BRICS key to global financial overhaul

Leaders laud 'more productive use of global resources'

Financial cooperation agreed upon during the BRICS summit in South Africa this week is a vital step in further reform of the global financial system, and could give developing countries more independence in dealing with global economic issues, experts say.

"BRICS cooperation toward more productive use of global financial resources can make a positive contribution to addressing the challenges of infrastructure development," leaders from Brazil, Russia, India, China and South Africa said in a joint statement in Durban on Wednesday.

Insufficient long-term financing, coupled with a lack of foreign direct investment, especially in capital stock, "constrains global aggregate demand", they said.

Zong Liang, a senior researcher with Bank of China, said: "Hopefully the financial cooperation under the BRICS mechanism will be an important step in reforming the global financial system."

Those reforms started with the establishment of a BRICS development bank, which South Africa's President Jacob Zuma announced in Durban earlier on Wednesday.

"We have agreed to establish the New Development Bank," he said. "The initial capital contribution to the bank should be substantial and sufficient for the bank to be effective in financing infrastructure."

Shen Jiru, a researcher with the Chinese Academy of Social Sciences, said the development bank could give developing countries an alternative to the World Bank and the International Monetary Fund when facing financing difficulties.

"The bank will be a financial institution with global influence. It could play a positive part in promoting global financial reform and reducing dependence on the institutions dominated by Western countries," he said.

"The establishment of a development bank has transformed the BRICS countries from a concept to a solid organization."

The World Bank said earlier that it welcomed the establishment of a BRICS development bank, and stood ready to "work closely with the new bank to end poverty and build shared prosperity throughout the developing world".

"Establishing a development bank is a significant undertaking," the Washington-based global lender said.

Liu Guijin, a former Chinese special representative on African affairs, said the BRICS bank would break the dominance of a global monetary system centered on the US dollar.

"BRICS countries will be able to rely on their own forces so as to forge solid momentum for global economic recovery."

Jeremy Stevens, an economist in Beijing with Standard Bank, said: "But the bank shouldn't be created as a counterweight to development banks such as the World Bank. Instead, it would be an auxiliary funding institution, albeit more aligned to the BRICS development agenda."

The success of the bank will depend on specialization, rather than creating overlapping agendas with other development financing institutions and state policy banks in BRICS countries, he said.

The five countries also announced on Wednesday that they are mulling a $100 billion (78 billion euros) contingent reserve arrangement among BRICS countries, asking their finance ministers and central bank governors to continue working towards its establishment.

Fan Yongming, a BRICS expert with Fudan University, said the contingent reserve was being set up to resolve payment difficulties in case of any foreign exchange shortage the five countries might face.

In addition, Fan said, in case of financial crisis the reserve will play a supplementary role to the IMF, which failed to play its part in the Asian financial crisis in 1998 and the global economic crisis 10 years later.

Yao Shumei, a researcher with the National Development and Reform Commission, said the reserve would also build a firewall for BRICS countries amid quantitative easing adopted by developed economies, and prevent large-scale inflows and outflows of hot money in BRICS economies.

"We will review progress made in these two initiatives at our next meeting in September 2013," BRICS leaders said in a statement.

On the last day of the two-day summit on Wednesday, President Xi Jinping said development potential among BRICS countries is "very promising".

BRICS was only formed five years ago and was still in its formative stages, so it should focus on strengthening ties and not be preoccupied with risks and external disturbance, he said.

Experts said BRICS countries have shifted from being a supporting platform of the G20 to an equally important international mechanism, but that its sound development depends on working with other forums such as the G20.

"A new type of cooperation is imminent," said Zhu Jiejin, a researcher on BRICS studies at Shanghai International Studies University.

"This year's G20 finance ministers' meeting largely centered on short-term issues, such as staving off further quantitative easing and trade protectionism," he said.

"It suggested that emerging markets are extending their agenda in addressing long-term economic tasks, such as global financial system reform and development issues."

The G20 and BRICS should complement one another rather than being mutually exclusive, said Yu Jianhua, a scholar on international relations at Shanghai Academy of Social Sciences.

But experts also warned that the BRICS members are at different stages of development and that their motives for being part of the bloc vary.

China's GDP outweighs the combined GDP of the other four members, but it should avoid that dominance being a cause of political strife with its partners, said Tang Xiaoyang, a researcher on developing countries at Tsinghua University.

There is increasing competition with exports, and Tang said India's export portfolio largely overlaps that of China's, and South Africa has serious concerns that imports from China pose a risk to its own industries.

But larger direct investment exchanges could provide a breakthrough in industrial cooperation among the BRICS countries, a report by the Chinese Academy of Social Sciences said.

"The level of inter-regional investment remains low," said Feng Shaolei, an expert on Russian studies at East China Normal University.

For example, total investment between China and Russia amounts to just $5 billion, just a fraction of the economic interconnection between China and the US, as well as Russia and the EU, he said.

Technical cooperation could be a key area in the future, as each country possesses its own technical advantages, such as telecommunications for China, aerospace for Russia, and IT for India.

Xinhua and Wang Xiaotian contributed to this story.

weitian@chinadaily.com.cn