El-Erian Says Summit Shows `Rebalancing' as BRICS Buy IMF Bonds
June 12 (Bloomberg) -- Leaders of Brazil, Russia, India and China will probably use their first summit next week to press the case that their 15 percent share of the world economy and 42 percent of global currency reserves should give them more clout.
For U.S. President Barack Obama and Federal Reserve Chairman Ben S. Bernanke, that’s a warning. For investors, it may be an opportunity.
Brazil and Russia joined China this week in saying they would shift some $70 billion of reserves into multicurrency bonds issued by the International Monetary Fund. While the moves aren’t an effort to “topple the dollar,” according to Mark Mobius, executive chairman of Templeton Asset Management Ltd., they increase the relevance of the four largest emerging economies, which account for only 6 percent of the MSCI AC World Index.
“The rebalancing of relative economic power is not only alive but gaining momentum,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., adviser to the world’s largest bond fund. “Average investors need to make sure that they are not hostage to an outdated conventional wisdom that underexposes them to this phenomenon.”
The meeting is primarily designed to focus on economic issues. Among the topics in the Ural Mountains city of Yekaterinburg, where Bolsheviks executed Tsar Nicholas II in 1918, will be the financial crisis, reshaping the IMF, climate change and the future of dialogue among the so-called BRIC countries, He Yafei, a vice foreign minister at China’s Ministry of Foreign Affairs, told reporters on June 9.
IMF Votes
The worst recession in the industrialized world in more than 50 years has emboldened emerging markets to demand a bigger say in the global financial system. That fight begins at the IMF, which developing countries say doesn’t reflect the shift in economic power. Brazil, the world’s 10th-largest economy, has 1.38 percent of the IMF board’s votes, less than the 2.09 percent for Belgium, an economy one-third the size.
The IMF, created as World War II was ending, gives more power to such countries as the U.S., which holds 16.77 percent of the votes.
The June 16 gathering of the BRICs is the biggest show of unity yet in their bid to win more financial influence -- while they take jabs at the U.S. Russian President Dmitry Medvedev said on June 5 that using a mix of regional currencies as a global reserve rather than the dollar would help stabilize the world economy.
About the Deficit
To Mobius, who oversees $20 billion of emerging-market assets at the Singapore-based Templeton asset arm, the real focus of the BRIC agenda is the U.S. 2009 projected $1.85 trillion deficit and $787 billion economic-stimulus plan. They’re both sparking fears among creditors that the dollar will fall and inflation will accelerate, shrinking the value of BRIC dollar holdings.
International reserve assets held by the BRICs, excluding gold, total $2.8 trillion, according to data compiled by Bloomberg.
“The BRICs are putting the U.S. on notice that there has to be a cutback on spending and get their house in order,” Mobius said in a telephone interview from Geneva.
“This isn’t an effort to topple the dollar,” he said. “Any attack on the dollar will hurt them. But they want to make sure this kind of mess doesn’t happen again.”
Kirk’s Warning
Representative Mark Kirk, co-chairman of the congressional U.S.-China Working Group, joined three other Republicans this month in drafting a letter to Bernanke urging him to stop buying Treasury debt. That raises the money supply and could spark inflation and erode the value of foreigners’ Treasury holdings, Kirk said. He visited China last month and met with officials including People’s Bank of China Governor Zhou Xiaochuan.
“I strongly urge the chairman to end the purchase of Treasury bills so that this BRIC conversation goes nowhere,” Kirk, an Illinois Republican, said in an interview.
Bernanke told Congress on May 5 that the Fed’s actions to boost credit and keep interest rates near zero were necessary to support the economy for now, and that the central bank planned to change course at the “proper moment.”
The BRICs may overtake the combined $30.2 trillion gross domestic product of the Group of Seven nations by 2027, said Jim O’Neill, the London-based Goldman Sachs Group Inc. chief economist who coined the term for the four countries in a 2001 report. That is a decade sooner than he had forecast.
BRIC Trade
Chinese trade with the other three countries grew twice as fast as that with the U.S. between 2003 and 2007, fueled by exports of consumer products to India and imports of iron ore from Brazil.
This year, China replaced the U.S. as Brazil’s largest trading partner, and last month the two countries signed a $10 billion financing deal to help state-controlled Petroleo Brasileiro SA develop 5 billion to 8 billion barrels in offshore-oil finds.
Russia probably will sign a contract in coming months to sell oil to China that may be priced in rubles, said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow.
Benchmark stock indexes in the four countries have risen on average about 60 percent this year, compared with a 4.6 percent advance for the Standard & Poor’s 500 Index. Still, there is room for more gains, O’Neill said.
Mobius said he recommended big companies in the retail and commodity industries that will benefit from increasing income levels and faster development, even after their prices have jumped this year.
Share Increases
Beijing-based PetroChina Co. Ltd., China’s second-largest oil refiner, has climbed 38 percent. Mumbai-based Tata Motors Ltd., India’s biggest truckmaker, has risen 131 percent. Sao Paulo-based homebuilder Rossi Residencial SA has doubled, and gas producer OAO Novatek of Tarko-Sale, Sibera, is up 186 percent.
“Investors need to start thinking about them as something more than a luxury risk market,” O’Neill said.
The countries attending the summit have sharp differences in governance, size and economic weight, with varying commitments to free trade, open markets and political pluralism. India, the world’s second-most populous country, has been a democracy for six decades, while China, the most populous, has been a Communist state for that long.
All except Brazil possess nuclear weapons; only Russia belongs to the Group of Eight industrial nations. Russia and China are permanent members of the United Nations Security Council, while Brazil and India want to be.
‘Perfectly Capable’
Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission, said in April that India would be “perfectly capable of contributing” to the IMF’s bond program. Still, newly re-elected Prime Minister Manmohan Singh may want to win U.S. favor, said Sebastien Barbe, Hong Kong-based head of emerging-market strategy at Calyon, the investment-banking unit of France’s Credit Agricole SA.
“Links with the U.S. are something the new government in India would like to support,” Barbe said. “India may try not to get too high profile at this meeting.”
Among bilateral deals that may be discussed is India’s desire for a stake in the Sakhalin-3 oil and gas project in Russia as it tries to secure energy to fuel the world’s second fastest-growing major economy. “There are discussions but nothing final yet,” R.S. Butola, managing director of ONGC Videsh Ltd., Oil & Natural Gas Corp.’s overseas investment arm, said in a June 8 interview.
‘Increase the Voice’
For China, which had $767.9 billion in U.S. Treasury securities at the end of March, making it the biggest foreign holder, the meeting is a way to “increase the voice and representation of emerging economies,” vice minister He said at a briefing on President Hu Jintao’s goals for the summit.
BRIC leaders have met on the sidelines of international conferences in the past, and foreign ministers met in Yekaterinburg in May 2008.
“As dynamic emerging-market countries begin playing a welcome and greater role in strengthening the international system and assuming stepped up responsibilities, we look forward to working with them on exploring areas of common interest,” said U.S. Treasury spokeswoman Natalie Wyeth.
In past meetings, there were some communications snafus. When Brazilian President Luiz Inacio Lula da Silva and China’s Hu met in April during the Group of 20 summit in London, an English translator was needed to bridge the language gap between Mandarin and Portuguese.
Brazil has only nine diplomats in Beijing, the same number it has in Chile, an economy 5 percent of its size. By contrast, the U.S. has 300 Americans working at the embassy in Beijing.
“There’s a great deal of ignorance about each other,” said Marco Aurelio Garcia, who is traveling to the summit as Lula’s top foreign-policy adviser. “What we share is a commitment to seek out new vocations in a world economy in transition.”
http://www.bloomberg.com/apps/news?pid=20601083&sid=atucH58_sh8s
June 12 (Bloomberg) -- Leaders of Brazil, Russia, India and China will probably use their first summit next week to press the case that their 15 percent share of the world economy and 42 percent of global currency reserves should give them more clout.
For U.S. President Barack Obama and Federal Reserve Chairman Ben S. Bernanke, that’s a warning. For investors, it may be an opportunity.
Brazil and Russia joined China this week in saying they would shift some $70 billion of reserves into multicurrency bonds issued by the International Monetary Fund. While the moves aren’t an effort to “topple the dollar,” according to Mark Mobius, executive chairman of Templeton Asset Management Ltd., they increase the relevance of the four largest emerging economies, which account for only 6 percent of the MSCI AC World Index.
“The rebalancing of relative economic power is not only alive but gaining momentum,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., adviser to the world’s largest bond fund. “Average investors need to make sure that they are not hostage to an outdated conventional wisdom that underexposes them to this phenomenon.”
The meeting is primarily designed to focus on economic issues. Among the topics in the Ural Mountains city of Yekaterinburg, where Bolsheviks executed Tsar Nicholas II in 1918, will be the financial crisis, reshaping the IMF, climate change and the future of dialogue among the so-called BRIC countries, He Yafei, a vice foreign minister at China’s Ministry of Foreign Affairs, told reporters on June 9.
IMF Votes
The worst recession in the industrialized world in more than 50 years has emboldened emerging markets to demand a bigger say in the global financial system. That fight begins at the IMF, which developing countries say doesn’t reflect the shift in economic power. Brazil, the world’s 10th-largest economy, has 1.38 percent of the IMF board’s votes, less than the 2.09 percent for Belgium, an economy one-third the size.
The IMF, created as World War II was ending, gives more power to such countries as the U.S., which holds 16.77 percent of the votes.
The June 16 gathering of the BRICs is the biggest show of unity yet in their bid to win more financial influence -- while they take jabs at the U.S. Russian President Dmitry Medvedev said on June 5 that using a mix of regional currencies as a global reserve rather than the dollar would help stabilize the world economy.
About the Deficit
To Mobius, who oversees $20 billion of emerging-market assets at the Singapore-based Templeton asset arm, the real focus of the BRIC agenda is the U.S. 2009 projected $1.85 trillion deficit and $787 billion economic-stimulus plan. They’re both sparking fears among creditors that the dollar will fall and inflation will accelerate, shrinking the value of BRIC dollar holdings.
International reserve assets held by the BRICs, excluding gold, total $2.8 trillion, according to data compiled by Bloomberg.
“The BRICs are putting the U.S. on notice that there has to be a cutback on spending and get their house in order,” Mobius said in a telephone interview from Geneva.
“This isn’t an effort to topple the dollar,” he said. “Any attack on the dollar will hurt them. But they want to make sure this kind of mess doesn’t happen again.”
Kirk’s Warning
Representative Mark Kirk, co-chairman of the congressional U.S.-China Working Group, joined three other Republicans this month in drafting a letter to Bernanke urging him to stop buying Treasury debt. That raises the money supply and could spark inflation and erode the value of foreigners’ Treasury holdings, Kirk said. He visited China last month and met with officials including People’s Bank of China Governor Zhou Xiaochuan.
“I strongly urge the chairman to end the purchase of Treasury bills so that this BRIC conversation goes nowhere,” Kirk, an Illinois Republican, said in an interview.
Bernanke told Congress on May 5 that the Fed’s actions to boost credit and keep interest rates near zero were necessary to support the economy for now, and that the central bank planned to change course at the “proper moment.”
The BRICs may overtake the combined $30.2 trillion gross domestic product of the Group of Seven nations by 2027, said Jim O’Neill, the London-based Goldman Sachs Group Inc. chief economist who coined the term for the four countries in a 2001 report. That is a decade sooner than he had forecast.
BRIC Trade
Chinese trade with the other three countries grew twice as fast as that with the U.S. between 2003 and 2007, fueled by exports of consumer products to India and imports of iron ore from Brazil.
This year, China replaced the U.S. as Brazil’s largest trading partner, and last month the two countries signed a $10 billion financing deal to help state-controlled Petroleo Brasileiro SA develop 5 billion to 8 billion barrels in offshore-oil finds.
Russia probably will sign a contract in coming months to sell oil to China that may be priced in rubles, said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow.
Benchmark stock indexes in the four countries have risen on average about 60 percent this year, compared with a 4.6 percent advance for the Standard & Poor’s 500 Index. Still, there is room for more gains, O’Neill said.
Mobius said he recommended big companies in the retail and commodity industries that will benefit from increasing income levels and faster development, even after their prices have jumped this year.
Share Increases
Beijing-based PetroChina Co. Ltd., China’s second-largest oil refiner, has climbed 38 percent. Mumbai-based Tata Motors Ltd., India’s biggest truckmaker, has risen 131 percent. Sao Paulo-based homebuilder Rossi Residencial SA has doubled, and gas producer OAO Novatek of Tarko-Sale, Sibera, is up 186 percent.
“Investors need to start thinking about them as something more than a luxury risk market,” O’Neill said.
The countries attending the summit have sharp differences in governance, size and economic weight, with varying commitments to free trade, open markets and political pluralism. India, the world’s second-most populous country, has been a democracy for six decades, while China, the most populous, has been a Communist state for that long.
All except Brazil possess nuclear weapons; only Russia belongs to the Group of Eight industrial nations. Russia and China are permanent members of the United Nations Security Council, while Brazil and India want to be.
‘Perfectly Capable’
Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission, said in April that India would be “perfectly capable of contributing” to the IMF’s bond program. Still, newly re-elected Prime Minister Manmohan Singh may want to win U.S. favor, said Sebastien Barbe, Hong Kong-based head of emerging-market strategy at Calyon, the investment-banking unit of France’s Credit Agricole SA.
“Links with the U.S. are something the new government in India would like to support,” Barbe said. “India may try not to get too high profile at this meeting.”
Among bilateral deals that may be discussed is India’s desire for a stake in the Sakhalin-3 oil and gas project in Russia as it tries to secure energy to fuel the world’s second fastest-growing major economy. “There are discussions but nothing final yet,” R.S. Butola, managing director of ONGC Videsh Ltd., Oil & Natural Gas Corp.’s overseas investment arm, said in a June 8 interview.
‘Increase the Voice’
For China, which had $767.9 billion in U.S. Treasury securities at the end of March, making it the biggest foreign holder, the meeting is a way to “increase the voice and representation of emerging economies,” vice minister He said at a briefing on President Hu Jintao’s goals for the summit.
BRIC leaders have met on the sidelines of international conferences in the past, and foreign ministers met in Yekaterinburg in May 2008.
“As dynamic emerging-market countries begin playing a welcome and greater role in strengthening the international system and assuming stepped up responsibilities, we look forward to working with them on exploring areas of common interest,” said U.S. Treasury spokeswoman Natalie Wyeth.
In past meetings, there were some communications snafus. When Brazilian President Luiz Inacio Lula da Silva and China’s Hu met in April during the Group of 20 summit in London, an English translator was needed to bridge the language gap between Mandarin and Portuguese.
Brazil has only nine diplomats in Beijing, the same number it has in Chile, an economy 5 percent of its size. By contrast, the U.S. has 300 Americans working at the embassy in Beijing.
“There’s a great deal of ignorance about each other,” said Marco Aurelio Garcia, who is traveling to the summit as Lula’s top foreign-policy adviser. “What we share is a commitment to seek out new vocations in a world economy in transition.”
http://www.bloomberg.com/apps/news?pid=20601083&sid=atucH58_sh8s