Can China give BRICS their Own BANK!!

After playing a central role in the Chiang Mai Initiative, China is now the unrivaled protagonist in the nascent bank envisioned by Brazil, Russia, India, China, and South Africa (BRICS). Having divided the responsibilities equitably among the 10 ASEAN countries, Japan and South Korea in May of 2000, China emerged to dominate the scene at the last summit in Durban. The agreement will give rise to a reserve pool of presumably 100 billion dollars. Beijing is expected to deposit 41 billion while Moscow, Delhi, Brasilia, and Pretoria contribute 18 billion each.

Even this time it will involve a multilateral swap line, which is to say an agreement between central banks (obviously with the approval of the respective governments) in order to make the requisite currency liquidity available to the financial institutions and subsequently the private sector. This agreement provides the dual function of stimulating economic activity and acting as a parachute in case of financial stress.

McKinsey reported a 70% decrease in cross-border asset flows since 2007. The ability of this proposed bank to act as an alternative to the World Bank is apparent; the BRICS continue to accuse the World Bank of being the tool used by industrialized countries to control emerging nations. Equally blatant is China’s central and dominant role. The swap lines are burdensome but nevertheless instrumental to the part China aims to take on in the financial markets.

Add to that the revaluation the Renminbi is experiencing– a precise and steady ascent that probably foreshadows a loosening of controls on exchange rates. In reality, the currency swap agreements will have little effect on exchange rates as the operations will eventually be managed through the accumulated reserve pools (compared to these pools, the agreements are a tiny fraction of the whole).
The agreement is important, however, to grow faith in the Renminbi and increase its diffusion as an internationally accepted currency. The swap line with Brazil provides an example: 30 million dollars were deposited in the central banks of the two countries in their respective national currencies. This swap line will secure and finance trade and capital flows, as well as seal China’s supremacy as the Latin American giant’s first commercial partner. Albeit with weaker political motives, even the United Kingdom is getting ready to launch a similar operation after numerous requests to the Bank of England by its principal bankers.

Commercial transactions in Renminbi remain limited—less than 1% of the global currency market (compared to 86% in US dollars)—but expectations are commonly accepted as promising. The possibility that the Renminbi could become one of the primary trade currencies in the next 10 years has persuaded the UK administration and the City that London needs to become an even stronger European market hub for the Chinese banknote. The expansion to other continents will only reinforce what has already been agreed upon in Asia.

In fact, China has already signed swap agreements with 20 countries among which Singapore, Australia, New Zealand, Malaysia, and Japan stand out. Beijing has undoubtedly achieved some very important objectives with the swap lines: it has escaped its reputation as a marginal currency and has drafted instrumental agreements.

All of this should propel the renminbi toward full convertibility, an upgrade in status that will thereby afford greater bargaining room? On the other hand, it would be an error to hide behind its diversity and indefinitely postpone the abolition of controls, and present the image of a country with commercial fortitude but lacking the base stability to venture into international markets without safeguards.

In order to assist its image building, China has been one of the foremost buyers of Gold in the international arena and so have India, Brazil, Russia, and others participating in the Brics venture. It is no wonder that no one has been barking at the US Fed for manipulating the price of Gold in a downward trend in the past year. It has given this club a golden opportunity to acquire Gold stocks at bargain rates at the expense of Gold producers around the world.

One thing is certain when the buying stops and short-term easing in the US economy also ends, the US dollar will face off with the newcomer on the global currency stage. We will be in for some extremely stormy weather to put it mildly, and the day will finally arrive when the US Dollar will have to prove to the world that it can back its perceived worth with actual hard numbers and reserves that can defend it. The world has long known of these facts, but when you're the only bully on the block you are tolerated till this fact changes then the day arrives when it will be time to “pay the piper”.