A development bank China launched with its fellow Brics countries was supposed to reshape international finance. Russia’s invasion of Ukraine now risks turning it into a zombie bank.
Eight years after Chinese leader Xi Jinping and his counterparts from Brazil, Russia, India and South Africa established the New Development Bank, with headquarters in a swanky Shanghai skyscraper, it has all but stopped making new loans and is having trouble raising dollar funds to repay its debts . . .
The New Development Bank is the lesser-known of two China-based multilateral lenders. Its larger cousin, the Asian Infrastructure Investment Bank, this week landed in the middle of a public-relations crisis after . . .
. . . its Canadian communications chief resigned and accused the bank’s management of being “dominated by the Communist Party,” allegations that the AIIB called baseless. Nonetheless, Canada’s government said it would halt all activity with the bank while it reviews the allegations, and the bank said it would conduct an internal review.
Meanwhile, the Brics’s development bank is fighting for its very survival, threatened by its own reliance on the U.S. currency. . . .
What’s (really) happening.
Foreign countries, (central banks, private banks, etc.) hold US dollars for two main reasons
1.) As a “store of gold” to operate their central banks, their pension funds etc…
2.) To a much smaller extent, because international trade transactions tend to take place in dollars.
But no one likes to hold something that declines in value (like the dollar does during dollar inflation), and no one likes to agree to a contract wherein they receive something that declines in value.
Think
“How many lottery tickets should our central bank hold?” or
“How many lottery tickets for a bushel of wheat?”
For a brief time, in the COVID and immediate post-COVID era the dollar began to get eaten by inflation and, more importantly, became a lottery ticket. People had no idea what future inflation and interest rates the dollar would see.
So, for a brief time interest in alternative currencies, BRICS (and gold and crypto) peaked. Now that interest is declining, primarily because the currencies that were combining to form BRICS have historically come with more risk and more inflation than the dollar.
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One day the dollar will lose its status as reserve currency. But when that happens it will happens because investor find something that
- pays more interest than the dollar
- has less inflation than the dollar
- is more reliable than the dollar.
A basket of historically crappy currencies does not pass any of those tests.
Creating a bank around an idea does not change that. Banks fail all the time.
More coverage (no paywall) at links below.
