The recent BRICS meeting in Xiamen formed the setting for what appeared to be a rapprochement between its two key members, India and China. It was preceded by a rather sudden diplomatic resolution to the recent Doklam (Donglang) crisis which saw Indian and Chinese troops step back from possible confrontation. This was widely viewed to have been agreed at the initiative of the Chinese, eager to secure the attendance of Narendra Modi at the immediately following BRICS meeting.
Although the BRICS concept is long past its pomp, it is clear that China still values it as a diplomatic forum, either for what is discussed and agreed while it takes place, or for the appearance that emerges of the Chinese engaged in a multilateral forum in which they take centre stage. Indeed, China has long been the real engine behind the BRICS, given that both Brazil and Russia (B and R respectively) were dependent on the China driven commodity boom and South Africa (the S) is there to make up numbers. The real quandary, however, was always India.
Without India, the “BRCS” would be harder to pronounce but perhaps a little easier to understand. Conceived by Goldman Sachs as a Powerpoint acronym to describe high growth emerging markets, there was always something slightly ad hoc about the arrangement, a useful thumb sketch perhaps, shorthand for time-poor, knowledge-light bankers and investment managers to add a patina of granularity to their boom dependent punts. In reality an almost endless, debt fuelled Chinese investment cascade fuelled what many mistook for a commodity super-cycle that flattered Russia and Brazil, and made India seem like the tortoise to China’s hare.
All about the growth
The key problem with the BRICS was always that there is little that unites them all aside from a once shared propensity for high rates of growth. This is fine if all you seek are outlets for investment capital, but rather begs an assessment of–in each case–what that growth implies. A recent explainer by Michael Pettis makes the obvious, but seemingly not widely understood, point that ‘GDP does not distinguish between activity that increases a country’s wealth and activity that doesn’t’. And in making this point he obliges readers to move beyond simplistic “GDPism” towards making judgements about the quality of investments in each case. Rising GDP, in other words, needn’t always been good news. It might in fact be disguising some very bad news indeed.
Here also is where China and India diverge. For all the fanfare laid on for the BRICS in Xiamen, the association has always been fundamentally driven by the development trajectories of those two Asian supergiants; China and India. Brazil and Russia, being primarily commodity suppliers, ride the international consequences of growth in those other two giants, but aside from that have little to contribute. In recent years China has driven the global economy with its rapid investment and export focussed growth while India has grown more slowly and organically.
The upshot is that China has huge amounts of infrastructure and an economy that must now service enormous amounts of debt. The staggering GDP growth figures they have achieved over many years have yet to register the consequences of all that investment and if much of it generates little or no return, the consequent write-downs will weigh down on China’s GDP figures for years to come. Some estimate coming write-downs in excess of 35% of GDP, which according to Pettis’ formula would mean China’s economy is actually much smaller than its reported GDP.
India, on the other hand, registered a growth rate higher than China last year, and while India’s economy is much smaller than China’s right now, in contrast to China it has a great deal of catch up growth ahead of it, and–again unlike China–has a government with an appetite for structural reform as a key driver for future growth, rather than debt-fuelled investment and exports.
What would Goldman Sachs say now?
Setting aside China’s effort to build the BRICS into a cooperative forum, the same formula that generated the BRICS concept would produce a wildly different set of results today. China, with its enormous debts, closed capital markets, asset bubbles and increasing communist party interference in the economy would look like an entirely different kind of investment prospect than India, with its greater growth potential, favorable demographics, open and pluralist society and reform minded government. Indeed, apart from both being large economies it’s hard to imagine anyone putting the two economies in the same category anymore.
All of which provides a useful contrast between the original concept of the BRICS as a meaningful investment destination premised largely on impressive growth rates, and its more recent emergence as a forum for the projection of influence. Because if the BRICS were originally premised on GDP growth, then as long China’s GDP growth becomes increasingly dependent on self-defeating credit expansion, India looks the better bet. Furthermore, given the emphasis China placed on securing the attendance of Narendra Modi at Xiamen, it appears China might already understand this quite well.