BRIC Currency Strategy
With confidence in the U.S. dollar waining among a number of countries, Brazil, Russia, India and China, or the BRIC countries are looking for way to increase trade using their own currencies rather than the dollar.
The strategy is to decrease dependence on the U.S. dollar, which is extremely flawed and has a dismal future because of the Federal Reserve and monetary policy of the U.S., which makes it hard to have much confidence in the greenback in the years ahead.
Russia has suggested using a mix of regional currencies as a way to protect against the U.S. dollar and reduce risk in relationship to the volatility of the dollar.
China has experimented with allowing companies located in the Guangdong province to do business using the reminbi with members of the Association of Southeast Asian Nations, Macau and Hong Kong.
Showing posts with label BRIC World Reserve Currency. Show all posts
Showing posts with label BRIC World Reserve Currency. Show all posts
Saturday, April 10, 2010
Thursday, August 13, 2009
Are BRICs Really that Powerful?
BRIC Business News
During the current economic crisis has provided fresh fuel to the debate over the decline of the West and emergence of the East. The so-called BRICs – Brazil, Russia, India, and China – are often looke upon as the inevitable economic winners. A glance behind the numbers, though, suggests proclaiming these countries victors may be a little too early. Some like Russia may not be included at all if major changes aren't made soon.
The numbers aren’t that great. The World Bank’s dark forecasts see global GDP plunging a record 2.9 percent in 2009, along with deteriorating current account balances, increased debt, soaring unemployment, chaotic stock markets and declining business confidence. Yes, there may be a few positives concerning recovery. China’s stimulus efforts – a rapid expansion of fixed investment and credit to the state sector fueled by massive foreign reserves – seem to have had a predictable positive, if probably short-term, effect. Although there is the possibility of a broader, but still mild, recoveries in 2010 and 2011 .
But the path to full recovery is not clear in any way. The global economy is at some kind of tipping or inflection point, a moment of paradigm shift. If the Anglo-American model of finance capital is yet another god that failed, so too the alternatives: Japanese networked capitalism, Euro-dirigisme, or various strains of state capitalism have not been widely accepted.
Before the depth of the coming economic storm was clear, the BRICs were the sweethearts of the investment community. They were first lumped together in an influential Goldman Sachs research report in 2001. Goldman projected that their continuing GDP growth could be faster than the rest of the world, with the GDPs of China and India surpassing those of the major Western economic powers before the middle of the 21st century. To be sure, these “emerging markets” were not seen as without risk, but with their scale – large populations and records of substantial economic growth – they looked very attractive.
But there’s more to economic prowess than GDP statistics and stock market indices. This is not to gainsay the BRICs’ – especially China and India’s – economic momentum and remarkable development. Visitors to China cannot be but wowed by what metropolitan giants Beijing and Shanghai have become. India’s IT prowess dominates. But long term growth and economic leadership will ultimately have to be based on business environment basics. International metrics that go beyond GDP suggest the BRICs have a long way to go, and they're right.
For example, corruption, the acid that eats away at business confidence, rule of law and fair dealing. None of the BRICs rank very high in the 180-country survey published by Transparency International. Brazil and India come in at 80th and 85th place, roughly comparable to Burkina Faso, Saudi Arabia and Panama. Russia, unsurprisingly, is almost at the bottom, ranking 147th – Kenya and Syria being near them. China does best, at 72nd place – right down there with Mexico. And if the current murky scandal involving China’s steel industry which has ensnared executives from Australia’s Rio Tinto shows anything, it’s that corruption and the opacity of China’s legal system can rust business confidence away.
If there’s corruption, then it’s not so easy to do business there, as there is no way of doing business in a predictable manner. The World Bank studies “the ease of doing business” in 181 countries. Brazil, Russia and India stand between 120 to 125 in those tables. China comes in somewhat better, in 83rd place – a little higher than Belarus, a little lower than Kenya. The most difficult issues? Dealing with the local authorities in Russia and China; enforcing contracts in India’s clogged legal system, and, interestingly enough, taxes in Brazil.
And if social stability is a metric, then the fires that have fueled tragic communal violence in India and, more recently, China (which also suffers from tens of thousands “mass incidents” of citizens protesting corruption) have to be a concern. You don’t push too hard against entrenched interests in Russia, where arbitrary arrest and even murder can be the outcome.
Should we really be surprised? From these points of view, the BRICs don’t look that strong. These countries are all, in one way or another, still developing. Brazil, India and China have large problems of income distribution (more unequal than even the US), issues exacerbated by large but low productivity agricultural sectors and urban squalor. Brazil and Russia rank at midpoint in the 179 country United Nations’ Human Development Index; China is just slightly below and India, alas, is almost at the bottom. And Russia and China face demographic challenges. China is aging. Russia has even more severe population problems – it’s disappearing.
Having said that, we do have to remember the days of America and the wild west where very similar situations were part of the mix. The only difference was the strong Christian influence which helped temper much of this. The BRICs, in general, don't have that as part of the matrix, with the excpetion - to a small degree - of Brazil.
But could they be considered a bloc? Their economic, social and political systems differ considerably: Brazil’s economy is based on agriculture; India’s on services; Russia’s on price-sensitive energy resources, and China on manufactures for export. China and Russia have had problematic political relations; the disputed borders between China and India are still hot (and let’s not forget New Delhi’s concerns about the cozy relationship between Beijing and Islamabad). What do they share? Growth potential. And a desire to take the Yankee dollar down a peg. Is that sufficient to suggest that the answer to the world’s woes be found with the BRICs?
BRIC officials seem to think so. In the run up to the April 2009 G-20 meeting in London they pushed their own agenda, calling for new international finance rules, reform of the IMF and the World Bank, and resurrection of the Doha round. Overall, they are pushing for a multi-polar economic order, one less dominated by the US.
The Russians called for a new international currency backed by IMF SDRs (Special Drawing Rights) – an idea also picked up by Brazil and China. Indian Prime Minister Manmohan Singh said that the eyes of the world were on India in the “hope that India would be an engine of growth for the world economy.” Chinese officials touted their own “stimulus package” and quick action, noting the superiority of China’s command system “when it comes to making vital policy decisions.”
But at a “BRIC Summit” held in Yekaterinburg in July, there was less fire – a BRIC agenda did not surface. Still, the idea of a new international reserve currency hasn’t gone away. The problem there are the consequences of being a world reserve currency, which these countries probably aren't ready to, or willing to take on.
We raise these matters not to criticize the BRICs individually but rather to put a little realism into the crucial discussion of world economic recovery. First, they can hardly be considered a cohesive group. Second, sustainable leadership requires a sound business environment. On that score, the BRICs have a way to go.
To be sure, their equity markets seem to be doing well enough. But there’s more to an economy than GDP projections and speculative bets about the future of a few leading companies.
While some think the BRICs are overly hyped, I don't think that's the case in the long term; with the possible exception of Russia. They will play a huge role the economics of the world, and if nothing else, the populations of China and India, along with their growing middle classes guarantee that.
BRIC Business News
During the current economic crisis has provided fresh fuel to the debate over the decline of the West and emergence of the East. The so-called BRICs – Brazil, Russia, India, and China – are often looke upon as the inevitable economic winners. A glance behind the numbers, though, suggests proclaiming these countries victors may be a little too early. Some like Russia may not be included at all if major changes aren't made soon.
The numbers aren’t that great. The World Bank’s dark forecasts see global GDP plunging a record 2.9 percent in 2009, along with deteriorating current account balances, increased debt, soaring unemployment, chaotic stock markets and declining business confidence. Yes, there may be a few positives concerning recovery. China’s stimulus efforts – a rapid expansion of fixed investment and credit to the state sector fueled by massive foreign reserves – seem to have had a predictable positive, if probably short-term, effect. Although there is the possibility of a broader, but still mild, recoveries in 2010 and 2011 .
But the path to full recovery is not clear in any way. The global economy is at some kind of tipping or inflection point, a moment of paradigm shift. If the Anglo-American model of finance capital is yet another god that failed, so too the alternatives: Japanese networked capitalism, Euro-dirigisme, or various strains of state capitalism have not been widely accepted.
Before the depth of the coming economic storm was clear, the BRICs were the sweethearts of the investment community. They were first lumped together in an influential Goldman Sachs research report in 2001. Goldman projected that their continuing GDP growth could be faster than the rest of the world, with the GDPs of China and India surpassing those of the major Western economic powers before the middle of the 21st century. To be sure, these “emerging markets” were not seen as without risk, but with their scale – large populations and records of substantial economic growth – they looked very attractive.
But there’s more to economic prowess than GDP statistics and stock market indices. This is not to gainsay the BRICs’ – especially China and India’s – economic momentum and remarkable development. Visitors to China cannot be but wowed by what metropolitan giants Beijing and Shanghai have become. India’s IT prowess dominates. But long term growth and economic leadership will ultimately have to be based on business environment basics. International metrics that go beyond GDP suggest the BRICs have a long way to go, and they're right.
For example, corruption, the acid that eats away at business confidence, rule of law and fair dealing. None of the BRICs rank very high in the 180-country survey published by Transparency International. Brazil and India come in at 80th and 85th place, roughly comparable to Burkina Faso, Saudi Arabia and Panama. Russia, unsurprisingly, is almost at the bottom, ranking 147th – Kenya and Syria being near them. China does best, at 72nd place – right down there with Mexico. And if the current murky scandal involving China’s steel industry which has ensnared executives from Australia’s Rio Tinto shows anything, it’s that corruption and the opacity of China’s legal system can rust business confidence away.
If there’s corruption, then it’s not so easy to do business there, as there is no way of doing business in a predictable manner. The World Bank studies “the ease of doing business” in 181 countries. Brazil, Russia and India stand between 120 to 125 in those tables. China comes in somewhat better, in 83rd place – a little higher than Belarus, a little lower than Kenya. The most difficult issues? Dealing with the local authorities in Russia and China; enforcing contracts in India’s clogged legal system, and, interestingly enough, taxes in Brazil.
And if social stability is a metric, then the fires that have fueled tragic communal violence in India and, more recently, China (which also suffers from tens of thousands “mass incidents” of citizens protesting corruption) have to be a concern. You don’t push too hard against entrenched interests in Russia, where arbitrary arrest and even murder can be the outcome.
Should we really be surprised? From these points of view, the BRICs don’t look that strong. These countries are all, in one way or another, still developing. Brazil, India and China have large problems of income distribution (more unequal than even the US), issues exacerbated by large but low productivity agricultural sectors and urban squalor. Brazil and Russia rank at midpoint in the 179 country United Nations’ Human Development Index; China is just slightly below and India, alas, is almost at the bottom. And Russia and China face demographic challenges. China is aging. Russia has even more severe population problems – it’s disappearing.
Having said that, we do have to remember the days of America and the wild west where very similar situations were part of the mix. The only difference was the strong Christian influence which helped temper much of this. The BRICs, in general, don't have that as part of the matrix, with the excpetion - to a small degree - of Brazil.
But could they be considered a bloc? Their economic, social and political systems differ considerably: Brazil’s economy is based on agriculture; India’s on services; Russia’s on price-sensitive energy resources, and China on manufactures for export. China and Russia have had problematic political relations; the disputed borders between China and India are still hot (and let’s not forget New Delhi’s concerns about the cozy relationship between Beijing and Islamabad). What do they share? Growth potential. And a desire to take the Yankee dollar down a peg. Is that sufficient to suggest that the answer to the world’s woes be found with the BRICs?
BRIC officials seem to think so. In the run up to the April 2009 G-20 meeting in London they pushed their own agenda, calling for new international finance rules, reform of the IMF and the World Bank, and resurrection of the Doha round. Overall, they are pushing for a multi-polar economic order, one less dominated by the US.
The Russians called for a new international currency backed by IMF SDRs (Special Drawing Rights) – an idea also picked up by Brazil and China. Indian Prime Minister Manmohan Singh said that the eyes of the world were on India in the “hope that India would be an engine of growth for the world economy.” Chinese officials touted their own “stimulus package” and quick action, noting the superiority of China’s command system “when it comes to making vital policy decisions.”
But at a “BRIC Summit” held in Yekaterinburg in July, there was less fire – a BRIC agenda did not surface. Still, the idea of a new international reserve currency hasn’t gone away. The problem there are the consequences of being a world reserve currency, which these countries probably aren't ready to, or willing to take on.
We raise these matters not to criticize the BRICs individually but rather to put a little realism into the crucial discussion of world economic recovery. First, they can hardly be considered a cohesive group. Second, sustainable leadership requires a sound business environment. On that score, the BRICs have a way to go.
To be sure, their equity markets seem to be doing well enough. But there’s more to an economy than GDP projections and speculative bets about the future of a few leading companies.
While some think the BRICs are overly hyped, I don't think that's the case in the long term; with the possible exception of Russia. They will play a huge role the economics of the world, and if nothing else, the populations of China and India, along with their growing middle classes guarantee that.
BRIC Business News
Wednesday, August 5, 2009
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
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
Monday, July 6, 2009
Power Shifting to BRIC Nations
BRIC Business
Economic conditions brought about by clueless and ignorant Western countries has hastened the power shift to BRIC and surrounding countries, as misguided and foolish policies are quickly bringing about the end of their overall affluence and power.
It will take decades to work off the largest increase in debt since World War II. The political costs may be permanent, laid bare at this week’s Group of Eight summit of leading industrial powers.
Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 percent of gross domestic product in 2014, more than triple the 35 percent of the main emerging economies including China, the International Monetary Fund forecasts.
The run-up in debt is quickening a power shift that saps the industrial world’s authority to force its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession they birthed.
The eight-nation forum that starts tomorrow in L’Aquila, Italy is “a lot less relevant given its makeup and given developments in the world,” French Finance Minister Christine Lagarde said July 5. “Big players, like emerging economies, India, China or Mexico, are invited, but they’re given only a jump seat outside of the main summit.”
The industrial world is beset by the harshest economic conditions in a lifetime: a projected U.S. budget deficit of 13.6 percent of GDP in 2009, unmatched since World War II; an annualized 14.2 percent contraction in Japanese GDP in the first quarter, also the worst since the war; in the first three months of 2009, German exports had their steepest quarterly decline since 1970 when the data were first compiled.
Market Capitalization
Reflecting the relative fortunes of the G-8 and emerging markets, developing nations’ share of worldwide stock-market capitalization has climbed to a record 24 percent from 15 percent at the start of 2007 as investors piled into the fastest-growing economies.
While the surge in borrowing has prompted calls for alternatives to the dollar as a reserve currency, emerging- markets policy makers aren’t near consensus on a plausible option. Chinese Deputy Foreign Minister He Yafei said July 2 the dollar will reign supreme for “many years to come.”
Staunching the recession, combating climate change, promoting trade and dealing with Iran top the agenda of the G-8, a grouping of 880 million people with combined GDP of $32 trillion that includes the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia.
Divisions persist over dialing back stimulus measures -- Germany says now is the time to begin curbing deficits -- and the scope of financial oversight. Britain opposes more intrusive market oversight proposed by the European Union.
‘Global Crisis’
“Different countries are pulling in different directions and that is, I think, quite troubling,” said Niall Ferguson, a history professor at Harvard University in Cambridge, Massachusetts. The uncoordinated response is “one of the classic symptoms of a global crisis.”
While the eight deliberate, leaders of five developing economies -- China, India, Brazil, Mexico and South Africa -- hold a parallel summit nearby before the G-8 meeting.
Led by China, the emerging economies don’t share the “somber fiscal outlook” of the affluent world, the IMF says. The IMF says the debt won’t be repaid as quickly as after World War II, which ended with debt topping 250 percent of GDP in the U.K., 200 percent in Japan and 100 percent in the U.S.
In wartime, governments exercised “comprehensive control” over the economy and citizens felt a “moral duty” to buy war bonds, the IMF said in a June 9 report.
Rich nations’ debt constituted 78 percent of GDP in 2006, the year before the financial crisis took hold, while emerging- markets debt has dipped from 38 percent, the IMF says.
Declining Leverage
The industrial world’s borrowing spree “decreases its ability to maneuver,” said Paul Hofheinz, president of the Lisbon Council, a Brussels research group.
Lesser-developed countries upstaged last year’s G-8 in Japan. Arguing that emissions cuts would stunt the economic growth that is lifting millions out of poverty, they forced through a joint statement entitling countries to tackle global warming according to their “respective capabilities.”
The climate clash will be rerun in L’Aquila, as the countdown starts to a United Nations summit in December to hammer out a replacement to the Kyoto Protocol.
Russia plays a dual role, straddling the G-8 and acting in concert with developing economies. In a sign of the shifting world order, Russia last month hosted the first-ever summit of the BRIC economies -- Brazil, Russia, India, China -- financiers of $1.1 trillion in U.S. Treasury debt as of April.
Medvedev’s Call
How much U.S. debt to keep remains in dispute. Russian President Dmitry Medvedev and Indian economic adviser Suresh Tendulkar have questioned the dollar’s dominance of the world’s $6.5 trillion in currency reserves.
The BRIC meetings failed to endorse a Russian call for diversification from the dollar, showing it is easier to denounce the U.S.-led world order than come up with a viable alternative.
“The credibility of the Anglo-Saxon model is under threat,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in a Web commentary last month. “Yet there are no ready substitutes that are able and willing to step in.”
There is an increasing call from BRIC nations to supplant the U.S. dollar as the reserve currency, even though no certainty as to what should be the replacement.
BRIC Business
Economic conditions brought about by clueless and ignorant Western countries has hastened the power shift to BRIC and surrounding countries, as misguided and foolish policies are quickly bringing about the end of their overall affluence and power.
It will take decades to work off the largest increase in debt since World War II. The political costs may be permanent, laid bare at this week’s Group of Eight summit of leading industrial powers.
Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 percent of gross domestic product in 2014, more than triple the 35 percent of the main emerging economies including China, the International Monetary Fund forecasts.
The run-up in debt is quickening a power shift that saps the industrial world’s authority to force its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession they birthed.
The eight-nation forum that starts tomorrow in L’Aquila, Italy is “a lot less relevant given its makeup and given developments in the world,” French Finance Minister Christine Lagarde said July 5. “Big players, like emerging economies, India, China or Mexico, are invited, but they’re given only a jump seat outside of the main summit.”
The industrial world is beset by the harshest economic conditions in a lifetime: a projected U.S. budget deficit of 13.6 percent of GDP in 2009, unmatched since World War II; an annualized 14.2 percent contraction in Japanese GDP in the first quarter, also the worst since the war; in the first three months of 2009, German exports had their steepest quarterly decline since 1970 when the data were first compiled.
Market Capitalization
Reflecting the relative fortunes of the G-8 and emerging markets, developing nations’ share of worldwide stock-market capitalization has climbed to a record 24 percent from 15 percent at the start of 2007 as investors piled into the fastest-growing economies.
While the surge in borrowing has prompted calls for alternatives to the dollar as a reserve currency, emerging- markets policy makers aren’t near consensus on a plausible option. Chinese Deputy Foreign Minister He Yafei said July 2 the dollar will reign supreme for “many years to come.”
Staunching the recession, combating climate change, promoting trade and dealing with Iran top the agenda of the G-8, a grouping of 880 million people with combined GDP of $32 trillion that includes the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia.
Divisions persist over dialing back stimulus measures -- Germany says now is the time to begin curbing deficits -- and the scope of financial oversight. Britain opposes more intrusive market oversight proposed by the European Union.
‘Global Crisis’
“Different countries are pulling in different directions and that is, I think, quite troubling,” said Niall Ferguson, a history professor at Harvard University in Cambridge, Massachusetts. The uncoordinated response is “one of the classic symptoms of a global crisis.”
While the eight deliberate, leaders of five developing economies -- China, India, Brazil, Mexico and South Africa -- hold a parallel summit nearby before the G-8 meeting.
Led by China, the emerging economies don’t share the “somber fiscal outlook” of the affluent world, the IMF says. The IMF says the debt won’t be repaid as quickly as after World War II, which ended with debt topping 250 percent of GDP in the U.K., 200 percent in Japan and 100 percent in the U.S.
In wartime, governments exercised “comprehensive control” over the economy and citizens felt a “moral duty” to buy war bonds, the IMF said in a June 9 report.
Rich nations’ debt constituted 78 percent of GDP in 2006, the year before the financial crisis took hold, while emerging- markets debt has dipped from 38 percent, the IMF says.
Declining Leverage
The industrial world’s borrowing spree “decreases its ability to maneuver,” said Paul Hofheinz, president of the Lisbon Council, a Brussels research group.
Lesser-developed countries upstaged last year’s G-8 in Japan. Arguing that emissions cuts would stunt the economic growth that is lifting millions out of poverty, they forced through a joint statement entitling countries to tackle global warming according to their “respective capabilities.”
The climate clash will be rerun in L’Aquila, as the countdown starts to a United Nations summit in December to hammer out a replacement to the Kyoto Protocol.
Russia plays a dual role, straddling the G-8 and acting in concert with developing economies. In a sign of the shifting world order, Russia last month hosted the first-ever summit of the BRIC economies -- Brazil, Russia, India, China -- financiers of $1.1 trillion in U.S. Treasury debt as of April.
Medvedev’s Call
How much U.S. debt to keep remains in dispute. Russian President Dmitry Medvedev and Indian economic adviser Suresh Tendulkar have questioned the dollar’s dominance of the world’s $6.5 trillion in currency reserves.
The BRIC meetings failed to endorse a Russian call for diversification from the dollar, showing it is easier to denounce the U.S.-led world order than come up with a viable alternative.
“The credibility of the Anglo-Saxon model is under threat,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in a Web commentary last month. “Yet there are no ready substitutes that are able and willing to step in.”
There is an increasing call from BRIC nations to supplant the U.S. dollar as the reserve currency, even though no certainty as to what should be the replacement.
BRIC Business
Monday, June 8, 2009
BRICs Buy More US Dollars While Looking for Currency Alternatives
BRIC Business News
The unique economic circumstances have led the BRICs to have to buy up the US dollar which they're becoming fearful of holding, while at the same time looking for currency alternatives to being so exposed by holding the greenback.
This is because they're shoring up their own domestic markets so they can continue exporting goods to the US, which was the main reason for the strong market before the economic crisis.
Brazil, Russia, India and China increased foreign reserves by over than $60 billion in May to limit currency gains as the first worldwide recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil acquired the most dollars in a year, India’s reserves increased the most since January 2008 and Russia added the most foreign exchange since July.
While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is suggesting the BRICs consider developing a new unit of exchange when they get together in Yekaterinburg on June 16. China and Brazil said in May they may look at ways of dropping the dollar for trade between the two countries.
“Foreign central banks do not want to see their currencies relentlessly strengthen,” said Daniel Tenengauzer, head of foreign-exchange and emerging-market debt strategy at Banc of America-Merrill Lynch in New York. “Such a move would dampen an already-weak outlook outside the U.S. and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline.”
Brazil’s real declined 0.1 percent to 1.9633 per dollar at 5:01 p.m. in New York. The ruble fell 1.7 percent to 31.4016 against the U.S. currency, while the Indian rupee dropped 1 percent to 47.57. The Chinese yuan’s 12-month forward contract dropped 0.4 percent to 6.7315 per dollar.
Real’s Rally
International reserve assets excluding gold held by the BRICs, an acronym coined by Goldman Sachs Group Inc. Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, total $2.8 trillion, a 7.8 percent increase from a year ago and 42 percent of the world’s total, data compiled by Bloomberg show.
The real, ruble, and rupee strengthened and the Dollar Index posted its biggest decline in 24 years last month as signs the global recession may be easing spurred investors to seek higher-yielding alternatives to the U.S. currency. A net $26.1 billion has flowed into emerging-market equity funds this year, EPFR Global, which tracks $11 trillion worldwide, said June 4.
The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.
Currency Alternatives
The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, lost 6.4 percent last month, the biggest decline since March 1985. It rose 0.3 percent today.
Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar. The subject may be on the agenda when he meets his counterparts in the Ural Mountains city of Yekaterinburg, the Kremlin said this month.
China’s central bank Governor Zhou Xiaochuan suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March. His Indian counterpart Duvvuri Subbarao hasn’t commented on that plan. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take such a “revolutionary” step over time.
Last month, China, the biggest importer of soybeans and iron-ore, and Brazil, whose main exports include soy, metals and petroleum, began studying a proposal to move away from the dollar and use yuan and reais instead.
Dollar ‘Discontent’
“What we are seeing is a public expression of discontent over the dollar, yet nobody knows what needs to be done specifically,” said Elina Ribakova, the chief economist in Moscow for Citigroup Inc.
Brazil, the only country to break down its dollar purchases, acquired $2.8 billion of the greenback in May, Russia bought at least $17 billion of foreign currencies, while India’s reserves rose by $10.6 billion, central bank data show. China may have purchased $30 billion in foreign exchange last month, Hong Kong-based research company SJS Markets Ltd. estimates.
At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the IMF in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.
Rising Holdings
Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside America, up from 35 percent in 2000. China is the biggest foreign owner of Treasuries, increasing its holdings to $768 billion as of March from $60 billion in 2000.
A steeper dollar decline would hurt BRIC exports, devalue their reserves and worsen the global credit crisis, said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment banking arm of Credit Agricole SA.
“It would be shooting yourself in the foot to sell U.S. assets and move away from dollars too quickly,” said Kotecha. “As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful.”
Intervention, where central banks buy or sell currencies to influence exchange rates, may help bolster the dollar, he said.
Currency Forecasts
The median estimate of analysts surveyed by Bloomberg is for the real to fall 7 percent to 2.1 per dollar by year-end, while the rupee will drop 0.6 percent to 48. The yen is forecast to weaken 4.4 percent.
“The dollar will stabilize against its major trading partners around the turn of the quarter,” said Michael Shaoul, chief executive officer at New York-based institutional brokerage Oscar Gruss & Son Inc., who called the emerging-market rally in February. “It got stronger than was warranted during the crisis and weakened rapidly during the recovery.”
Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all by the safest, most easily traded assets, such as Treasuries. The MSCI EM Index tumbled 54.5 percent last year.
A shortage of the U.S. currency forced central banks to pump reserves into their economies. The Dollar Index rose 18 percent between June 30 and March 31.
Reserves Reversal
Asian central banks, excluding China, ran down foreign- exchange reserves by more than $300 billion in the 12 months ended April 30, according to London-based HSBC Holdings Plc. Russia’s slid by $213 billion in the eight months ended March 31, central bank data show. Brazil’s reserves dropped $5.7 billion in the six months ended Feb. 27.
Emerging-market central banks are buying dollars as stronger currencies threaten exports while the global economy contracts.
The IMF estimates the world’s gross domestic product will shrink 1.3 percent this year. Trade worldwide will plunge 9 percent, the most since World War II, the World Trade Organization said in March.
Brazil’s $1.3 trillion economy, Latin America’s largest, may drop 0.73 percent in 2009, the biggest contraction in 19 years, according to the median forecast in a May 29 central bank survey. Russia’s economy will contract at least 6 percent, Medvedev said this month. China’s exports, which account for 60 percent of its GDP, slumped 22.6 percent in April from a year earlier, according to the government.
Dollar Strength
“There might be a risk-appetite reversal which could mean some temporary dollar strength,” said Peter Eerdmans, head of emerging-market bonds in London at Investec Asset Management Ltd., which manages $700 million in developing-nation debt. “We have taken profits on some of our emerging-market positions.”
Brazil’s central bank President Henrique Meirelles said last month foreign currency flows are creating a “very favorable” condition for policy makers to boost reserves.
“Given the breadth and depth of the U.S. economy in relation to the world economy, it is unlikely the dollar will be displaced as the principal reserve currency anytime soon,” said Nikhil Srinivasan, who overseas $20 billion of assets as chief investment officer for Asia and the Middle East at Munich-based Allianz SE, Europe’s biggest insurer.
BRIC Business News
The unique economic circumstances have led the BRICs to have to buy up the US dollar which they're becoming fearful of holding, while at the same time looking for currency alternatives to being so exposed by holding the greenback.
This is because they're shoring up their own domestic markets so they can continue exporting goods to the US, which was the main reason for the strong market before the economic crisis.
Brazil, Russia, India and China increased foreign reserves by over than $60 billion in May to limit currency gains as the first worldwide recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil acquired the most dollars in a year, India’s reserves increased the most since January 2008 and Russia added the most foreign exchange since July.
While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is suggesting the BRICs consider developing a new unit of exchange when they get together in Yekaterinburg on June 16. China and Brazil said in May they may look at ways of dropping the dollar for trade between the two countries.
“Foreign central banks do not want to see their currencies relentlessly strengthen,” said Daniel Tenengauzer, head of foreign-exchange and emerging-market debt strategy at Banc of America-Merrill Lynch in New York. “Such a move would dampen an already-weak outlook outside the U.S. and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline.”
Brazil’s real declined 0.1 percent to 1.9633 per dollar at 5:01 p.m. in New York. The ruble fell 1.7 percent to 31.4016 against the U.S. currency, while the Indian rupee dropped 1 percent to 47.57. The Chinese yuan’s 12-month forward contract dropped 0.4 percent to 6.7315 per dollar.
Real’s Rally
International reserve assets excluding gold held by the BRICs, an acronym coined by Goldman Sachs Group Inc. Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, total $2.8 trillion, a 7.8 percent increase from a year ago and 42 percent of the world’s total, data compiled by Bloomberg show.
The real, ruble, and rupee strengthened and the Dollar Index posted its biggest decline in 24 years last month as signs the global recession may be easing spurred investors to seek higher-yielding alternatives to the U.S. currency. A net $26.1 billion has flowed into emerging-market equity funds this year, EPFR Global, which tracks $11 trillion worldwide, said June 4.
The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.
Currency Alternatives
The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, lost 6.4 percent last month, the biggest decline since March 1985. It rose 0.3 percent today.
Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar. The subject may be on the agenda when he meets his counterparts in the Ural Mountains city of Yekaterinburg, the Kremlin said this month.
China’s central bank Governor Zhou Xiaochuan suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March. His Indian counterpart Duvvuri Subbarao hasn’t commented on that plan. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take such a “revolutionary” step over time.
Last month, China, the biggest importer of soybeans and iron-ore, and Brazil, whose main exports include soy, metals and petroleum, began studying a proposal to move away from the dollar and use yuan and reais instead.
Dollar ‘Discontent’
“What we are seeing is a public expression of discontent over the dollar, yet nobody knows what needs to be done specifically,” said Elina Ribakova, the chief economist in Moscow for Citigroup Inc.
Brazil, the only country to break down its dollar purchases, acquired $2.8 billion of the greenback in May, Russia bought at least $17 billion of foreign currencies, while India’s reserves rose by $10.6 billion, central bank data show. China may have purchased $30 billion in foreign exchange last month, Hong Kong-based research company SJS Markets Ltd. estimates.
At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the IMF in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.
Rising Holdings
Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside America, up from 35 percent in 2000. China is the biggest foreign owner of Treasuries, increasing its holdings to $768 billion as of March from $60 billion in 2000.
A steeper dollar decline would hurt BRIC exports, devalue their reserves and worsen the global credit crisis, said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment banking arm of Credit Agricole SA.
“It would be shooting yourself in the foot to sell U.S. assets and move away from dollars too quickly,” said Kotecha. “As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful.”
Intervention, where central banks buy or sell currencies to influence exchange rates, may help bolster the dollar, he said.
Currency Forecasts
The median estimate of analysts surveyed by Bloomberg is for the real to fall 7 percent to 2.1 per dollar by year-end, while the rupee will drop 0.6 percent to 48. The yen is forecast to weaken 4.4 percent.
“The dollar will stabilize against its major trading partners around the turn of the quarter,” said Michael Shaoul, chief executive officer at New York-based institutional brokerage Oscar Gruss & Son Inc., who called the emerging-market rally in February. “It got stronger than was warranted during the crisis and weakened rapidly during the recovery.”
Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all by the safest, most easily traded assets, such as Treasuries. The MSCI EM Index tumbled 54.5 percent last year.
A shortage of the U.S. currency forced central banks to pump reserves into their economies. The Dollar Index rose 18 percent between June 30 and March 31.
Reserves Reversal
Asian central banks, excluding China, ran down foreign- exchange reserves by more than $300 billion in the 12 months ended April 30, according to London-based HSBC Holdings Plc. Russia’s slid by $213 billion in the eight months ended March 31, central bank data show. Brazil’s reserves dropped $5.7 billion in the six months ended Feb. 27.
Emerging-market central banks are buying dollars as stronger currencies threaten exports while the global economy contracts.
The IMF estimates the world’s gross domestic product will shrink 1.3 percent this year. Trade worldwide will plunge 9 percent, the most since World War II, the World Trade Organization said in March.
Brazil’s $1.3 trillion economy, Latin America’s largest, may drop 0.73 percent in 2009, the biggest contraction in 19 years, according to the median forecast in a May 29 central bank survey. Russia’s economy will contract at least 6 percent, Medvedev said this month. China’s exports, which account for 60 percent of its GDP, slumped 22.6 percent in April from a year earlier, according to the government.
Dollar Strength
“There might be a risk-appetite reversal which could mean some temporary dollar strength,” said Peter Eerdmans, head of emerging-market bonds in London at Investec Asset Management Ltd., which manages $700 million in developing-nation debt. “We have taken profits on some of our emerging-market positions.”
Brazil’s central bank President Henrique Meirelles said last month foreign currency flows are creating a “very favorable” condition for policy makers to boost reserves.
“Given the breadth and depth of the U.S. economy in relation to the world economy, it is unlikely the dollar will be displaced as the principal reserve currency anytime soon,” said Nikhil Srinivasan, who overseas $20 billion of assets as chief investment officer for Asia and the Middle East at Munich-based Allianz SE, Europe’s biggest insurer.
BRIC Business News
Thursday, June 4, 2009
BRIC Business | BRIC New World Reserve Currency?
BRIC Business
Will BRICs push for creating new world reserve currency represented by them?
“Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” said Ben Bernanke yesterday. The Fed Chairman took a page from our playbook yesterday, warning Congress that “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,”
From a man who played an integral role in two of the most easy-money, spendthrift administrations in U.S. history… that’s an interesting recommendation.
So what’s an investor to do? Prepare for higher Fed interest rates? Look for Bernanke to shut down the dollar printing press and for Congress to get its fiscal act together?
For the most part, we suspect Bernanke is just talking up his book. He’s got loads of T-bonds to buy, yields to suppress and mortgage rates to manipulate. The more interference he can run, the longer it will take for the world to wake up to this:
Washington is on track to issue more than $5 trillion in new debt over the next 18 months. Total interest payments on government debt are plotted to exceed $800 billion in the next 10 years, up almost fivefold from 2009. That’s if long bond yields stay under 5%, as the Congressional Budget Office forecasts. Every one percentage point higher, says Harvard economist Kenneth Rogoff, will cost the U.S. government an extra $170 billion annually.
“The Fed can only manipulate interest rates so far,” notes our currency trader Bill Jenkins. “Then the market takes over. Our Treasury bonds are becoming a greater and greater risk to people who buy and hold them. Of course, basic market theory holds that to assume greater risk going forward, one must have a higher rate of return. So no matter what the Fed “dictates” by lowering rates, they are on their way up!”
Perhaps Washington’s only saving grace: The whole Western world has bought into America’s economic school of thought.
“We are witnessing the end of the post-World War II economic construct of the world’s financial system,” opines Byron King. “That construct always had a Western bias. But the 2008 crash of the Western business and financial model has changed everything. It has left a barren worldwide financial landscape for large development projects. Most traditional Western financing is simply not available for large projects. And as French author Francois Rabelais (1494-1553) once noted, ‘Nature abhors a vacuum.’
“Thus has the Western financial crisis handed well-capitalized, government-backed Chinese banks and industrial firms an unmatched competitive advantage. With the traditional credit markets dry, Chinese banks have transformed into key lenders for the resource developments that will fuel the next generation of humanity. Indeed, for now, the Chinese are the world’s ONLY lenders for large resource development projects.
“Exhibit 1, Brazil. Brazil is making a national commitment to develop energy resources located far offshore in the South Atlantic. Indeed, no nation has ever advanced such an ambitious plan for long-term comprehensive offshore development. And it’s being bankrolled by China.”
Could the world’s new reserve currency be “BRIC dollars”? Russian President Dmitry Medvedev will propose a new world currency when he meets with Chinese, Brazilian and Indian leaders this month, his spokeswoman said this week.
“We need some kind of universal means of payment, which could create the basis of a future international financial system,” Medvedev told CNBC. “Naturally, because of the crisis in the American economy, attitude to the dollar has also changed.”
BRIC Business
Will BRICs push for creating new world reserve currency represented by them?
“Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” said Ben Bernanke yesterday. The Fed Chairman took a page from our playbook yesterday, warning Congress that “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,”
From a man who played an integral role in two of the most easy-money, spendthrift administrations in U.S. history… that’s an interesting recommendation.
So what’s an investor to do? Prepare for higher Fed interest rates? Look for Bernanke to shut down the dollar printing press and for Congress to get its fiscal act together?
For the most part, we suspect Bernanke is just talking up his book. He’s got loads of T-bonds to buy, yields to suppress and mortgage rates to manipulate. The more interference he can run, the longer it will take for the world to wake up to this:
Washington is on track to issue more than $5 trillion in new debt over the next 18 months. Total interest payments on government debt are plotted to exceed $800 billion in the next 10 years, up almost fivefold from 2009. That’s if long bond yields stay under 5%, as the Congressional Budget Office forecasts. Every one percentage point higher, says Harvard economist Kenneth Rogoff, will cost the U.S. government an extra $170 billion annually.
“The Fed can only manipulate interest rates so far,” notes our currency trader Bill Jenkins. “Then the market takes over. Our Treasury bonds are becoming a greater and greater risk to people who buy and hold them. Of course, basic market theory holds that to assume greater risk going forward, one must have a higher rate of return. So no matter what the Fed “dictates” by lowering rates, they are on their way up!”
Perhaps Washington’s only saving grace: The whole Western world has bought into America’s economic school of thought.
“We are witnessing the end of the post-World War II economic construct of the world’s financial system,” opines Byron King. “That construct always had a Western bias. But the 2008 crash of the Western business and financial model has changed everything. It has left a barren worldwide financial landscape for large development projects. Most traditional Western financing is simply not available for large projects. And as French author Francois Rabelais (1494-1553) once noted, ‘Nature abhors a vacuum.’
“Thus has the Western financial crisis handed well-capitalized, government-backed Chinese banks and industrial firms an unmatched competitive advantage. With the traditional credit markets dry, Chinese banks have transformed into key lenders for the resource developments that will fuel the next generation of humanity. Indeed, for now, the Chinese are the world’s ONLY lenders for large resource development projects.
“Exhibit 1, Brazil. Brazil is making a national commitment to develop energy resources located far offshore in the South Atlantic. Indeed, no nation has ever advanced such an ambitious plan for long-term comprehensive offshore development. And it’s being bankrolled by China.”
Could the world’s new reserve currency be “BRIC dollars”? Russian President Dmitry Medvedev will propose a new world currency when he meets with Chinese, Brazilian and Indian leaders this month, his spokeswoman said this week.
“We need some kind of universal means of payment, which could create the basis of a future international financial system,” Medvedev told CNBC. “Naturally, because of the crisis in the American economy, attitude to the dollar has also changed.”
BRIC Business
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