Will the BRICS Development Bank Turn the Renminbi into a Reserve Currency?

On July 15th plans for a BRICS Development Bank were announced at the BRICS Summit in Fortaleza Brazil. It is likely that this bank could serve as a mechanism for China to transform the renminbi into a reserve currency while delaying the liberalization of the Chinese economy and protecting Beijing’s interests in regions such as Sub-Saharan Africa and Latin America. Though the bank will presumably pay lip service to the concept that all BRICS currencies are equal the fact that China is contributing $41 Billion of the $100 Billion capitalization for the bank means that this is not a partnerships of equals. In Beijing’s ideal world the bank would be viewed as democracy as this would demonstrate that China is not a hegemon, however, the reality is that the BRICS members have very different levels of economic development as well as conflicting interests. The fact that mutual opposition to the dominance of the World Bank and IMF united them does not mean that they will always find consensus. China will presumably dominant the BRICS Development Bank for the same reasons the United States dominates the Bretton Woods Organizations, namely, they provide more capital than other donors and can use these organizations to advance their own interests. One of Beijing’s goals is the internationalization of the renminbi. The bank could help China achieve this objective.

If China wants to be a super power the renminbi must be a reserve currency like the US Dollar and the Euro. Thus far the Chinese have been reluctant to liberalize their economy as it would weaken the Communist Party as well as other powerful interests, such as the heads of state owned industries and governmental ministries, all of whom would lose wealth and influence. Though Chinese President Xi Jinping has been launching an aggressive anti-corruption campaign many large state owned companies and their supporters in the upper echelons of the Chinese Communist Party still remain influential. The corruption crackdown is unlikely to completely change this reality. Liberalization would also likely encourage greater transparency which would raise further questions about the validity of Chinese economic indicators, the sustainability of the country’s shadow banking sector, and the reality that China’s property bubble could be bursting. All of these questions would run contrary to Beijing’s interests.  By making the BRICS Development Bank denominate loans in renminbi China could start the transformation of its currency into a reserve currency without necessarily making politically difficult reforms at home. The internationalization of the renminbi could also help China in its dealings abroad as it would no longer have to exchange renminbis for US Dollars or Euros to conduct transactions thus making Beijing less dependent upon the monetary policies of foreign powers. Such a shift would be helpful in China’s dealings abroad.

In recent decades China’s interests have expanded far beyond East and Southeast Asia. China has loaned and invested billions of dollars in Sub-Saharan Africa to develop infrastructure and the extractive industries. There is no indication that this trend will slow. In July Xi Jinping made a tour of Latin America where he proposed a $20 Billion dollar infrastructure fund and $5 Billion Chinese-Latin American cooperation fund to facilitate investment in Latin America. Creating a context where it is easier to conduct business using the renminbi is clearly in China’s interest as well as countries that China is investing in especially as trade with these countries is likely to grow.

In recent decades much talk has been made about China’s rise. The reality is that China is not becoming abnormally strong. The country has in fact been abnormally weak and is in the process of attaining the status that a country with its population, resource base, and geographic location should have. We have already seen Beijing increase its military spending and investment in other regions of the world. If China wants to be a great power (which it does) internationalizing its currency is a crucial step. The BRICS Development Bank could be a game changer even if it does not live up to its full potential. The bank’s ability to provide funding for infrastructure in the developing world will be crucial to economic development and global trade. The BRICS Development Bank will also be a symbolic reminder that the Post World War II construct of international organizations, such as the United Nations and the Bretton Woods Organizations, does not reflect the current world order. These factors are important but the emergence of a new reserve currency of global significance would be no less of a game changer.