Development bank expands BRICS platform

Indeed, the bank can act as a responsible player in forming the new world order. But to become influential, a larger capital base than the initial $50 billion is necessary, which can be partially achieved by admitting some developed states as minority shareholders.

The approach of the Asian Development Bank may also be considered. Founded in 1966, the bank, headquartered in Manila, the Philippines, has 67 members and received paid-in capital of only $8.2 billion at the end of 2011. But the members had subscribed $162.5 billion in capital accumulated in the last 45 years, and the remaining $154.3 billion was "callable capital" that can be called anytime if required to meet its obligations incurred on borrowings or guarantees. No such calls have ever been made.

Then an interesting issue arises: in the ensuing capital expansions, should the five BRICS members inject pro-rata funds or allow some degree of variation? Since the five states' economic sizes vary remarkably, especially given China's $3.31 trillion in foreign exchange reserves at the end of 2012, and also because equal capital contribution, whose merit is to install an equal voting mechanism different from the World Bank's structure, will confine the bank's scale and the significance of the role it will play, the amount of future capital injection may vary accordingly.

Meanwhile, China may use an extra portion of its massive foreign exchange reserves to provide debt financing as the bank's additional source of funding, since the bank will issue debt instruments for fundraising from the market to meet its investment needs anyway.

Do not expect the BRICS bank to be a significant profit-maker. As a source of comparison, the Asian Development Bank recorded a net income of $609.5 million in 2011, with return on equity 3.74 percent. Its bottom line was even in the red in 2009 with a loss of $27.5 million. However, although yields from funding by the BRICS bank will be low, they are still higher than investing in US treasuries, currently at 0.15 percent per year for one-year maturities and 0.85 percent for five-year maturities.

The author was a senior economist and head of the Financial Institutions Group at China Merchants Bank head office and is now a partner at Asia Capital Link Equity.

(China Daily 02/21/2013 page8)