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NO. 37, 2017
New Bank on the Block
BRICS New Development Bank operates as a multilateral development financial institution to help emerging economies
By Hou Weili | NO. 37 SEPTEMBER 14, 2017

Vice Finance Minister Shi Yaobin (left) shakes hands with K.V. Kamath, President of the New Development Bank (NDB), at a signing ceremony in Xiamen on September 3. The NDB signed loan agreements on three projects with China's Fujian, Hunan and Jiangxi provinces(XINHUA)

Rooftops all over the Shanghai Lingang Industrial Area are now serving a more productive purpose than simply covering factories and warehouses. In August, the vast area in southeast Shanghai had solar panels installed on all roofs, creating the capacity to generate power for local businesses and surrounding households.

The action was the inaugural project of a new energy demonstration program that is expected to be expanded to more areas in Shanghai. It is funded by the first lending program of the New Development Bank (NDB), an international multilateral financial institution co-founded by BRICS countries.

"When completed, the rooftop photovoltaic power stations with a total capacity of 100 megawatts will reduce annual carbon dioxide emissions by 88,360 tons," said Wang Tai, Deputy General Manager of Shanghai Hongbo New Energy Development Ltd. The company is the first to borrow from the NDB in China and a contractor for the new energy utilization project.

This is just one of the green infrastructure programs funded and supported by the NDB. Since it came into operation in July 2015, the NDB has approved 11 loans to member nations totaling $3 billion, all of which are devoted to clean energy and sustainable development infrastructure. It is offering developing countries alternatives to global development finance.

Green focus

The bank's focus on green finance is a large aspect of its operations. According to Leslie Maasdorp, Vice President and Chief Financial Officer of the NDB, 50 percent of its capital will be raised by issuing green bonds to be used exclusively for green projects. It is an effective way for financial institutions to support long-term energy-saving and environmentally friendly projects with a low borrowing price, he noted.

To ensure raised funds are used to develop green industries and improve infrastructure, the NDB has prioritized investment areas for each BRICS country. For China, urbanization is still a long-term and arduous task and should be advanced in a sustainable way. Green and low-carbon infrastructure projects are expected to be a priority. Zhou Xiaochuan, Governor of the People's Bank of China, the country's central bank, said earlier last year that China needs an annual investment of $600 billion in green sectors like environmental protection and restoration, renewable energy exploration and application, energy efficiency improvement and green transportation.

Supported by such bonds, South Africa is also putting green energy high up on its development agenda. Loans granted by the NDB in 2016 include one given to Eskom, South Africa's largest power supplier that generates nearly 95 percent of the electricity used in the country and 45 percent of that used in Africa. The $180-million loan will assist renewable energy projects and is expected to reduce carbon dioxide emissions by 2 million tons, according to the bank.

To optimize its power portfolio, South Africa introduced the Integrated Resource Plan in 2010 and has pledged to add 10,000 megawatts of renewable energy capacity over the next 20 years. A major reduction, to around 46 percent of capacity by 2030 in reliance on coal as the main source of electricity, will be realized due to the introduction of sustainable energy from renewable sources.

"This financial institution co-founded by emerging economies aims to assist member countries to thrive in a sustainable way rather than achieve GDP growth at the cost of polluting the environment," said Zhan Shu, a senior adviser with the NDB.

Economic booster

Currently, the slowing growth of some BRICS economies may have cast doubts on the future of their cooperation plans. But Maasdorp believes cooperation will not be jeopardized, but strengthened in the short term against the backdrop of a weak economic recovery.

He said the bank has a long-term outlook and is focused on supporting infrastructure projects that generate returns over long periods. "In the short term, the bank is a well-capitalized investor. Only by increasing investment in the infrastructure sector could it help economies in recession recover as soon as possible," he said.

For the convenience of South African projects, the NDB launched its African regional center in Johannesburg officially in August. "It will expand the bank's influence to a broader sphere in Africa," said Xu Xiujun, a researcher from the Institute of World Economics and Politics with the Chinese Academy of Social Sciences.

More African countries are likely to be included in the NDB as it plans to invite new members in the near future. Although the continent has big challenges in terms of financing infrastructure, it also has vibrant emerging economies such as Nigeria and Ethiopia. "With new members joining in, the bank will be more powerful and better play the role of a multilateral development financial institution," said Xu.

He also noted that it was imperative for the bank to obtain a high rating from international rating agencies and then raise local currency funding in member countries. "A high rating is the essential basis for the NDB to lower financing costs and raise a large amount of capital," said Xu. Currently, the bank has received the highest ratings from Chinese rating agencies including Chengxin International Credit Rating and China Lianhe Credit Rating, but none from international agencies.

Workers are seen at the construction site of the Beloporozhskaya hydropower project in Karelia, the first NDB-financed project in Russia, on August 15(XINHUA)
RMB internationalization

The NDB is the first international financial institution headquartered in China, but it doesn't mean it is Chinese-dominated, according to Maasdorp. "Shanghai was chosen because it is a major financial center and will attract global focus in financial terms," he said. The bank works on an equal-share voting basis with each of the five signatories contributing $10 billion to its $50-billion initial capital.

Fan Yongming, Director of the Center of BRICS Countries Studies in Fudan University, believes such an arrangement will give developing countries a louder voice in international monetary and financial systems and help develop a diversified international monetary system.

"The establishment of the NDB will facilitate the internationalization of China's renminbi by offering a platform for the currency's circulation," said Fan. He explained that the NDB issues bonds in the international financial market besides absorbing deposits to raise funds. "With renminbi-denominated bonds being bought by global investors on a large scale, the process of currency internationalization is advanced," said Fan.

In the future, the NDB will also offer services in the same way as general commercial banks, such as trade settlement, as well as supporting development projects with low interest rate loans. "Enlarging the share of the renminbi in settling international trade transactions is also an important aspect of accelerating the process of its internationalization," said Fan.

He added that the NDB is not replacing current international or regional funding institutions but complementing them and helping push forward reform of established international financial mechanisms. "The NDB and other institutions are more partners than competitors," he said. "It is such cooperation and competition that advance reform of current mechanisms and bring emerging economies to the attention of established financial institutions."

Copyedited by Bryan Michael Galvan

Comments to houweili@chinafrica.cn

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