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

Dr. Alexander Mirtchev Warns Against the Mid and Long-Term Repercussions of Unbalanced and Even Mindless State Intervention in Emerging Markets' Fina

Emerging Markets Expert Assesses the Implications for Government Intervention in the Banking System

Sunday January 11, 2009, 4:14 pm EST

WASHINGTON, DC--(MARKET WIRE)--Jan 11, 2009 -- Alexander Mirtchev, Washington-based economic strategist and expert, reviewed the actions of governments in the emerging markets in support of the beleaguered financial sector and their potential effects with Mergermarket, the partner publication of the Financial Times.

Dr. Mirtchev explained that governments had little choice in taking urgent measures to the financial crisis. "With the crisis looming, it was not possible to stick to ideological positions or specific doctrines -- you do not consider the price of the carpet you are using to put out the fire in your house," said Mirtchev. However, he believes that it is high time to look beyond the immediate short-term pressures, and devise a broader policy response that would address the long-term needs to encourage productivity, competitiveness and growth. He is of the view that, when devising such strategies, governments have to take into account the truly global nature of today's financial system. "The world financial system has evolved to the point where no economy functions as a closed circuit. Economic interaction in a specific market cannot be considered a zero-sum game." In the case of emerging markets such as India, China, Mexico, Indonesia and others, "participation and integration in the global financial system makes sense," in particular with a view to the productivity and growth-generating role that these markets have in the world economy.

He considers that in the short-term direct government support and recapitalization can help banks and institutions continue their function as the mechanism that pumps capital throughout the global economy, and it seems already unavoidable. However, the key is, at the end of the day, to face the reality of the newly emerging global financial system of the XXI century, not to try and "put the genie back in the bottle" by returning to the model of the 1990s, and jumpstart the new, inclusive financial order that could accelerate the recovery and sustain growth.

Some emerging market governments have introduced "special enforcement and monitoring bodies to supervise the use of the funding by the banks, to ensure that the funds are spent exactly for the purposes required by the government, i.e. alleviation of the fallout from the credit crunch on businesses and the population." In particular, his view is that "the banks' shareholders and management will have to share the responsibility and the burden -- there should be no rewards for failure." In the case of Kazakhstan, he noted that "the State refrained from direct nationalization of the banks; rather the government is only offering to buy stakes in banks leaving them with the choice to accept or decline additional capital infusion in return for equity stakes."

Government financial packages to "ensure the stability of the financial system by propping up the banks for the duration of the crisis will need to be complemented with comprehensive strategies to support growth," Dr. Mirtchev told Mergermarket. "The financial sector's malaise cannot be realistically resolved just on the basis of government funding. The market and private investors would need to be engaged."

At the same time, Dr. Mirtchev argues that a number of the rapidly developing economies have better chances of pulling out of the crisis than some of the mature economies. He said that "due to numerous factors, emerging markets are much easier to micro-manage. With the right political vision and will, they should be able to move past the short-term tactics to the long-term necessity of modernization, productivity and competitiveness." He notes that unlike for example U.S. and Japan, many of the emerging markets enjoy the recent hard-won experience of successful privatizations. Therefore, their governments know quite well when and how to exit the companies. He considers that emerging markets would also be better served by preserving their openness to the global economy. "They know that being part of the international financial system exposes them to global shocks. However, they should not forget that this same openness brought them ten years of booming foreign direct investments that generated an unprecedented level of economic growth," Mirtchev indicated.

Dr. Mirtchev is President of Krull Corp., a Washington-based consultancy. He is also an independent director of Samruk-Kazyna National Welfare Fund of Kazakhstan, and serves as senior economic adviser to the country's Prime Minister.

To read the entire interview with Dr. Mirtchev in Mergermarket, visit http://www.mergermarket.com/.

About Krull Corporation:

Krull Corporation is a Washington, D.C.-based advisory and project management firm with expertise in dealing with economic growth, industrial expansion and restructuring issues. Founded by Dr. Alexander Mirtchev in 1992, Krull Corporation capitalizes on his extensive professional experience in market developments and reforms and focuses primarily on emerging and transitional economies. Over the years, the firm has provided its clients with outstanding strategic guidance and professional services in various areas. Combining a unique blend of global reach and understanding of local markets, Krull is able to consistently produce high quality results and returns.

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