the World Bank, regarded as agents of “capitalist imperialism”.
Yet, China agreed in 2004 to give Cuba US$400 million in long-term loans. And since the 1990s, China has invested US$1.3 billion in the island.
A Matter of Time
If China is seeking to expand its influence in Latin America and revive national economies through the BRICS bank, it will have to be patient. The project is currently pending legislative approval in each member country, and this process could take several years.
“The influence of the BRICs will be long term, not short term,” says David Thomas, a BRIC expert based in Australia.
“It will take five years before we will see meaningful outcomes, but in the longer term we will see enormous shifts in capital flows, economic influence and power, and the emergence of the four BRIC countries (and Africa) as the new geo-political leaders,” he explains.