The BRIC story is common knowledge by now. The BRIC countries are characterised by high economic growth rates, large populations and expanding middle classes. China and India will re-emerge as major economic and political powers over the next fifty years or so and China is projected to replace the United States as the world’s largest economy by 2040.
According to data compiled by economic historian Angus Maddison, as recently as 1700, Qing China and Mughal India each represented a little less than 25% of world GDP. Their respective share dropped to less than 5% by 1950. The recent revision of World Bank PPP data notwithstanding, China and India are poised to “reclaim” their place as the world’s largest economies over the next half century. This, in a nutshell, is the BRIC story.
The BRIC label visibly lumps together a diverse group of countries. The countries differ enormously in terms of size, population and economic growth potential. An important difference that has received insufficient attention is how the BRICs differ in terms of their economic strategy. China pursues an East Asian development strategy relying on large domestic savings and high investment rates, a competitive exchange rate and a manufacturing-based export-oriented strategy.
The other three BRICs follow very different models. Russia pursues what may be labeled the “Gulf” model, which is based on strategic commodity exports. India and Brazil, by contrast, remain fairly closed economies, forcing them to rely more on the growth of their domestic markets. While India’s growth is heavily concentrated in services (and lagging in manufacturing), Brazil pursues a diversified growth strategy focusing on services, manufacturing and commodities simultaneously.
These differences in economic strategy, especially as pertains to trade openness, stability of export revenues and savings generation capacity, are of relevance to the BRIC countries’ emerging role as international investors. A lot of ink has been spilled on the rise of sovereign wealth funds (SWF) and increasing outward direct investment (ODI) by emerging market multi-nationals. Although all BRIC countries have seen a substantial increase in external assets, China stands out in terms of size of external asset holdings and asset accumulation.
Only China will be a major net capital exporter over the next decade thanks to its large domestic savings and export-oriented development strategy. China’s current account surplus (net capital exports) has been increasing dramatically. Last year, China was responsible for more than 20% of world net capital exports, ahead of Japan and Germany.
The IMF projects that China will remain a net capital exporter over the coming years, while the other three BRICs are projected to remain (Brazil, India) or to become (Russia) net capital importers. According to the IMF, Chinese cumulative net capital exports will amount to USD 3.4 tr in 2008-2013. By contrast, Brazil and India will register a cumulative current account deficit, while Russia will register a cumulative surplus of a mere USD 35 bn (equivalent to 1% of China’s cumulative current account surplus!). China will accumulate a massive amount of net external assets over the next five years, adding to its already large stock of external assets.
China is already in a class of its own in terms of net international investment position (NIIP). As of 2007, China’s gross (net) external assets totalled USD 2.3 tr (USD 1 tr), more than the gross (net) external assets of the other three BRICs combined. When it comes to the size of gross external asset holdings, China is far ahead of the pack. Nonetheless, the expansion of gross cross-border financial flows combined with continued official asset accumulation will lead to a further increase in government-controlled external assets in all BRIC countries (but much, much less so in Brazil and India than in China and Russia). Even though only two of the four BRICs (China, Russia) will improve their net external position (leaving aside valuation effects), all four BRIC countries will increase their gross external asset holdings.
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| Source: IMF |
A significant share of the increase in external assets will accrue to the official sector (central bank, SWFs etc.). All BRIC governments (with the exception of India) have set up (China, Russia) or are in the process of setting up (Brazil) sovereign wealth funds with the objective of investing part of their external holdings in higher-return assets rather than keeping them invested in low-return, high-grade debt instruments. This, in addition to increasing external asset holdings, will make the BRIC countries more important international financial players.
China again has the largest “excess” FX reserves – amounting to USD 1.8 tr, compared with Brazil’s USD 200 bn, India’s USD 310 bn and Russia’s USD 600 bn. (Russia’s FX reserves include assets held by the National Wealth Fund and Reserve Fund.) Government-controlled external assets will increase in all BRICs, but only China (and much less so Russia) will be a net capital exporter. This is why China’s net external asset accumulation will dwarf Russia’s, let alone Brazil’s and India’s. On account of its large current account surpluses and large FDI inflows, China will also dwarf the other BRICs in terms of gross external asset accumulation, especially if the Chinese authorities continue to liberalise inward investment. All four countries will emerge as important international investors. But China, like in so many other respects, will undoubtedly be in a class of its own.