China’s giant role in 2 new finance institutions

The sixth BRICS (Brazil, Russia, India, China, South Africa) summit began July 14 in Brazil. The three-day summit was expected to see plans finalized for a new financial institution to be known as the BRICS Development Bank and a currency pool to be known as the Contingency Reserve Arrangement. The moves are a part of an ongoing process by which non-Western developing countries are seeking to build mechanisms for loans with fewer conditions than those issued by multilateral Western institutions. It also represents an effort to create insulation from potential fallout from future crises in the Western-led financial system, which BRICS’ efforts notwithstanding will continue to dominate the world’s financial markets. Within the new BRICS mechanism itself, China will dominate given that its economy and financial power dwarfs those of the other BRICS members.

Many details of the BRICS Development Bank and Contingency Reserve Arrangement have surfaced ahead of their finalization. The bank will start lending in 2016 with an initial capital base of $50 billion ($10 billion will come from each member), with plans to increase the capitalization to $100 billion over the next five years. Each country will not, however, have an equal share in the $100 billion Contingency Reserve Arrangement. Instead, contributions there will be based on the size of each country’s economy, thus China will contribute $41 billion of the total. Both mechanisms will help alleviate challenges the BRICS countries face from the international financial system.