China & the BRICS Bank

China & the BRICS Bank

The Global Distribution of Power, Growth and

Development

Gregory ChinPolitical Science, York University, Canada &

SPERI Visiting Fellow

SPERI 2014“The conference seeks to take discussion

of the political economy of the crisis beyond its British and European contexts to focus centrally on the dynamics and patterns of the distribution of growth and development across the entire global political economy.”

Main points1. The proposed BRICS Bank sheds light on

China’s structural location, and strategic positioning amid the emerging contours of global power, and global distribution of growth and development

2. What has been the impact of the 2008-09 GFC on the cooperative/collective action of China and the rising states (the “BRICS”)

Shared Structural DynamicsBRICS Bank as institutional microcosm for

analyzing key patterns of power, growth and development in the world economy: (1) a shift in the balance of power in the world

economy (2) the emergence of not only China as a rising power,

but also a broader group of rising states (the “BRICS”)(3) the systemic need for medium to long-term

development finance, especially in the area of infrastructure finance – needed to sustain the rise of the BRICS, and growth in other developing countries

Shared Structural Dynamics(4) the financial deficit in the established

sources of development finance & failure of the existing “premier” global summitry mechanism to deliver on infrastructure finance

(5) the differing but complementary interests of the respective BRICS states, in a BRICS bank

Infrastructure finance needs ‘Return to fundamentals’ that has

come in the wake of the 2008-09 GFC

Growing appreciation of the huge deficit in infrastructure investment in the developing world

Heavy investment in infrastructure was key factor in driving sustained growth and modernization for all of the traditional economic powers, as well as for recent risers in Northeast Asia

Yet major shortfalls in infrastructure financing for current developing countries.

Infrastructure finance needsAfDB: only a third of the continent’s rural population has

access to roads, less than 40% of Africans have access to electricity, only 5% of agriculture is under irrigation, only 34% of the population has access to improved sanitation, and about 65% to clean water (Kaberuka, 2011)

AfDB President Donald Kaberuka estimates it will cost at least $93 billion per year until 2020 to bring infrastructure in Africa on par with low- and middle-income countries in other regions

Infrastructure finance needsG-24 Secretariat: around US$1-1.5 trillion in infrastructure

investment per year will be needed to sustain the current growth trajectory in the developing world, while the total amount actually invested is about US$800 billion (Battacharya and Romani, 2013)

Currently, the bulk is provided via public (state) budgetsThe amount contributed per year from private sources of

finance and development institutions is about US$250 billion

G-24 estimates that the BRICS economies provide about US$70-80 billion per year (may be overestimate)

Impact of GFCPrivate finance for infrastructure has fallen sharply since

the 2008-09 GFCEuropean banks have undergone major deleveraging; has

reduced their lending capacityNew Basel III capital requirements for banks will likely cut

further into financing for infrastructurePrivate bank financing is reportedly at one-third of the

amount before the GFC - traditional debt financing is no longer as viable

Infrastructure finance needsNewer sources of finance, e.g. sovereign wealth funds,

and pension funds, with around $75 trillion in pension fund assets, but almost none goes to infrastructure

Exceedingly difficult to get these fund managers to invest in infrastructure in the South.

Bilateral official development assistance (ODA) and the multilateral development banks (MDBs) are now providing very limited infrastructure financing, especially for greenfield projects

Failure of G20 process – GFC and AfterThe Leaders of the G20 countries agree to address

infrastructure needs at the Seoul G20 Summit in November 2010

But no follow through at Cannes Summit in 2011 or Los Cabos Summit in 2012

What happens when African officials try to approach the World Bank for support on infrastructure development in the spirit of the G20 instruction

Patterns of Contestation and ConflictContestation within the collective actionBilateral trade tensions, and industrial and

manufacturing competitionStrategic positioning on environmental

protection & climate change (Brazil vs. India & China)

Intra-regional competition (Russia, China over Central Asia; India and China over SE and South Asia)

Bilateral contestation – interstate rivalry in Africa between Brazil, India, China, South Africa and even Russia (also in Latin & Central America?)

Contestation Inside the BRICS Bank over:

1) the main sources of funding for the new financial institution2) a shared definition on the ideal and target borrower

(sovereigns only, or also private sector actors3) geographical scope of lending)4) the bank’s headquarters5) the balance and source of staffing6) the structure and source of the senior management for the

new bank7) what currencies the new bank would use to issue its loans.

Tangible practical as well as important symbolic decisions to be made

China’s Interests Material Needs - Open new avenues for its engineering

and construction companies, stimulate job creation, and redirect a portion of its massive foreign currency reserves to productive purposes

Strategic - Chinese take long view on the BDB, seeing the bank as useful for driving sustained and stable growth in the developing worldthereby helping to provide the alternative markets and

trading partners that China wishes to cultivate, to allow for diversification beyond the traditional consumers of last resort

China’s interestsDiplomatic - BRICS Bank as a way to redistribute some of

China’s massive surpluses, to reduce the heat from the major deficit countries, and to build stronger ties with other developing countries, and to secure resourcesOffset the influence of the World Bank, and some other

MDBs & help induce reform of global institutions

China’s Interests – Convergence of Financial and Monetary InfluenceOver the last decade, the China Development Bank (CDB)

and China Eximbank have funded infrastructure development in other parts of the developing world (Chin, also Brautigam and Gallagher 2014)

Bank as potential platform for the BRICS nations to experiment with using their own currencies to settle trade and investment among themselves, and with other developing countries

Currency CooperationChen Yuan, chairman of CDB

(and a former central bank vice governor), at the Sanya BRICs Summit in 2011 that: “It is in the interest of all to practice lending and settlement in local [their own national] currencies”

Chen urged the BRICS nations to increase multicurrency trade settlement and lending in a “practical and efficient way”

Pledged that CDB would lend around RMB10 billion (US$1.53 billion) to the other 4 BRICS members by end of 2011

Challenges for China - Balancing Reality is that a US$10 billion contribution

amounts to 2.5% of GDP for South Africa (2012), while it amounts to a meager 0.12% of GDP for China (2012)

Thus creating disproportionate pressure on the BRICS member states.

The unavoidable reality is that China’s economy (2012) is about 25% larger than the other four BRICS economies combined, and 22 times larger than the South African

China is an economic giant among the BRICS

Reality is that China is a superpower already – part of a de facto “G2”

If China moves rapidly in any direction, raises the concern and suspicion of other states in the BRICS – India is getting “wet feet” about the BRICS bank

China’s Other OptionsPromoting reform and realignment of the World BankWorking more through regional development banks,

especially the African Development Bank, Inter-American Development Bank and Caribbean Development Bankalso sub-regional development banks

New Asian Infrastructure Investment Bank (Wang & Chin SPERI Commentary forthcoming)

China as a bilateral actor in providing credit and assistance

Unique contribution of the BRICS Bank – Global PowerChina can achieve its aims and advance its interests

through the other international institutional mechanisms . . .but

a BRICS Bank is particularly useful for counter-balancing the United States, collectively, in a world of power balancingFor achieving collective action between the BRICS nations,

and with the developing world, for power balancingUseful mechanism for facilitating rising power collective

action, in an extended transition, toward a more decentralized, multi-layered and negotiated world order

Thank you