By Frank-Jürgen Richter
We can still recall the gleams in the eyes of Goldman Sachs statisticians in 2000 as they crunched data creating correlations between several countries which soon came to be called “BRICs”. They said Brazil, Russia, India and China all had great potential for growth, and they would become the dominant economies with China leading the pack – overtaking Japan by 2015, and even outstripping the US by 2043. South Africa joined the group in 2010 to create BRICS.
But BRICS’ collective strength has now faded, as developing economies often illustrate long-term tendencies toward lower growth rates. The average growth of BRICS has fallen from 8 percent to 6 percent, though they had annual rates as high as 11 percent. Even so, BRICS’ combined economic output last year almost matched that of the US.
Market traders often cry “foul” when they perceive others might have an unfair advantage. That is exactly what the US, and other countries, kept saying China had kept the value of the yuan low relative to the rest of the world’s currencies. Over the last 10 years the yuan has fallen from 8 to nearly 6 to the US dollar, but on “Black Monday” (Aug 24) many were still accusing China of beginning a currency war. But we ought not to consider a few days of rapid change as a unique indicator. Summer adjustments of the global economy have occurred sporadically, yet relatively often.
In the near future, China will have an easier time selling its goods to other countries but will find buying commodities more costly – yet perhaps it doesn’t wish to buy so much raw materials because of the economic slowdown. China’s index of manufacturing growth (purchasing managers index or PMI) has been below 50 for almost a year, falling from occasional highs of 55 from 2004 to 2014. Since “50” is seen as the divide between growth and slump, this suggests China is heading for a fall. And if the fall is “hard” it will have a significant effect on the rest of the world. Associated with its reduced PMI is a general lack of new capital investment and also job shedding (with its associated loss of employees’ knowledge base).
But I believe China will experience a “soft” landing. Why? Simply because it has looked carefully at history, and decided many years ago that it needs to manage its people much more carefully.
China has invested heavily in its interiors and western region which are less developed. At present, China’s coherent development of its internal trade arteries of roads, railways and rivers augmented by new regional airports strongly support internal trade. It is controlling its massive rural-to-town migration by building about 200 new cities in the interiors and linking them on the trade arteries. Both activities will avert social and economic unrest – but other countries may not be so secure. No other BRICS state can match China’s prowess. One example of its prowess is the establishment of two investment banks – the New Development Bank and Asian Infrastructure Investment bank – to help developing countries in particular, one aimed at BRICS and the other at Asia in general.
Furthermore, China has supported its own shipping lanes and ports so that they can take full advantage of the newly enlarged Suez and Panama canals and help lift world trade when it redevelops – specifically to the US, the EU and the UK. And I don’t think I am being too optimistic.
The author Frank-Jürgen Richter is founder and chairman of Horasis, a global visions community.