Competing interests between BRICS nations could lead to challenges for new bank: analysts

Low capitalisation and possible rivalry among members could hold it back, analysts say

PUBLISHED : Monday, 21 July, 2014, 3:18am
UPDATED : Monday, 21 July, 2014, 8:45am

Last week leaders from five emerging economies celebrated the birth of a new bank on the block.

The New Development Bank is intended to rival Western-led financial institutions and become a more sympathetic alternative for developing countries and a platform for China to exert greater global prowess.

But it faces an uphill battle, analysts say. Potential competing interests among the five so-called BRICS nations, and the bank's relatively small initial capitalisation, present obstacles, they say.

Founded by Brazil, Russia, India, China and South Africa, the bank will start lending by 2016 with an initial capitalisation of US$50 billion and a US$100 billion emergency reserve fund.

Despite disagreement about the location of the bank's headquarters, Shanghai was chosen in the end.

The bank's declaration says all member states will play equal roles. India will provide the first president, while the first chairman of the board of governors will be from Russia, and the first chairman of the board of directors chosen by Brazil.

It takes a long time and intense negotiation for such issues to be settled
Oliver Rui, finance professor

According to a People's Bank of China spokesman, all members would have equal share of voting rights in the new bank. But for the Contingent Reserve Arrangement, a US$100 billion pool to help countries facing short-term liquidity pressures, China would have the largest voting right - 39.5 per cent.

Any such friction could undermine the lender's growth.

Oliver Rui, a professor of finance and accounting at the China Europe International Business School in Shanghai, said nations seeking to cast a more influential role and leverage could present a hurdle.

"It takes a long time and intense negotiation for such issues to be settled," Rui said. "It's not easy at all."

But he said such questions would not prevent the bank from providing financing to developing nations.

No consensus has emerged on which nations will be the initial recipients of the loans. The founders have said any nation can apply for assistance, but some scholars say the bank is unlikely to lend outside the BRICS grouping, at least initially.

In either case, the bank's capitalisation will limit the reach of the institution. Zhu Jiejin, a researcher with the Centre for BRICS Studies at Fudan University in Shanghai, said the bank's financial size would not be enough to make a big impact on the five emerging economies.

"It might take 20 years before the real impact of the New Development Bank can be felt around the world," Zhu said. "But the establishment of the bank is certainly in line with China's strategy to play a bigger role in the world."

Cao Heping, a professor of economics at Peking University, said the small initial capitalisation would mean the bank could only prioritise projects within its founding members. "The US$50 billion could only fund five to six projects in China," he said.

The existing international development financing system is centred on the World Bank and the International Monetary Fund, set up 70 years ago. But many also see the new bank as an attempt by China to challenge what it views as a US-led system.

Professor Stephany Griffith-Jones, an economist at the Initiative for Policy Dialogue at Columbia University, said huge infrastructure needs in the developing world provided room for more institutions like the BRICS bank.

"We talk about competition in the private sector, we encourage that, and we should have competition in the public sector too."

She said that while the World Bank had in the past enforced conditions that were not always in the developing countries' best interests, the new bank might offer an alternative that is more sympathetic to such clients.

"They [BRICS countries] may have more sympathy to developing countries because they have undergone, or are undergoing, development themselves," Griffith-Jones said.