On Thursday in the coastal city of Sanya on China's Hainan island, Brazil, Russia, India, China and now joined by South Africa for the first time - the BRICS group of global emergent economies - met in their third annual summit. These economies represent 40 percent of the world's population and 20 percent of the global Gross Domestic Product (GDP). More importantly, these economies are growing over six percent per annum compared to negligible growth in the world's most advanced industrial economies.
At their first meeting in Brazil two years ago, the BRIC economies accounted for just over 15 percent of global GDP. By 2016, the International Monetary Fund predicts the GDP of the four largest - Brazil, Russia, India, China - will total $2.1 trillion collectively out-stripping the US economy. The BRICS group also hold 40 percent of the world's currency reserves, the majority of which is still in US dollars.
While summit dealt with a whole range of issues from Libya to climate change, the primary focus was to forge ever closer financial and trade ties. To that end, the BRICS each represented by their head of governments - Indian Prime Minister Manmohan Singh, China's Hu Jintao, Brazil's Dilma Rousseff, Russia's Dmitry Medvedev and South Africa's Jacob Zuma - signed an agreement to use their own currencies instead of the predominant US dollar in issuing credit or grants to each other. Full text of the Sanya Declaration is available from China's Xinhua Net news service.
"Our designated banks have signed a framework agreement on financial cooperation which envisages grant of credit in local currencies and cooperation in capital markets and other financial services," Manmohan Singh told reporters at a news conference with other BRICS leaders.
While the agreement is confined to credit and not trade, it is only a matter of time before trade is settled in non-dollar denominated currencies. Take Sino-Brazilian trade. Brazil’s imports from China have gone from $1.2 billion in 2000, to $5.3 billion in 2005, to $25.5 billion in 2010 - mostly Chinese manufactured good such as cell phones and televisions. Brazilian exports to China have gone from $1 billion in 2000, to $6.8 billion in 2005, to $30.7 billion in 2010. Over 80 percent of Brazilian exports to China are one of three things: iron, soy, or oil.
While Indian Prime Minister Singh, Russian President Medvedev and South African President Jacob Zuma all headed home or went on to other destinations, Brazilian President Dilma Rousseff is spending five more days in China this week to concentrate on trade talks. As Al Jazeera notes there is concern in Brazil if exporting iron and soy (which is major cause of Amazon deforestation) to China while importing billions of dollars in low-cost Chinese manufactured goods (that would be putting Brazilians out of work) is really the kind of healthy trade relationship Brazil wants with China.
From the Brazilian point of view, there is an increasing worry that Brazil is being pigeonholed as just another commodity supplier to China. The proportion of raw materials within Brazilian exports has grown from 29 percent in 2002 to 41 percent in 2009. Furthermore, Brazil’s manufacturing sector is suffering from Chinese competition. While Brazil does run an overall trade surplus, the country which had been used to running a deficit in manufacturing goods of several hundred million dollars a year has now seen that gap grow to $23.5 billion dollars in 2010. Brazilian imports of Chinese manufacturing goods reportedly lost 70,000 Brazilian jobs in 2010, and a slower GDP growth is forecast in 2011 partly due to Chinese manufactured goods replacing Brazilian domestic goods. In sum, more than 80 percent of Brazilian manufactured exports are being adversely affected. Coupled with China’s undervaluing of the yuan, occurring alongside the sharp appreciation of Brazil’s real, has put Brazilian goods at a massive disadvantage in terms of price.
The Economist Intelligence Unit reports:
Accompanied by a large contingent of Brazilian businessmen and officials, President Rousseff was clear in her message to her Chinese hosts: she wants a “qualitative jump” in what Brazil sells to the Asian powerhouse, with a major increase in value-added and processed goods. The government also wants Chinese investment in Brazil to be more diversified, to include not just extractive industries but also high-tech manufacturing.
There is a major caveat that must be noted, there is reason for concern that the Chinese economy may be in danger of overheating. Numerous economists are already warning of Chinese bubble in real estate and infrastructure. Should China's economy catch cold, much of the emerging market economies that are commodity exporters to China will simply buckle under.