The feasibility of a BRICS currency coexisting alongside the U.S. dollar has sparked discussions among economists, shedding light on the necessary steps to establish a common BRICS currency. Notably, China's role in this process is of particular importance.
Herbert Poenisch, a senior fellow at Zhejiang University and former senior economist at the Bank for International Settlements (BIS), explored the potential of a BRICS currency in an opinion piece published by the Official Monetary and Financial Institutions Forum (OMFIF). Poenisch emphasized China's significance as a key trading partner for all BRICS nations and proposed the initial crucial measure of pegging the currency to the renminbi and aligning bilateral exchange rates.
Poenisch discussed the recent gathering of foreign ministers from the BRICS countries (Brazil, Russia, India, China, and South Africa), along with ministers from other nations such as Iran, Egypt, the United Arab Emirates, and Saudi Arabia. The primary focus of their discussions centered around the establishment of a viable BRICS currency. Furthermore, over 19 countries have reportedly submitted applications or expressed interest in joining the economic bloc, leading to deliberations on potential expansions of BRICS membership.
The economist highlighted the challenges faced by Russia, Brazil, and China in settling bilateral trade payments using their respective currencies. However, this payment mechanism encounters difficulties when imbalances arise. Poenisch acknowledged that while the idea of a unified BRICS currency is not new, it is unlikely to replace the dollar. Instead, it would exist alongside the established dollar-based global monetary system, similar to the regional initiative of the euro. Poenisch noted that the transition from bilateral settlements to a shared currency could take several decades, drawing parallels with Europe's experience.
To establish a common BRICS currency, Poenisch suggested the crucial step of pegging the currencies to the renminbi and aligning exchange rates. Additionally, he recommended the creation of an organization similar to the European Payments Union (EPU) and the appointment of a management agent comparable to the Bank for International Settlements (BIS). This process would require China to shoulder the responsibility of sustaining the clearing system, including setting up the necessary mechanisms and institutions, allocating sufficient funds to address liquidity shortages, and establishing a reserve facility for surplus funds. China would also need to remove barriers to the fungibility of the renminbi, enabling other countries to freely convert surplus supplies of other currencies into renminbi.
These measures would contribute to the internationalization of the renminbi and place increased pressure on China to liberalize its financial account, both of which have significant implications for the country's domestic monetary policy.
