OREANDA-NEWS. August 04, 2014. On behalf of the Chinese Government, Governor Zhou Xiaochuan signed the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement together with representatives from other BRICS countries.

The PBC’s spokesperson answered press questions on the Contingent Reserve Arrangement. The following is the questions and answers.

Q: On July 15, the BRICS leaders witnessed, during their sixth summit meeting in Fortaleza, Brazil, the signing of two documents, i.e. one on the creation of a new development bank, another on the establishment of a BRICS Contingent Reserve Arrangement (CRA). In what ways are the development bank and the CRA different, and how are they related to one another?

A: The creation of a BRICS development bank and CRA are two major results in implementing the consensus of BRICS leaders and deepening pragmatic cooperation among the BRICS countries. As a manifestation of the strategic trust among the BRICS, the two initiatives will create more rooms to deepen the common interests and expand the cooperation among the five countries.

As two separate arrangements independent from one another, the Development Bank and the CRA are different in terms of purposes, size, operational and decision making mechanisms. First of all, the BRICS Development Bank is to provide long-term development financing to support infrastructure building and sustainable development in BRICS countries, other emerging and developing economies; the CRA is established for the purpose of maintaining financial stability through providing short-term liquidity support to a member that faces pressure in the BOP account. Secondly, the starting capital of the BRICS Development Bank will be USD50 billion to be shared equally among the five countries whereas the initial total committed resources of the CRA is USD100 billion, composed of individual commitments as follows: China (USD41 billion), Brazil, India and Russia (USD18 billion each), and South Africa(USD5 billion). Thirdly, members of the Development Bank need to subscribe to paid-in capital according to a certain proportion and make the payment at the time of the establishment of the Bank to support is daily operation whereas the establishment of the CRA does not imply any outright transfer of international reserves. The committed resources of CRA will only be drawn through a currency swap if a member requests for assistance and meets certain condition. Fourthly, in the BRICS Development Bank, the equity and voting power are shared equally among all the members, and its governance structure include a Board of Governors, Executive Board and management; as for the CRA, its governance structure includes a Council of CRA Governors (Governing Council) and a standing committee, and the CRA distributes 5 percent of the total voting power equally among the members, with the remainder of the voting power to be distributed according to the relative size of individual commitments. As China’s commitment of resources is the largest among all CRA members, China has largest share of voting power. Finally, the BRICS Development Bank will engage in investment and financing business to support infrastructure development whereas the CRA is a monetary cooperation framework based on multilateral currency swap and has drawn on the experience of regional mechanism of monetary cooperation including the multilateralization of the Chiang Mai Initiative.

Q: Why have the BRICS decided on establishing a Contingent Reserve Arrangement?

A: Against the background of economic and financial integration, a country might encounter temporary BOP pressure even when the fundamentals of its economy are sound. In the current global financial safety net, the international financial organizations may not be able to provide prompt assistance due to the inherent restraint in their governance structure and the prescribed conditions of lending facilities while the bilateral monetary cooperation between central banks may not be able to provide assistance up to the needed volume. The BRICS Contingent Reserve Arrangement will add a new layer to the global financial safety net, as it is a collective commitment to provide liquidity support in the form of a multilateral currency swap to alleviate a member’s difficulty when it encounters pressure in the BOP account, and aims to promote financial stability in the BRICS countries and in the world at large.

The signing of the CRA is a milestone, and represents a major endeavor by some emerging economies to establish a collective financial safety net in response to common global challenges beyond regional boundaries. It will provide a platform for cooperation among BRICS countries to constructively participate in global economic governance, enhance the influence and voice of BRICS countries, and promote global economic governance structure to become fair and equitable.

Q: How are the individual commitments of resources determined in the CRA?

A: BRICS countries have decided on the size of individual commitment through consultation after taking into consideration the level of development, the size of GDP , the volume of foreign exchange reserves and other factors of each individual country. In March 2013, BRICS leaders stated during their Summit in Durban that “the establishment of the CRA with an initial size of USD100 billion is feasible and desirable.” As a result of consultation, the individual commitments are decided upon as follows: China (USD41 billion); Brazil, India and Russia (USD18 billion each); and South Africa (USD5 billion).