Are BRIC Really Leading Recovery?

BRIC Markets Business

How a little time changes everything, as potential investment in China and Asia has swung from extremely negative sentiment to a huge emotional uplift as the Shanghai stock market index has exploded by over 90 percent so far in 2009. The influx of capital from brokerage firms into the market makes the rally unsustainable based on economics, as eventually the rally will correct, but in the meantime the rally has made people a lot of money.

For several years Beijing has been struggling to keep deflate and inflate its stock market, and unfortunately has been using the same misguided printing of money to cause inflation in the asset markets, but which inevitably inflate energy and consumer goods to the detriment of consumers.

Unbelievably, China's M2 money supply has been increasing by 28.5 a year, which could come back and haunt them before it's all over. Government-controlled banks have infused loans worth $1.2 tillion into the economy in attempts to stimulate growth. That's an extraordinary 25 percent of the overall Chinese economy.

All that could and eventually will burst from the artificially created market boom.

China has been buying up a huge amount of gold and the Shanghai gold market has benefited from it. China is now on track to overtake India as the leading consumer of gold in the world as it builds up its stockpiles. Rumors are the gold the IMF is ready to unload will be acquired by China over the years going forward.

China is also poised to increase gold output by 3 percent this year, bringing the total to about 290 tons. Even so, that's far below the 400 tons they consumed in 2008.

With that in mind, China could import even more gold over the next several months, of balance off the eventual gold correction to come.

Investors in the Shanghai market are counting on Beijing to inflate even more in the asset markets to balance things off with the gold.

The question is whether Beijing will continue to loan at the levels it did in the early part of 2009, as it could generate even more inflation that could harm consumers and make it difficult to live.

Much of the existing monetary policy from Beijing has been to shore up their regions which were hit hard by the drop in global trade and exports, as their stimulous plan focused primarily on infrastructure projects.

Growth for Chinese corporate earnings are of majore importance, with the Shanghai stock index soaring higher in bubble territory. Massive industrial companies in 22 Chinese provinces saw their profits plunge -21.2% in the first half to 894.14 billion yuan, but the fall was less from the first quarter’s 32% slide, and now, “less bad,” means signs of a recovery.

Best case scenarios are growth rates in the Chinese industrial sector to reach 30 percent for the fourth quarter because of the government insertion of cash.

That's probably going to be far from the reality though as China’s Bank of Communications a more healthy, but significant growth rate of over 9 percent for the third quarter and close to 10 percent for the fourth quarter.

Surging markets in China are helping hold up the BRIC nations, including Brazil, India, and Russia, which have the four best performing stock markets this year. Brazil’s Bovespa Index has grown by 79%, India’s Sensex Index is up 63%, and Russia’s RTS Index has surged by 62-percent. The S&P-500 Index by comparison, is up 9.4% this year, while Japan’s Nikkei-225 index is up 7.5-percent.

The ongoing strength of China’s economy has brought back the de-coupling debate, which hinges on the theory that the emerging economies in Brazil, Russia, India, China, (BRIC) can continue to grow in regardless of the declining G-7 economies. The so-called BRIC countries accounted for half of global growth in 2008 - China alone accounted for a quarter, and Brazil, India, and Russia combined equaled another quarter. BRIC has accounted for over 90% of the rise in consumption of energy products and metals, and 80% of grains since 2002.

The cycle of events are now swinging back in Russia’s favor, as global speculators flock back into hard-hit resource shares trading in Moscow. Russia’s central bank slashed its main interest rates for the fourth time in less than three-months, after Moscow said the local economy contracted an annual 10.2% in the January-May period.

The Russian rouble has rebounded 16% against the US-dollar, since the first quarter, as Urals blend crude oil has gained close to $70 a barrel, and base metals inceased much higher, boosting demand for Russia’s currency, a world leader in commodity exports. Russia is the world’s second-largest oil exporter behind Saudi Arabia, and supplies a quarter of Europe’s natural gas needs. Russia is also the world’s largest nickel and palladium miner, the second largest platinum miner, and the fourth-largest iron ore miner, behind Brazil, Australia, and India.

After reaching a record high of $597-billion last August, Moscow’s foreign currency reserves were depleted in a major way during the second-half of 2008, as the central bank spent more than $200-billion shoring up the Russian rouble and strengthing the capital position of domestic banks. This year’s uptick in Urals blend crude oil has improved the Kremlin’s coffers, to the tune of $404-billion today. China, the world’s second-largest oil guzzler, imported 3.83-million barrels per day in July, or 25% more than a year earlier, the fastest pace in close to two years.

The BRIC nations are having second thoughts on how their US-dollar currency reserves are managed, underscoring a power shift from the United States, which sparked the global financial crisis. Russian chief Dmitry Medvedev has repeatedly questioned the US-dollar’s future as a global reserve currency. China is allowing companies in its southern provinces of Yunnan and Guangxi to use yuan to settle cross-border trade with Hong Kong and Southeast Asia to reduce exposure to the US-dollar.

Reserve Bank of India chief Duvvuri Subbarao says India’s modest dependence on exports will help Asia’s third largest economy, to weather the “Great Recession” and even stage a modest recovery later this year. Even during the depths of the October massacre in the Bombay Sensex Index, India managed to retain a 5.3% growth rate in the fourth quarter, and India’s banking system had virtually no exposure to any kind of dangerous asset generated in the United States.

India’s factory output fell by 0.25% in January, the first decline this decade, and export earnings have dropped for six straight months. In January exports were 16% down from a year earlier falling to $12.3-billion. So the Reserve Bank of India battled to rescue the Bombay stock market, by cutting its lending rates six times from September thru April, by a total of 425-basis points.

The Indian Sensex index began to decouple from Wall Street and Tokyo in early May, after it rallied 14% for its biggest weekly gain since 1992, when Indian Prime Minister Manmohan Singh won a second term. Bombay stocks surged at the idea that Singh’s new government, shorn of Communists, would privatize up to $20-billion of state-owned assets, increase foreign investment in highly profitable crown jewel companies, begin deregulation of banking and financial services, and get rid of restrictions on the closing of factories.

India’s manufacturing sector, measured by the Purchasing Mgr’s Index, remained at a strong reading of 55.3 in July, or 2-points above China’s, implying a strong industrial recovery in the second half of this year. If the decoupling of China, India, Russia, and Brazil becomes a reality, it could be good for the developed G-7 nations, as growing wealth in BRIC nations could, in theory, increase demand for goods made in weakend nations like Japan, Germany, and the United States.

A decoupling between the emerging BRICK nations and the more developed G-7 economies would mean a huge shift in the global financial markets, away from the traditional pattern of emerging markets dancing to the tune of G-7 economies, which still account for 60% of global GDP. Instead, increasing independence could lead to a greater sphere of influence of the emerging giants, led by Beijing.

In the United States, Fed chief Bernanke is pumping a “bailout bubble” for Wall Street, similar to the policies of his mentor “Easy” Al Greenspan, who inflated the housing bubble, the sub-prime debt bubble, and the high-tech bubble. It’s a never ending cycle of boom-and-busts of bubbles, engineered by central banks. The revival of the “Commodity Super Cycle,” might already be already in motion, and if a global economic recovery gains traction, soaring input costs, would begin to crimp the profit margins of the giant Asian industrialists.

All the liquidity that’s been unleashed into the global banking system would play havoc with accelerating inflation. History shows that central banks won’t pre-empt inflation by withdrawing liquidity early. Instead, the money printers tend to inflate bubbles to dangerous proportions. Add to the mix, the vast leverage of the US-dollar and Japanese yen carry trades, it’s going to be a wild ride for the US Treasury bond market, which is increasingly dependent upon the whims of BRIC.

The many assertions about a turn around because of government interference and intervention around the world is a dangerous assumption to make, and it's far from certain that we're in a recovery of any sort at all.

But when a real recovery does come, the BRIC nations should be at the forefront of it.

BRIC Markets Business