670 BRICS Bank challenges Atlanticist hegemony, offers alternative to Vulture Capitalism

BRICS Bank challenges Atlanticist hegemony, offers alternative to
Vulture Capitalism

Newsletter published on 1 August 2014

(1) BRICS set up bank to counter Western hold on global finances
(2) The dollar's 70-year dominance is coming to an end
(3) BRICS Bank challenges Atlanticist hegemony, offers alternative to
Vulture Capitalism
(4) China increases use of Yuan in trade, but won't float it. 70% of
Japan's trade is in Yen

(1) BRICS set up bank to counter Western hold on global finances

http://www.reuters.com/article/2014/07/16/us-brics-summit-bank-idUSKBN0FK08V20140716

By Alonso Soto and Anthony Boadle

FORTALEZA Brazil Wed Jul 16, 2014 12:42am EDT

(L-R) Russian President Vladimir Putin, Indian Prime Minister Narendra
Modi, Brazilian President Dilma Rousseff, Chinese President Xi Jinping
and South African President Jacob Zuma talk at a group photo session
during the 6th BRICS summit in Fortaleza July 15, 2014. REUTERS/Nacho Doce

FORTALEZA Brazil (Reuters) - Leaders of the BRICS emerging market
nations launched a $100 billion development bank and a currency reserve
pool on Tuesday in their first concrete step toward reshaping the
Western-dominated international financial system.

The bank aimed at funding infrastructure projects in developing nations
will be based in Shanghai, and India will preside over its operations
for the first five years, followed by Brazil and then Russia, leaders of
the five-country group announced at a summit.

They also set up a $100 billion currency reserves pool to help countries
forestall short-term liquidity pressures.

The long-awaited bank will be called the New Development Bank.

It is the first major achievement of the BRICS countries - Brazil,
Russia, India, China and South Africa - since they got together in 2009
to press for a bigger say in the global financial order created by
Western powers after World War Two and centered on the International
Monetary Fund and the World Bank.

The BRICS were prompted to seek coordinated action following an exodus
of capital from emerging markets last year, triggered by the scaling
back of U.S. monetary stimulus.

The new bank reflects the growing influence of the BRICS, which account
for almost half the world's population and about one-fifth of global
economic output.

The bank will begin with a subscribed capital of $50 billion divided
equally between its five founders, with an initial total of $10 billion
in cash put in over seven years and $40 billion in guarantees. It is
scheduled to start lending in 2016 and be open to membership by other
countries, but the capital share of the BRICS cannot drop below 55 percent.

The contingency currency pool will be held in the reserves of each BRICS
country and can be shifted to another member to cushion
balance-of-payments difficulties. This initiative gathered momentum
after the reverse in the flows of cheap dollars that fueled a boom in
emerging markets for a decade.

BID TO CONTAIN VOLATILITY

"It will help contain the volatility faced by diverse economies as a
result of the tapering of the United States' policy of monetary
expansion," Brazilian President Dilma Rousseff said.

"It is a sign of the times, which demand reform of the IMF," she told
reporters at the close of the summit.

China, holder of the world's largest foreign exchange reserves, will
contribute the bulk of the contingency currency pool, or $41 billion.
Brazil, India and Russia will chip in $18 billion each and South Africa
$5 billion.

If a need arises, China will be eligible to ask for half of its
contribution, South Africa for double and the remaining countries for
the amount they put in.

China's official Xinhua news agency, citing unidentified sources at the
Chinese Finance Ministry, said the new bank would give developing
countries a greater say in the international financial order, a theme
President Xi Jinping struck ahead of the summit.

The new bank "will promote the global system of economic governance to
develop in a just and fair direction," the agency said.

IMPASSE BROKEN

Negotiations over the headquarters and first presidency lasted until the
eleventh hour due to differences between India and China. The impasse
reflected the trouble Brazil, Russia, India, China and South Africa have
had in reconciling stark economic and political differences that made it
hard for the group to turn rhetoric into concrete action.

"We pulled it off 10 minutes before the end of the game. We reached a
balanced package that is satisfactory to all," a Brazilian diplomat told
Reuters.

Negotiations to create the bank dragged on for more than two years as
Brazil and India fought China's attempts to get a bigger share in the
lender than the others.

In the end, Brazil and India prevailed in keeping equal equity at its
launch, but fears linger that China, the world's No. 2 economy, could
try to assert greater influence over the bank to expand its political
clout abroad. China, however, will not preside over the bank for two
decades.

Facing efforts by leading Western nations to isolate Russia for annexing
Crimea and stirring revolt in eastern Ukraine, the BRICS summit provided
President Vladimir Putin with a welcome geopolitical platform to show he
has friends elsewhere, economic powers seen as shaping the future of the
world.

The BRICS abstained from criticizing Russia over the crisis in Ukraine
and called instead for restraint by all actors so the conflict can be
resolved peacefully.

(Additional reporting by Ben Blanchard in BEIJING; Editing by Tom Brown,
Jonathan Oatis and Richard Borsuk)

(2) The dollar's 70-year dominance is coming to an end

http://www.telegraph.co.uk/finance/comment/liamhalligan/10978178/The-dollars-70-year-dominance-is-coming-to-an-end.html

The dollar's 70-year dominance is coming to an end

Within a decade, greenback's could be replaced as the world's reserve
currency

By Liam Halligan

5:30PM BST 19 Jul 2014

In early July 1944, delegates from 44 countries gathered at the Mount
Washington Hotel in Bretton Woods, New Hampshire. A three-week summit
took place, at which a new system was agreed to regulate the
international monetary and financial order after the Second World War.

The US was already the world’s commercial powerhouse, having eclipsed
the British Empire several decades earlier. America was also on course
to be among the victors of “Europe’s conflict”, even though its economy
was largely unscathed by war. As such, Bretton Woods was US-dominated
and produced a settlement largely on US terms.

Seventy years ago this week, that fateful summit ended. Its close marked
the moment the dollar’s unquestionable supremacy was secured. Since
then, global commerce has been conducted largely in dollars and leading
economies have held the greenback as their primary reserve currency.

The same system remains intact today, with the lion’s share of
commercial settlements worldwide still clearing the US banking system –
even if the parties involved have nothing to do with the States.

The dollar’s hegemony continues to be cemented, meanwhile, by the
operations of the International Monetary Fund and World Bank. Founded at
Bretton Woods, they’re both Washington based, of course, and controlled
by America, despite some Francophone window-dressing.

The advantages this system bestows on the US are enormous. “Reserve
currency status” generates huge demand for dollars from governments and
companies around the world, as they’re needed for reserves and trade.
This has allowed successive American administrations to spend far more,
year-in year-out, than is raised in tax and export revenue.

By the early Seventies, US economic dominance was so assured that even
after President Nixon reneged on the dollar’s previously unshakeable
convertibility into gold, amounting to a massive default, dollar demand
kept growing.

So America doesn’t worry about balance of payments crises, as it can pay
for imports in dollars the Federal Reserve can just print. And
Washington keeps spending willy-nilly, as the world buys ever more
Treasuries on the strength of regulatory imperative and the vast
liquidity and size of the market for US sovereign debt.

It is this “exorbitant privilege” – as French statesman Valéry Giscard
d’Estaing once sourly observed – that has been the bedrock of America’s
post-war hegemony. It is the status of the dollar, above all, that’s
allowed Washington to get its way, putting the financial squeeze on
recalcitrant countries via the IMF while funding foreign wars. To
understand politics and power it pays to follow the money. And for the
past 70 years, the dollar has ruled the roost.

This won’t change anytime soon. Something just took place, though, which
illustrates that dollar reserve currency status won’t last forever and
could be seriously diluted. Last week, seven decades on from Bretton
Woods, the governments of Brazil, Russia, India and China led a
conference in the Brazilian city of Fortaleza to mark the establishment
of a new development bank that, whatever diplomatic niceties are put on
it, is intent on competing with the IMF and World Bank.

It’s long been obvious the BRICs are coming. The total annual output of
these four economies has spiralled in recent years, to an astonishing
$29.6 trillion (£17.3 trillion) last year on a PPP-basis adjusted for
living costs. That’s within spitting distance of the $34.2 trillion
generated by the US and European Union combined.

America’s GDP, incidentally, was $16.8?trillion on World Bank numbers,
and China’s was $16.2?trillion – within a whisker of knocking the US off
its perch. The balance of global economic power is on a knife-edge.
Tomorrow is almost today.

(3) BRICS Bank challenges Atlanticist hegemony, offers alternative to
Vulture Capitalism

http://www.atimes.com/atimes/World/WOR-01-150714.html
http://mycatbirdseat.com/2014/07/65598-brics-against-washington-consensus/

BRICS against Washington consensus

Pepe Escobar July 16, 2014 0

This Russia-China commercial/diplomatic offensive fits the concerted
push towards a multipolar world – side by side with political/economic
South American leaders.

by Pepe Escobar

Asia Times

The headline news is that this Tuesday in Fortaleza, northeast Brazil,
the BRICS group of emerging powers (Brazil, Russia, India, China, South
Africa) fights the (Neoliberal) World (Dis)Order via a new development
bank and a reserve fund set up to offset financial crises.

The devil, of course, is in the details of how they’ll do it.

It’s been a long and winding road since Yekaterinburg in 2009, at their
first summit, up to the BRICS’s long-awaited counterpunch against the
Bretton Woods consensus – the IMF and the World Bank – as well as the
Japan-dominated (but largely responding to US priorities) Asian
Development Bank (ADB).

The BRICS Development Bank – with an initial US$50 billion in capital –
will be not only BRICS-oriented, but invest in infrastructure projects
and sustainable development on a global scale. The model is the
Brazilian BNDES, which supports Brazilian companies investing across
Latin America. In a few years, it will reach a financing capacity of up
to $350 billion. With extra funding especially from Beijing and Moscow,
the new institution could leave the World Bank in the dust. Compare
access to real capital savings to US government’s printed green paper
with no collateral.

And then there’s the agreement establishing a $100 billion pool of
reserve currencies – the Contingent Reserve Arrangement (CRA), described
by Russian Finance Minister Anton Siluanov as “a kind of mini-IMF”.
That’s a non-Washington consensus mechanism to counterpunch capital
flight. For the pool, China will contribute with $41 billion, Brazil,
India and Russia with $18 billion each, and South Africa with $5 billion.

The development bank should be headquartered in Shanghai – although
Mumbai has forcefully tried to make its case (for an Indian take on the
BRICS strategy, see here )

Way beyond economy and finance, this is essentially about geopolitics –
as in emerging powers offering an alternative to the failed Washington
consensus. Or, as consensus apologists say, the BRICS may be able to
“alleviate challenges” they face from the “international financial
system”. The strategy also happens to be one of the key nodes of the
progressively solidified China-Russia alliance, recently featured via
the gas “deal of the century” and at the St. Petersburg economic forum.

Let’s play geopolitical ball

Just as Brazil managed, against plenty of odds, to stage an
unforgettable World Cup – the melting of the national team
notwithstanding – Vladimir Putin and Xi Xinping now come to the
neighborhood to play top class geopolitical ball.

The Kremlin views the bilateral relation with Brasilia as highly
strategic. Putin not only watched the World Cup final in Rio; apart from
Brazilian President Dilma Rousseff, he also met German chancellor Angela
Merkel (they discussed Ukraine in detail). Yet arguably the key member
of Putin’s traveling party is Elvira Nabiulin, president of Russia’s
Central Bank; she is pressing in South America the concept that all
negotiations with the BRICS should bypass the US dollar.

Putin’s extremely powerful, symbolic meeting with Fidel Castro in
Havana, as well as writing off $36 billion in Cuban debt could not have
had a more meaningful impact all across Latin America. Compare it with
the perennial embargo imposed by a vengeful Empire of Chaos.

In South America, Putin is meeting not only with Uruguay’s President
Pepe Mujica – discussing, among other items, the construction of a
deepwater port – but also with Venezuela’s Nicolas Maduro and Bolivia’s
Evo Morales.

Xi Jinping is also on tour, visiting, apart from Brazil, Argentina, Cuba
and Venezuela. What Beijing is saying (and doing) complements Moscow;
Latin America is viewed as highly strategic. That should translate into
more Chinese investment and increased South-South integration.

This Russia-China commercial/diplomatic offensive fits the concerted
push towards a multipolar world – side by side with political/economic
South American leaders. Argentina is a sterling example. While Buenos
Aires, already mired in recession, fights American vulture funds – the
epitome of financial speculation – in New York courthouses, Putin and Xi
come offering investment in everything from railways to the energy industry.

Russia’s energy industry of course needs investment and technology from
private Western multinationals, just as Made in China developed out of
Western investment profiting from a cheap workforce. What the BRICS are
trying to present to the Global South now is a choice; on one side,
financial speculation, vulture funds and the hegemony of the Masters of
the Universe; on the other side, productive capitalism – an alternative
strategy of capitalist development compared to the Triad (US, EU, Japan).

Still, it will be a long way for the BRICS to project a productive model
independent of the casino capitalism speculation “model”, by the way
still recovering from the massive 2007/2008 crisis (the financial bubble
has not burst for good.)

One might view the BRICS’s strategy as a sort of running, constructive
critique of capitalism; how to purge the system from perennially
financing the US fiscal deficit as well as a global militarization
syndrome – related to the Orwellian/Panopticon complex – subordinated to
Washington. As Argentine economist Julio Gambina put it, the key
question is not being emergent, but independent.

In this piece, La Stampa’s Claudio Gallo introduces what could be the
defining issue of the times: how neoliberalism – ruling directly or
indirectly most of the world – is producing a disastrous anthropological
mutation that is plunging us all into global totalitarianism (while
everyone swears by their “freedoms”).

It’s always instructive to come back to Argentina. Argentina is
imprisoned by a chronic foreign debt crisis essentially unleashed by the
IMF over 40 years ago – and now perpetuated by vulture funds. The BRICS
bank and the reserve pool as an alternative to the IMF and World Bank
offer the possibility for dozens of other nations to escape the
Argentine plight. Not to mention the possibility that other emerging
nations such as Indonesia, Malaysia, Iran and Turkey may soon contribute
to both institutions.

No wonder the hegemonic Masters of the Universe gang is uneasy in their
leather chairs. This Financial Times piece neatly summarizes the view
from the City of London – a notorious casino capitalism paradise.

These are heady days in South America in more ways than one. Atlanticist
hegemony will remain part of the picture, of course, but it’s the
BRICS’s strategy that is pointing the way further on down the road. And
still the multipolar wheel keeps rolling along.

(4) China increases use of Yuan in trade, but won't float it. 70% of
Japan's trade is in Yen

http://www.businessspectator.com.au/article/2014/7/16/china/dont-believe-hype-about-renminbi

Don't believe the hype about the renminbi

     * John Lee
     * 16 Jul, 8:15 AM

A report by the Institute of International Finance last week showing
that the use of the Chinese renminbi has become the sixth most used
currency in global transactions is being used to support arguments that
the genuine internationalisation of the RMB is close, rapid and all but
inevitable. I have consistently argued that this is far from the case.

In this article, I will reiterate the argument that we should not get
too excited by RMB internationalisation. Genuine RMB
internationalisation is not possible without genuine and profound
Chinese economic reform. And until that occurs, RMB will remain a niche
and speculative currency rather than one reflecting China’s status as a
great trading nation and the second largest economy in the world.

Let’s start with some numbers. The RMB has become the ninth most traded
foreign currency on foreign exchange markets, in addition to being
number six in all global transactions mentioned above. In 2010, $US34
billion per day was traded, rising to $US120bn per day currently.

This appears a dramatic rise, but from a very low base. Payments in RMB
still only accounts for about 1.6 per cent of forex transactions. In
March 2014, the US dollar accounted for 40.19 per cent and the Euro
31.78 per cent.

Since the majority of transactions in RMB are for the purpose of
settling trade, so-called ‘swap agreements’ with the People’s Bank of
China will become more important. China conducts the majority of its
trade in American dollars, and a small percentage in Japanese yen. In
2012, RMB was used in only 15 per cent of China’s imports and nine per
cent of its exports. (This is in contrast to the US, where 90 per cent
of its trade is in US dollars and Japan where 70 per cent of its trade
is in Japanese yen.)

This means that local currency needs to be converted to the greenback,
and then into RMB (and vice versa) when trading with China. The extra
cost of intermediary conversions to and from the US dollar in IOUs
increases the transactions costs of trade, and precludes businesses from
hedging against rises or falls in the American dollar. It also carries
the additional risk of a liquidity crunch during transactions with China
should American dollars be in short supply into the future, even though
the prospect of this is minimal for the moment.

To minimise transaction costs and other settlement risks, the PBoC has
signed over twenty currency swap agreements with central banks of major
trading partners including Australia. These agreements differ in the
maximum amount of currency available for the swap. They also vary as to
whether the direct swap applies to the principal or only the interest
payment of any IOUs from bilateral trade. But the point of these
agreements – besides providing central banks a buffer against possible
shortages in American dollars required for trade with China – is to
establish a future foundation for importers and exporters to exchange
RMB with local currency without having to sign IOUs that are denominated
in American dollars.

While the vast majority of payments and settlements in RMB are in the
context of trade activity, the emergence of financial centres outside
China and Hong Kong (such as Singapore, Taiwan and London) as a clearing
house for RMB are intended to be more meaningful and extensive than
merely facilitating more efficient payments for trade transactions. In
addition to utilising swap agreements, the prospect is that key
financial centres such as Singapore can emerge as a global financial
centre to buy, sell and ‘park’ RMB-denominated assets whether they be
bonds, shares, IOUs or other assets.

Yet while the RMB is used in increasing but still relatively small
amounts as a medium of exchange in settling trade transactions, it has
virtually no international status as a ‘store of value’ for central
banks to accumulate in official reserves or as an investment currency
for use outside China. Besides using RMB to settle trade invoices,
currency speculators also periodically buy RMB (through illicit use of
the trade account and other methods, otherwise known as ‘hot money’) on
the prospect that the RMB will be partially liberalised and rise in
value. But until the RMB is seen as a legitimate and reliable store of
value, international demand for RMB will not match the top five or six
currencies, meaning that the RMB will have limited relevance and
penetration in financial centres such as Singapore beyond trade purposes.

The genuine internationalisation of the RMB -- and its emergence as a
‘store of value’ for central banks -- is unlikely to occur for a number
of reasons.

First, China still maintains a de facto fixed currency regime linked to
a US dollar dominated 'basket of currencies'. Until this is changed,
there is little incentive to hold too many assets and IOUs in RMB since
the prospect of dramatic appreciation in the value of China’s currency
is slight. Bear in mind that Beijing places significant restrictions on
the band within which conversion rates utilising swap arrangements can
deviate from official, fixed conversion rates for RMB into US dollars.

The prospect for dramatic change in China’s fixed currency regime is
also poor. China’s two largest export markets in America and the EU are
still deleveraging and will grow relatively slowly; and the margins of
its exporters are increasingly suffering from competitors in rising
Asian manufacturing hubs such as Vietnam, Cambodia and Indonesia. To
protect an export-manufacturing sector that employs 50 million people
directly and another 100-150 million people indirectly, Beijing will not
float the RMB and allow it to significantly appreciate into the future.
Besides, rapid appreciation of the RMB against the US dollar would
severely reduce the value of its U.S. dollar-denominated foreign
exchange reserves and dramatically increase the liabilities of the PBoC
vis-à-vis IOUs issued to domestic banks on behalf of exporters as
explained earlier.

Second, foreign governments, firms and individuals will remain reluctant
to hold too much RMB-denominated assets for the simple reason that there
is not much use for the currency outside China (and Hong Kong). This
will remain the case until China opens its capital account, liberalises
its domestic interest-rate regime (deposit and lending rates), and
removes obstacles currently in place to restrict the presence and
operation of foreign firms in Chinese financial and other domestic sectors.

Without an open capital account, foreign holders of RMB-denominated
assets will not be able to transfer capital in and out of China freely
and without restriction. Without a liberalised interest rate regime,
deposit and lending rates in China will remain artificially suppressed,
decreasing the incentive to ‘park’ capital inside China. Without being
able to invest freely and openly in major domestic sectors of the
Chinese economy, there will be limited utility and therefore demand for
RMB-denominated assets for investment purposes.

Due to Beijing’s determination to maintain the dominance of its
state-owned banks in the domestic financial sector, corporate bond
markets within China will remain relatively undeveloped, meaning that
RMB fixed-income options will remain shallow and relatively illiquid
compared to other major currencies.

The point is that until there are deep, lasting and irreversible reforms
to the Chinese political-economy – and there is little evidence of that
so far - the role of the RMB in regional and global financial markets
will be far smaller than it could be given the size of the Chinese
economy. In other words, the much lauded ‘capitalism with Chinese
characteristics’ is preventing China from becoming a global financial
player commensurate with its absolute size.

Until you see hard evidence of reform and opening of the Chinese capital
account, domestic financial system and corporate sectors, ignore
headlines about the rise of the RMB as a genuine international currency.

Dr. John Lee is Adjunct Associate Professor at the University of Sydney,
non-resident senior scholar at the Hudson Institute in Washington DC,
and a Director of the Kokoda Foundation.