BRICS bailout fund advances bloc's power, experts say

Creation of a $100 billion contingency fund by Brazil, Russia, India, China and South Africa is a major step in advancing the collective power of the BRICS and will help the international community as well, analysts say.

According to various reports, China will contribute the largest single share - $41 billion - to the fund, which will consist of currency reserves now held by the five countries' central banks. The self-governing fund will be used to respond to financial crises as an alternative to the International Monetary Fund. It was formed with an agreement signed by the BRICS leaders at their summit in Durban, South Africa, on Wednesday.

"The creation of a $100 billion contingency fund is a substantial step for the benefit of the BRICS and the global community beyond," said John Kirton, co-director of the BRICS Research Group at the University of Toronto's Munk School of Global Affairs.

"However, it is still subject to meeting legal requirements in member states and is rather small compared to the new firewall funds recently created at the International Monetary Fund and the European Union," he said.

The BRICS economies represent a fifth of global GDP. China, the world's second-biggest economy, accounts for 9 percent of global GDP, followed by Brazil and India. The large Chinese contribution to the fund is therefore expected, analysts said.

"It is natural that, given China's larger reserves, it may carry a larger share of the contingency fund," said Oliver Stuenkel, a professor of international relations at the Getulio Vargas Foundation in Sao Paulo, Brazil. "For China, it will be a great opportunity to build trust between it and the other emerging powers."

The fund will require each member's central bank to maintain the pooled reserves among its own currency holdings. Finance ministers and central bankers of the BRICS nations were still discussing when the fund will open, South Africa's President Jacob Zuma said at the end of the two-day summit on Wednesday.

While the joint fund's main purpose will be to shore up the finances of a BRICS member if it falls into crisis, it could also "contribute to strengthening the global financial safety net and complement existing international arrangements as an existing line of defense," Zuma told reporters in Durban.

Also during the Tuesday-Wednesday summit, the bloc's two biggest economies, Brazil and China, formally agreed to a bilateral currency swap equivalent to as much as $30 billion, in an effort to expand their trade relationship. The arrangement bypasses conversion into US dollars of transactions involving the Chinese yuan and the Brazilian real.

China in recent years has been actively pushing the internationalization of the yuan. Data from its central bank, the People's Bank of China, showed that cross-border trade settlement in the Chinese currency totaled $467 billion last year, up 41 percent from 2011.

Kirton, the Canada-based BRICS researcher, said the swap arrangement is a "particular benefit to Brazil" given its concerns about currency wars, its capital controls and its rapidly slowing economy.

"Brazil has the resources that China needs, and China has the money to help finance the new infrastructure that Brazil badly needs," he said.

Stuenkel, the Sao Paulo academic, said Chinese-Brazilian trade is likely to grow further in coming years.

"China turned into Brazil's most important trading partner in 2010, and an open and transparent partnership will be important to assuage Brazil's fears that trade with China will contribute to deindustrialization," he said. "Yet many analysts in Brazil also rightly point out that it was only thanks to Chinese demand that Brazil was not hit harder by the economic crisis of 2008 and 2009."

But the BRICS leaders couldn't reach an agreement on a development bank intended to circumvent both the IMF and the World Bank, which the bloc and other developing countries have criticized as being out of touch because of the institutions' domination by Western governments.

Left for future discussion were details including where the development bank would be located or how seed money it would receive. Initial proposals were for each of the five BRICS members to contribute about $10 billion.

"We should vigorously promote the building of a development bank for the prosperity of all countries," said China's President Xi Jinping, who took office two weeks ago and was attending his first BRICS summit. "One tree does not make a forest, and we BRICS should not just seek our own development but work for the development of all countries."

Xi promised China would strengthen its cooperation with the other four members.

"To pursue peace, development and win-win cooperation is our common aspiration and responsibility," he said in a speech.

Kirton said Xi's first full outing on the world stage since becoming president boded well "for the influence and role of China, both in the BRICS and beyond".

"The new government kept building the BRICS on its key projects of a development bank and a financial safety net," he said.

That Xi's first foreign visit was to Russia, before the Durban meeting, was seen as "a strong signal that China is committed to strengthening the emerging-power grouping", Stuenkel said.

"The BRICS grouping depends on China's willingness to contribute to South-South cooperation," he said, referring to the hemisphere where most of the world's developing nations are located. "Steps to institutionalize cooperation are seen in the other BRICS countries as crucial, and we may be expected to see additional structures in the coming years to sustain cooperation."

yuweizhang@chinadailyusa.com