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BRIC or CRIB?

June 15 2009 at 7:41 PM
  (Login oneman28)
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BRIC or CRIB? 7 comments
by: Marc Chandler June 14, 2009 | about: ASIA / CAF / EWZ / FXI / GXC / IFN / PGJ / RSX / XRU
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Font Size: PrintEmail TweetThis Brazil, Russia, India and China, now collectively known as the BRIC countries, will hold a summit in Russia on June 16th. Besides the Goldman Sachs invented moniker, these countries have very little in common except for the fact that they believe, to seemingly varying degrees of intensity, that they deserve greater influence in the conduct of world affairs than they currently have.

And given the enormity of US power, as hard-core realists, they know any increase in their power and influence will come at the expense of Americas.


The BRICs are on different sides of the terms of trade trends. Brazil and Russia benefit from higher commodity prices, while India and China prefer lower prices. All except Russia are in the World Trade Organization. All but Brazil have nuclear weapons. While India and Brazil are democracies, China surely is not. While it may be premature to draw hard and fast conclusions about Russia, the direction does not look particularly promising.


Russia and China are permanent members of the United Nations Security Council. With their veto power there, they arguably have achieved greater political influence than in the economic sphere. Russian and Chinese influence is often sought in regional issues, like the Caucuses and North Korea. For their part, Brazil and India have quite different foreign policies.

For Brazil, its immediate surroundings are considerably more peaceful than in Eastern and Central Europe, where the end of an empire has seen the birth of new states. Indias foreign policy challenges are dominated by Pakistan. Security Council membership remains in the realm of aspirations.


CRIB


One of the most important reasons why the BRICs do not have the economic clout that they would like is frankly they dont deserve it. Goldman Sachs had a story (and more) to sell with its BRICs concept, but those same letters spell a real word, CRIB. The point is that the countries, outside of China, are not among the largest.


According to Bloomberg data, at the end of last year, China was the fourth largest economy ($3.2 trillion), behind the US, Japan, and Germany. This of course takes the Chinese data at face value, and given the often large gaps between energy production and reported GDP growth, as well as the amazing consistency of the pace of growth, many often cast a suspicious eye on Chinese data.


With a GDP of $1.3 trillion in 2008, Brazil was the 10th largest economy, though it is roughly half the size of France, which is the 6th largest economy. Russia and India were neck-and-neck for 11th and 12th places with each having produced about $1.2 trillion of goods and services last year. Spains economy is nearly 20% bigger than Russias and Indias, and it is the 8th largest economy.

Together the BRICs account for a little more than 12% of the worlds GDP, and China alone accounts for half of that.


The BRICs are also small in terms of the depth of the capital markets. Together, according to Bloomberg data, they account for a little more than 6% of the world equity capitalization (MSCI World Index). What equities that are truly tradable are very limited and concentrated in a few names. Often the markets lack the kind of transparency that many Western investors are familiar with, even given the financial crisis.


There are various capital controls and the BRICs currencies are not freely convertible or tradable. The banks have managed to partially circumvent the restrictions of the domestic (on-shore) market by creating a parallel off-shore market and non-deliverable forward contracts. Rydexs CurrencyTrust ETF that tracks the ruble (XRU) was launched at the end of last year and has drawn little interest. It boasts a lowly $5 million market cap (assets under management).


Girth Not Size


Political scientists often argue that one of the characteristics of power is that it is concordant. By that they essentially mean that by having one element of power, say economic prowess, one can achieve other elements of power, such as like cultural influence. And yet during the Cold War, Russias claim to world power relied almost exclusively on one elementits military might. Power is surely multi-dimensional, but one of the common characteristics of the BRICs are that their power is limited in breadth and depth.




Each of the BRICs has amassed a large level of reserves. Brazil has the least at about $205 billion, just below Indias $251 billion. Russia has almost as much as both of them put together with almost $410 billion. China dwarfs all of them, individually and collectively, with nearly $2 trillion in reserves. Together they account for a third of the worlds currency reserves.


Yet there is no reason to consider them as a unitary whole or that they will act in concert. To the contrary, they each seem to embrace their reserves differently. India seems to regard its reserves most traditionally; an insurance against future calamities. Brazil is more willing to use reserves for domestic purposes and operates in the foreign exchange market daily.

Given that Russia defaulted a decade ago, it is little wonder that its large reserves, a third of GDP, are a sign of national pride. The run-down in reserves during the last five months of 2008 was more politically embarrassing than threatening from an economic point of view.


Chinas massive reserves, more than a quarter of the worlds reserves, are as much a sign of its successes as its failures. Reserves accumulate as a function of Chinas large trade surplus. Rather than increase the share of consumption in GDP, Chinas own figures show that it has fallen. China remains reliant on exports. Reserves accumulate as the central bank absorbs some of the hot money coming into the country so as to neutralize its effect. Reserves also accumulate as China manages its exchange rate.


IMF Bonds


The BRICs appear to be under-presented in the International Monetary Fund. As we have seen they account for about 12% of the world economy and yet have a combined quota (vote) of 9.82%. Yet the representation is not as straight-forward as that. Consider that the US accounts for a quarter of the worlds economy and yet the US has a 16.77% weighted vote at the IMF.


The April G20 meeting resolved to raise more funds for the IMF. Some countries like Japan have lent the IMF money. The BRICs want to provide their funds in the form of SDR (Special Drawing Right) bonds. This dovetails nicely with their call to increase the use of the SDR.


Some esteemed money managers are reading into this a grave signal. According to Bloomberg reports, Mark Mobius, executive chairman of Templeton Asset Management, sees the desire for SDR bonds as a rebuke of US fiscal policy. Mohamed El-Erian, CEO of PIMCO, sees the purchases as evidence of accelerating rebalancing of the world economy.


But, it does not seem that it is about us as in the US, but rather about these countries trying to bolster their own prestige and gravitas by contributing to the IMF. It is a function of the wealth they have already attained (reserve accumulation), but says nothing about the challenges that lie ahead. Moreover, the moves are largely symbolic. The $10 billion worth of SDR bonds that Russia is going to procure is 2.5% of its reserves. The $50 billion China will provide is about 2.5% of its reserves as well.

Russia is thus far the only BRIC to suggest it will purchase the SDR bonds with its Treasury holdings, which stood at about $138 billion at the end of March, according to US Treasury data. It does not amount to noteworthy diversification of reserves. Nor does it represent much of a diversification away from the dollar as the greenback accounts for 44% of an SDR-basket. The contribution that Japan is committed to is greater than all the BRICs combined.


Although noticeably quiet on the subject, India is expected to provide $10 billion to the IMF.

Still an SDR bond market is innovative insofar as one does not exist at the moment. The IMF is expected to announce details later this month or next month. Rather than have to sell US Treasuries there has been some suggestion that the interested countries, which are likely to extend beyond the BRICs, may swap the Treasuries for the SDR bonds, minimizing any market impact.

A newly formed SDR bond market will lack the breadth and depth to truly compete with the US Treasury market, though it might have some novelty appeal. The impact on the dollar will likely be marginal at best. An SDR bond market does not mean the SDR is a viable alternative to the dollar or is any closer to being the supra-sovereign reserve asset that some imagine.


http://seekingalpha.com/article/143051-bric-or-crib

 
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BR
(Login BharatRakshak)
Elite WAFF Vet Club

Re: BRIC or CRIB?

June 15 2009, 10:45 PM 

The reason BRIC idea was there was that even though countries like Spain, France, Germany etc have higher GDPs, they aren't going through same growth rate as the countries in BRIC.

 
 
Anonymous
(Login oneman28)
WAFFer

Re: BRIC or CRIB?

June 15 2009, 11:19 PM 

China's economy was way bigger than US$3.2 trillion as mentioned in the article. It was US$4.4 trillion.

 
 

Kronic
(Login Kronicfool)
Satyameva Jayate (India)

Re: BRIC or CRIB?

June 15 2009, 11:26 PM 


BRIC was coined taking into consideration the future potential of these countries. (China more than others are living up to it) but if you look at Brazil/India since the year 2000 alone they have seen a massive increase. Its not a question of what they are doing today. India/Brazil came up from being the poorest of the poor.

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AKA KRONICFEVER

 
 

AryanArya
(Login AryanArya)
Satyameva Jayate (India)

Re: BRIC or CRIB?

June 16 2009, 3:27 AM 

From the article,


\\This of course takes the Chinese data at face value, and given the often large gaps between energy production and reported GDP growth, as well as the amazing consistency of the pace of growth, many often cast a suspicious eye on Chinese data.\\


LOL ! This is exactly what i said before !

The chinese growth rate never corresponds with the GDP electricity of energy consumption ! .Either the power data is wrong or the GDP data is wrong ! Of course one can argue , that the chinese are going green as one chinese author recently said ! But considering the chinese are not known for their efficient use of the resources (the chinese need double the amount of savings as of India to acheive similar growth), i doubt the 'green' argument.


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Hawkssss
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Elite WAFF Vet Club

Re: BRIC or CRIB?

June 16 2009, 3:44 AM 

If you want to use power consumption for comparison, then China's GDP should be 10x that of India, not 4.....l1o1l1o1l

in fact, many have questioned india's economic data too so what say you?

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Hawkssss
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Re: BRIC or CRIB?

June 16 2009, 3:56 AM 

http://en.wikipedia.org/wiki/Electricity_in_India

In March 2009, the installed power generation capacity of India stood at 147,000 MW[5] while the per capita power consumption stood at 612 kWH.


http://english.mofcom.gov.cn/aarticle/counselorsreport/westernasiaandafricareport/200901/20090106000185.html

The total installed power capacity reached 792.5 million kilowatts at the end of last year (2008).




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Hawkssss
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Re: BRIC or CRIB?

June 16 2009, 3:57 AM 

Of course, no indian believes anything about China.....but the fact is Chinese are 4 times richer, live 10 years longer, much better educated and have much higher standard of living than indians...More important, we are growing faster and investing more....l1o1l1o1l

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AryanArya
(Login AryanArya)
Satyameva Jayate (India)

Re: BRIC or CRIB?

June 26 2009, 3:01 AM 


\\More important, we are growing faster and investing more....l1o1l1o1l \\


India's growth rate is projected to be faster than China's and all other BRIC countries in the future !


http://www.chinadaily.com.cn/world/2009-06/11/content_8272451.htm

'India is predicted to grow at an average rate of 6.3 percent from 2011 to 2050, China 5.2 percent, Brazil 4.3 percent and Russia - constrained by forecasts of a declining population - just 2.8 percent.'


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Let Noble Thoughts Come to Us from All Sides- RigVeda

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Anonymous
(Login huaxiachang)
Middle Kingdom (China)

Re: BRIC or CRIB?

June 26 2009, 3:30 AM 

"'India is predicted to grow at an average rate of 6.3 percent from 2011 to 2050, China 5.2 percent, Brazil 4.3 percent and Russia - constrained by forecasts of a declining population - just 2.8 percent.' "


wow,2011-2050? is this from GS also?

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Hawkssss
(Login Hawkssss)
Elite WAFF Vet Club

Re: BRIC or CRIB?

June 26 2009, 3:57 AM 

lo1l1o1l1o

China is projected to crash by indians many years ago too....l1o1l1o1l1o11l

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