Ref. :  000038492
Date :  2015-07-15
Language :  English
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The pending affaire of BRICS: star the world economy’s yuan-ization

imageMuch ink has been spilled in the international press about BRICS. There is no doubt that the five party block has increased its participation in the world economy in recent years, competing directly with the United States and the European Union. Nevertheless, the details of the new development bank and the Contingent Reserve Arrangement indicate that its members are reluctant to abandon the orbit of the dollar in order, by so doing, to destroy the shell of the Bretton Woods Institutions.

In the Russian city of Ufa, almost at the foot of the Ural Mountains the heads of BRICS were assembled, made up of Brazil, Russia, India, China and South Africa, and the Shanghai Cooperation Organization (SCO), which includes China, Kirghizistan, Russia, Tajikistan and Uzbekistan.

Regarding financial cooperation, BRICS announced the details of its new development bank, along with the Contingent Reserve Arrangement. Nevertheless, the modus operandi of both institutions reveals that neither promotes the process of global de-dollarization[1]. The credits of the new BRICS development bank are denominated in dollars, and the same is true of the liquidity provided by the Contingent Reserve Arrangement, that in addition needs the backing[2] of the International Monetary Fund (IMF) in order to act as the stabilizer for the balance of payments of BRICS[3].

On the other hand if China undermines –alone– the domination of the dollar through the yuan-ization of the world economy. They can establish exchange of money (‘swap’) of a bilateral character between central banks, or establish banks of direct liquidation (‘clearing banks’), or authorizing licenses to participate in the Renminbi Qualified Foreign Institutional Investor program (RQFII), the “people’s currency” (‘renminbi’) the way is opened.

Nevertheless, it must be remembered that China promotes the yuan only through bilateral deals, wasting the extraordinary potential of its institutions for the financing of infrastructure, supported mostly by emerging economies. The credit operations of the Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund, and the new BRICS development bank all work in dollars.

Hence, although it is certain that for the quantity of resources at the disposition of the three institutions (240 billion US dollars), China challenges the power of the IMF and the World Bank, even as it carries on its shoulders the US dollar Imperium, the cornerstone of the International Monetary System established in 1944.

Within BRICS the impulse of the yuan is marginal. To date no member of BRICS has shown any desire to participate in the RQFII. Only last week the Republic of South Africa became the first BRICS member to install a bank of direct liquidation (‘clearing bank’) to facilitate operations in yuan.

In the case of India, neither the geographical proximity nor the geo-economical complementarity with China urged the Prime Minister, Narendra Modi, to request a ‘swap’ agreement at the doors of the People’s Bank of China (PBOC) in order to protect his country from the dollar’s volatility.

Why is there resistance to support the yuan? What happened with the cooperation in the block? According to the FMI, the combined GDP of BRICS reached 16.9 billion US dollars (at current prices) in 2014, a quantity that represents one fourth (27%) of the world GDP. Although the rates of accumulation of capital have been diminished, the BRICS contributed half of the growth of the world economy over the last decade.

However, these historical registers contrast with the low volume of trade and investment among the BRICS countries. While the exports of BRICS (336 billion US dollars) constitute 16% of global exports, the interchange of merchandise intra-block hardly represents 1.5% of the world total.

The same thing is true of investment, with the exception of the multi-million dollar projects launched by China; the flows of capital between Brazil, Russia, India and South Africa are very small, less than 5% of the total invested by the four countries according to data from the United Nations Conference on Trade and Development (UNCTAD).

In the face of this scenario, it is necessary that BRICS assume the engagement for tree fundamental tasks. In the first place, BRICS should accelerate the construction of an "integral economic association"[4] to deepen industrial, technological, energetic and financial cooperation, etc.

In the second place, the creation of a Free Trade Area (FTA) of BRICS would be a decisive step with vistas of increasing economic ties among the members of the five-party block[5]. In this sense, China should increase the amount of their imports in order to lessen commercial imbalances[6].

In the third place, it is urgent to abandon the orbit of the dollar. Either creating a "basket of exchange" or promoting the use of the yuan[7], BRICS should begin to challenge the hegemony of the North American currency[8].

In definitive, if BRICS continues without putting the yuan in the greater part of its transactions, it will be impossible that future initiatives of finance of infrastructure (AIIB, the Silk Route Fund and the BRICS development bank) undertaken by China will become the ingredients of a multipolar monetary system.

(Translated for ALAI by Jordan Bishop)

- Ariel Noyola Rodríguez is an economist graduated from the National Autonomous University of Mexico.

Contact: Twitter: @noyola_ariel.

[1] «BRICS and the Fiction of “De-Dollarization”», Michel Chossudovsky, Global Research, April 8, 2015.

[2] «Los beneficiarios del fondo BRICS deberán atenerse a los consejos del FMI», Sputnik Mundo, 9 de julio de 2015.

[3] «The US still decides the future of capitalism, not the G20, and not the Brics nations», Leo Panitch, The Guardian, August 27, 2014.

[4] «The Strategy for BRICS Economic Partnership», Official website of Russia’s Presidency in BRICS, July 2015.

[5] «‘BRICS Free Trade Zone’ being considered: Russia», The BRICS Post, July 6, 2015.

[6] «Xi pushes BRICS potential», Chen Heying, The Global Times, July 9, 2015.

[7] «Ufa could be the yuan moment», Jagannath Panda, The Hindu, July 7, 2015.

[8] «The Brics are building a challenge to western economic supremacy», Radhika Desai, The Guardian, April 2, 2013.

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