Economically, politically and demographically, the BRIC differ dramatically. The same is true with respect to their international financial importance. China is not only by far the BRIC country with the largest foreign assets (and foreign-exchange reserves). Chinese foreign reserve assets alone amount to USD 3.3 tr compared with a combined USD 1.2 tr in Brazil, India and Russia. But it is also the largest net external creditor. China’s foreign investment potential is enormous and dwarfs that of all the other BRIC. For now, China, like the other BRIC, is running a ‘long debt and short equity’. Similar to the other BRIC, most of its assets are denominated in foreign-currency, while its higher-yielding (equity-type) liabilities are predominantly denominated in local currency. From a narrowly financial perspective, China and the other BRIC are getting a proverbial raw deal, not least because they are likely to see their local-currency-denominated liabilities appreciate relative to its largely foreign-currency-assets. After all, real exchange rate appreciation is characteristic of fast-growing emerging economies experiencing productivity growth. Thus, from a narrow financial point of view, the BRIC and China have every reason to diversify their assets out of low-yielding foreign-currency-denominated ‘safe haven’ bonds into higher-yielding, (preferably) local-currency-denominated (from the BRICs’ point of view) assets.
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| Source: IMF |