BRICS bank boosts Shanghai's profile, vies for more clout

The BRICS's answer to an emerging market infrastructure funding facility became a reality this week, with the announcement that a development bank would be established and headquartered in Shanghai.[Special coverage]

The bank has the potential of gaining greater sway in global finance that matches with the bloc's growing economic might.

The BRICS emerging economy nations - Brazil, Russia, India, China and South Africa - have agreed to headquarter the development bank in China's financial hub Shanghai. India will get the bank's first presidency and a regional office will open in South Africa.

"It is only natural for the headquarters to go to Shanghai. Of all the BRICS nations, China is the most populous country and the size of the economy is also the largest," said Zhang Haibing, a researcher with the Shanghai Institutes for International Studies.

Shanghai has aspired to join the ranks of regional financial centers. "A lot of international organizations operate in cities like New York, Tokyo and London. A city cannot truly become an international metropolis without the presence of global institutions, so the BRICS bank is what Shanghai needs to boost its global profile," said Zhang.

Analysts say Shanghai will have to make itself more friendly to international institutions. Improvements will include increasing its openness and better governance, while policies and services should be adapted to meet the needs of an international workforce.

The bank, according to Zhang, will also have potential to add jobs in a range of services, such as hospitality, catering, and conferences. Also,young people will gain more exposure to global opportunities in Shanghai. "It will allow aspiring Chinese professionals to work at international financial institutions within Chinese borders," she said.

The BRICS nations constitute one fifth of the world's economic output and account for half of global economic growth. Yet their representation at the International Monetary Fund (IMF) does not match their growing economic might.

Developing countries have long complained that loans from organizations like the World Bank have always come with strings attached and thus advocated reforms at these institutions.

"The establishment of a BRICS bank may spur the IMF and World Bank to do more to address the concerns of the large, fast-growing emerging economies," said Mark Williams, chief Asia economist at Capital Economics, in an e-mail to Xinhua.

The move to create a development bank for emerging economies marks a shift in how BRICS nations seek solutions to fund their infrastructure programs as frustration has mounted over the slow-moving reforms at established funding facilities.

"Credit supply for infrastructure programs remains tight across the world. The World Bank and some other regional funds have limited resources and the assistance sometimes is not provided in a way to serve the best interests of developing nations," said Zha Xiaogang, head of the Shanghai-based Institute for World Economy Studies.

Jim Yong Kim, president of the World Bank Group, said at a press conference in Beijing last week that the World Bank welcomes new establishments like the BRICS bank and would work with them once they became a reality to meet the infrastructure needs of developing economies.

Kim said the investments currently extended by organizations such as the World Bank to help infrastructure building in developing countries is far from enough to meet these countries' needs, estimated to be above 1 trillion U.S. dollars each year.

The BRICS nations will commit 100 billion U.S. dollars to the bank, which is expected to start lending in 2016. An initial subscribed capital of 50 billion U.S. dollars will be equally shared by the five countries.

"While the BRICS bank may not cover the total financing needs of all emerging economies, a 100 billion fund is enough to make a difference to the infrastructure projects in some smaller emerging economies with fiscal problems and a volatile currency," Zha said.

He added that China would also provide valuable input to infrastructure building across emerging countries as its own infrastructure construction, along with exports, had kept economic growth at a double digit rate for about a decade.

"When it comes to infrastructure, China has had unrivaled advantages, given its technical capabilities and experiences gained from various projects. Experiences gained through working on complicated terrains have also added to China's sophistication in infrastructure building across a broad range of geographical conditions," Zhang Haibing said.

Yet analysts say China would also share with other emerging economies some of the problems it has been struggling with in building infrastructure, particularly risks stemming from reckless financing by local governments and low efficiency caused by mis-allocation of resources.

There are also concerns over how the newly created fund will differ from existing lenders that have been actively funding infrastructure projects in the developing world.

"It is not clear to me what a BRICS bank can offer that the China Development Bank or Brazilian Development Bank doesn't already offer. They are both already big players," Mark Williams said.

"The only difference it seems to me is that the interventions of a BRICS bank will have a more multilateral feel, but we'll have to wait and see whether in practice the need to achieve a consensus between the BRICS nations over priorities is a hindrance or a help," he added.

The difficulties to strike a consensus among the group of nations are already evident in the debate over where to headquarter the bank just hours ahead of its declaration. Coordinating the various and sometimes, competing demands among BRICS nations could pose challenges ahead.

"It's normal to have differences among nations. The fact that BRICS nations are taking time to reach an agreement speaks of their prudence in decision-making. After all, there are geopolitical and economic stakes involved," said Zhang Haibing.