China & the BRICS Bank

1. China & the BRICS Bank The Global Distribution of Power, Growth and Development Gregory Chin Political Science, York University, Canada & SPERI Visiting Fellow

2. 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.”

3. Main points • 1. 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”)

4. Shared Structural Dynamics • BRICS 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

5. 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

6. 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.

7. Infrastructure finance needs • AfDB: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

8. Infrastructure finance needs • G-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) budgets • The 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)

9. Impact of GFC • Private finance for infrastructure has fallen sharply since the 2008-09 GFC • European banks have undergone major deleveraging; has reduced their lending capacity • New Basel III capital requirements for banks will likely cut further into financing for infrastructure • Private bank financing is reportedly at one-third of the amount before the GFC - traditional debt financing is no longer as viable

10. Infrastructure finance needs • Newer 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

11. Failure of G20 process – GFC and After • The 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

12. Patterns of Contestation and Conflict • Contestation within the collective action • Bilateral trade tensions, and industrial and manufacturing competition • Strategic 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?)

13. Contestation • Inside the BRICS Bank over: • 1) the main sources of funding for the new financial institution • 2) a shared definition on the ideal and target borrower (sovereigns only, or also private sector actors • 3) geographical scope of lending) • 4) the bank’s headquarters • 5) the balance and source of staffing • 6) the structure and source of the senior management for the new bank • 7) what currencies the new bank would use to issue its loans. • Tangible practical as well as important symbolic decisions to be made

14. 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 world • thereby 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

15. China’s interests • Diplomatic - 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 resources • Offset the influence of the World Bank, and some other MDBs & help induce reform of global institutions

16. China’s Interests – Convergence of Financial and Monetary Influence • Over 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

17. Currency Cooperation • Chen 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

18. 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

19. China’s Other Options • Promoting reform and realignment of the World Bank • Working more through regional development banks, especially the African Development Bank, Inter-American Development Bank and Caribbean Development Bank • also sub-regional development banks • New Asian Infrastructure Investment Bank (Wang & Chin SPERI Commentary forthcoming) • China as a bilateral actor in providing credit and assistance

20. Unique contribution of the BRICS Bank – Global Power • China 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 balancing • For achieving collective action between the BRICS nations, and with the developing world, for power balancing • Useful mechanism for facilitating rising power collective action, in an extended transition, toward a more decentralized, multi-layered and negotiated world order

21. Thank you