Hamish McRae: Increasingly the future of the world economy is being determined by what happens in the Brics

Economic View: While China is pressing forward on bank reform 'the omens are not good'

The past couple of weeks has seen a progressive reassessment of the strengths and weaknesses of the Brics. They are, of course, an utterly different group of countries, linked simply by the fact that they are the four largest emerging economies. But three of them have, for quite different reasons, been downgraded in the eyes of the business and financial communities.

As far as Russia is concerned there is not much more to be said. What has happened has confirmed that there are political risks to business with Russia that are hard to calculate. You might have imagined that something similar to what has happened in Ukraine could have been foreseen but it evidently was not. The fall of both the rouble and Russian share prices in the past few weeks shows that this risk was not "in the market".

In the case of Brazil the switch has been driven entirely by economics rather than politics, with growth back in 2010 of 7.5 per cent flipping to near-recession at the moment. Actual recession is thought unlikely but there is no doubt that the country is experiencing very slow growth. It is, in the phrase of The Wall Street Journal, "a wilting giant".

India is the one of the four where prospects are perceived to have improved, while in China there are two stories. One is about the transition from an economy driven by investment and exports to one driven by consumption. The other is the shift from an economy where there was very little debt to one where debt, known and unknown, hangs over future growth.

The first is a necessary and inevitable shift of emphasis. As you can see from the graph, which shows the size of the working-age population relative to the total population, China's demographic structure is becoming more adverse, at least from an economic point of view. The one-child policy is starting to kick in. Russia faces similar headwinds, while in the case of Brazil and especially India, demographic trends are positive for some time yet. Demography is by no means the only driver of economic growth, but it is an important one. On a long view it seems reasonable to expect Chinese growth to decline, while that of India and Brazil to remain high.

China's first story is illustrated by some sharp numbers for trade last month, when there was a rare trade deficit. Imports were up 10 per cent on February last year, while exports were down 18 per cent. True, this is just one month but it gives a feeling for the transition that China is seeking to make. Why shift so much stuff abroad and pile up dollars that go down in value, when you can use those resources to improve the living standards of your own people? It's a difficult transition to make and it does, in the view of Steen Jakobsen, the chief economist at Saxo Bank, involve short-term pain. But that pain, he argues, will lead to long-term gain.

Besides, the country has to do this because export-driven growth will run up against increasing resistance. As Andrew Smithers notes in a paper out yesterday, China's past policy of boosting its economy through an undervalued exchange rate has been successful but has created problems which are becoming more acute. He argues that to hold down the exchange rate China had to increase its foreign exchange reserves, which in turn had to be sterilised to prevent the resulting increase in domestic liquidity from causing inflation. This has been successful, but at the cost of creating a large, unregulated, parallel banking system.

That leads to story two, the rise of debt. The growth of the parallel banking system is not the only source of instability; the boom in investment, orchestrated to try to offset the impact of the global downturn, also involved huge borrowing. Relative to GDP, public debt in China is quite low, around 50 per cent (we are about 80 per cent). But add all debt together, public and private, and insofar as we know what it is, it must be at least 200 per cent of GDP. Worse, a lot of that debt has been accumulated by poor investment decisions. So there is a dilemma: China needs fast growth to work through its debt mountain but one of the main ways it has maintained fast growth is piling up more debt.

How serious is this? Diana Choyleva at Lombard Street Research suggests that while China is pressing forward on bank reform "the omens are not good". She argues that the authorities have to allow defaults rather than have banks roll over loans that cannot be repaid. That was the policy employed by Japan to shore up banks after the property bubble of the 1980s, which meant Japanese banks were so stuffed with bad debts that they were unable to make new loans to creditworthy customers. The result was 20 years of stagnation.

I don't think China is in that position, for two reasons. First it is a much less mature economy, with much greater growth potential. Second the scale of the indebtedness, as far as one can see from the outside, is much more manageable. But over the next decade Chinese growth will slow, as it needs to, with all the implications this will have for demand for raw materials and energy.

A final quick word about India. The rupee is very undervalued – by more than 30 per cent against the dollar, according to some calculations by World Economics. So the country should be ripe for an export boom. Elections start next month, with the strong possibility that the BJP, led by Narendra Modi, will take office. This will be controversial, but there is a perception that India will have a more business-friendly climate and lift growth, currently 4.5 per cent, to something nearer 6 per cent.

We will see. The big point here is that the future of the world economy is being increasingly determined by what happens in the Brics rather than what happens among the G7. On my quick tally the Brics will this year again add more demand to the world economy than the G7, as well, of course, as continuing to grow more swiftly.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
video
Arts and Entertainment
tv

First full-length look is finally here

Arts and Entertainment
Stanley Tucci as DCI Eugene Morton, Sophie Grabol as Hildur Odegard and Christopher Eccleston as Professor Charlie Stoddart in 'Fortitude'
tvGrace Dent: Still, it's compelling and cinematically sublime
News
news

Rap music mogul accused of running two men over in his truck

Arts and Entertainment
EastEnders actor Danny Dyer has been rejected from Game of Thrones three times
tv
Arts and Entertainment
Frank Turner performing at 93 Feet East
musicReview: 93 Feet East, London
News
Toronto tops the charts across a range of indexes
news

World cities ranked in terms of safety, food security and 'liveability'

ebooks
ebooksA special investigation by Andy McSmith
Voices
A mother and her child
voices
Voices
The veterans Mark Hayward, Hugh Thompson and Sean Staines (back) with Grayson Perry (front left) and Evgeny Lebedev
charity appealMaverick artist Grayson Perry backs our campaign
News
Tax now accounts for ‘nearly 80%’ of the price of a bottle of whisky
news

Arts and Entertainment
Peppa Pig wearing her golden boots
film

"Oink! Oink! Hee hee hee!" First interview with the big-screen star

Life and Style
tech

Biohacking group hopes technology will lead people to think about even more dystopian uses

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee