Brics Nations Take Steps on Currency Trade, Bank

Brazil and China Set Currency Swap, but Bloc’s Idea for Development Bank Encounters Some Obstacles

By PATRICK MCGROARTY in Durban and DEVON MAYLIE in Pretoria, The Wall Street Journal

ReutersSouth Africa’s first lady Bongi Ngema toasts China’s first lady Peng Liyuan as President Jacob Zuma looks on.

Members of the Brics group of emerging markets took steps to trade their currencies more freely and to establish a joint development bank, seeking to counter the influence that developed countries exert over the global economy.

Brazil and China agreed Tuesday at a summit of Brics leaders in Durban, South Africa, to use their central banks to swap up to $30 billion in Brazilian real and Chinese yuan over the next three years, allowing businesses to trade between the two countries without converting earnings and investments to U.S. dollars, the standard conduit of global trade.

Brazil’s finance minister, Guido Mantega, said the arrangement, which the countries have been working toward since this past June, would give them a means to exchange currencies “independent of the conditions of financial markets.” He also said the Brics countries—Brazil, Russia, India, China and South Africa—were close to an agreement to pool some foreign-currency reserves in case of a balance-of-payments crisis.

The bloc’s move to create a new development bank, however, was weighed down by disagreements over funding and management, said Russian Finance Minister Anton Siluanov. “On the whole, we agreed that we will continue to work on creating a Brics bank once the unresolved questions are answered,” the Interfax news agency quoted Mr. Siluanov as saying.

South Africa’s finance minister, Pravin Gordhan, added that he was pleased with the negotiations. “We’re on track,” he said.

South African officials want a new development bank to fund infrastructure projects that the International Monetary Fund and the World Bank have overlooked. Larger Brics members, such as China and India, are eager to establish an institution that could extend their influence deeper into Africa and other emerging markets where their economic interests are expanding.

The Brics’ slow march toward establishing their own bank illustrates their struggle to move past populist rhetoric to true cooperation between powerful and sometimes adversarial nations. Each is eager to reap the benefits of a larger trade group—and all are fearful of being flooded with products from the others, particularly China.

“What we now seek to address jointly is to find the means towards a more equitable balance of trade,” South Africa’s President Jacob Zuma told reporters in South Africa’s capital, Pretoria, after meeting with China’s President Xi Jinping. “Africa is counting on the People’s Republic of China for support in the continent’s development.”

Mr. Xi acknowledged China is pursuing its own commercial interests in Africa. “We each see the other side as an opportunity for our own development,” he said.

According to the proposals discussed Tuesday, each country would likely contribute up to $10 billion to the bank, an official said, speaking before plans were to be approved by the national leaders gathering Wednesday. The bank would focus on infrastructure development, he said, both in the five-nation group and in emerging markets where they want to do business.

But economists and business leaders said an initial pool of $50 billion wouldn’t be enough for the bank to make its mark in Africa or elsewhere.

“At this point it’s somewhat symbolic,” said Anthony Thunström, chief operating officer for accounting firm KPMG LLP‘s Africa investment program. “Its potential will only be realized when it’s better capitalized, and I think that’s going to be a longer-term project.”

More specific decisions—including which country will host the bank and where it will invest—will be postponed at least until the bloc’s next summit meeting in Brazil in 2014, he said.

“There is general agreement that there is a need for this,” said the official involved in the negotiations. “Creating a multilateral institution takes quite a long time from being an idea to being set up.”

 

BRICS Nations Plan New Bank to Bypass World Bank, IMF

By Mike Cohen & Ilya Arkhipov –  Bloomberg.com

Tomohiro Ohsumi/Bloomberg

The leaders of the so-called BRICS nations — Brazil, Russia, India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban.

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations — Brazil, Russia,India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that began today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe.

Reform Needed

“We need to change the way business is conducted in the international financial institutions,” South African International Relations Minister Maite Nkoana-Mashabane said in a March 15 speech in Johannesburg. “They need to be reformed.”

The U.S. has failed to ratify a 2010 agreement to give more sway to emerging markets at the IMF, while it secured Jim Yong Kim, an American, as head of the World Bank last year over candidates from Nigeria and Colombia.

Finance ministers and central bank governors from the BRICS nations, who met in Durban today, agreed to set up currency crisis fund of about $100 billion, Brazilian Finance Minister Guido Mantega told reporters today. He didn’t give details of proposed funding for the new bank, which Brazil wants established by 2014. The nation’s leaders are due to sign a final accord tomorrow.

FDI Inflows

Goldman Sachs Asset Management Chairman Jim O’Neillcoined the BRIC term in 2001 to describe the four emerging powers he estimated would equal the U.S. in joint economic output by 2020. Brazil, Russia, India and China held their first summit four years ago and invited South Africa to join their ranks in December 2010.

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. Foreign direct investment into BRICS nations reached $263 billion last year, accounting for 20 percent of global FDI flows, up from 6 percent in 2000, the United Nations Conference on Trade and Development said on its website yesterday.

“If they announce a BRICS bank it will be quite something,” O’Neill said in an e-mailed reply to questions on March 15. “At a minimum it symbolizes they can achieve something as political group and means lots of other things could follow in the future. It also means that they will have their own kind of special World Bank, which may aid infrastructure and trade projects.”

Currency Pool

While BRICS leaders may approve the creation of a development bank in principle at the summit, details on funding and operations may take longer to finalize.

Russia favors capping each side’s initial contribution at $10 billion, Mikhail Margelov, PresidentVladimir Putin’s envoy to Africa he said in a March 15 interview in Moscow.

“It will be some time before it will be feasible for this bank to start financing say, a railway project,” Simon Freemantle, an analyst at Standard Bank Group Ltd., Africa’s biggest lender, told reporters in Durban yesterday. “That is some way out.”

Interest rates near zero in the U.S., Japan and Europe have fueled foreign investors’ appetite for higher-yielding assets, driving up currencies from Brazil to Turkey. Brazil has warned of a global currency war as nations take reciprocal action to weaken their currencies and protect export industries.

African Leaders

Brazil’s real has gained 1.9 percent against the dollar since the beginning of the year, while South Africa’s rand has dropped 8.7 percent in the period.

For South Africa, which makes up just 2.5 percent of total gross domestic product in BRICS, the summit is a way to showcase its role as an investment gateway to Africa. President Jacob Zuma has invited 15 African heads of state, including Egypt’s Mohamed Mursi and Ethiopia’s Hailemariam Desalegn, for talks with the BRICS leaders at the summit. For most of the BRICS leaders, it’s also the first opportunity to meet Chinese President Xi Jinping after his appointment on March 17.

“We will discuss ways to revive global growth and ensure macroeconomic stability, as well as mechanisms and measures to promote investment in infrastructure and sustainable development,” Indian Prime Minister Manmohan Singh said in a statement yesterday.

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

Related articles

• BRICS to approve new bank to replace IMF: report (marketwatch.com)
• BRICS Summit: Creating New Development Bank to Rival World Bank (goldenageofgaia.com)

Brics Fade as Engine of Growth

By BOB DAVIS, The Wall Street Journal

BEIJING—Not too long ago, the Brics nations looked like they might be able to provide a powerful engine of growth for the global economy. Don’t count on it for 2013.

Brics refers to some of the stars of the emerging markets—Brazil, Russia, India, China and South Africa—which together represent 40% of the world’s population. But only one of the nations, China, has the economic heft to make a major difference internationally on its own, and it is just now starting to come out of a slowdown. The other four nations face a variety of economic challenges, ranging from inflation to inadequate foreign investment to labor unrest.

Since 2009, the leaders of the group have held four leaders summits. South Africa, which joined the group at the end of 2010, is hosting the fifth summit in Durban, South Africa, in March 2013. But tThe hope that the Brics countries would help one another through increased trade, investment and political support hasn’t panned out. Officials and analysts from Brics nations say they act as much as rivals as allies, and their lack of cohesion adds to their economic problems.

China complains that other Brics countries increasingly target it in anti-dumping suits. Brazil objects to Moscow’s restrictions on Brazilian agricultural imports. Russia is trying to turn itself into a major farm exporter, which is bound to heighten competition with Brazil. Slower growth in China and India pushes down commodity prices, which hurts South Africa and Russia.

“The Brics is not about the economy,” said Fyodor Lukyanov, an analyst who chairs an influential Kremlin foreign-policy advisory board. “The bloc sees itself as an alternative to the West, but not a confrontational one, like Iran.” On the economic front, Brics nations “have different, sometimes conflicting interests,” he said.

The Brics view themselves as an alternative to the Group of Seven industrial nations—U.S., Canada, France, Britain, Germany, Italy and Japan—politically and economically. But the economies of the Brics and the G-7 remain interlocked. When the U.S. financial crisis spread to Europe, it didn’t stop there. The Brics nations weakened because they lost big export markets and sources of financing and investment.

In 2009, China’s vast stimulus plan helped shore up commodity prices, which helped its Brics partners—for Russia on oil and gas, for Brazil or iron ore and agricultural goods; and for India and South Africa on minerals. But China itself slowed in 2012, as did the other four Brics nations, which all are expected to register slower growth for 2012 than they did the previous year, according to JP Morgan JPM +1.02% . The bank predicts all but Russia, whose growth rate is expected to slow further, will see modest improvements in 2013.

“These countries face so many domestic problems,” said Arvind Subramanian, a former IMF senior economist who is now at the Peterson Institute for International Economics in Washington. “The common dynamism they had is coming under question.”

For China, 2013 looks as if it will yield somewhat faster growth than 2012, when its economy is expected to show a 7.6% increase, according to JP Morgan, the slowest pace in more than a decade. China slowed because European and U.S. export markets shriveled, but also because the country’s leaders, wrestling with the legacy of the stimulus spending, imposed restrictions on real estate to deflate a housing bubble.

Now, feeling more confident that it has housing and banking problems under control, officials have been easing restrictions and approving more infrastructure projects. A number of analysts project China’s growth in 2013 should top 8%.

“China should be able to generate a positive impulse for growth,” said RBS analyst Louis Kuijs, as imports of commodities and other goods needed to build Chinese projects pick up.

Modest gains by other Brics nations aren’t likely to matter nearly as much internationally. India, with nearly the same population as China, has an economy just one-third the size of China’s. With inflation in India above 7% and large current-account and budget deficits, growth isn’t the country’s main concern.

“The government has now little choice but to press for fiscal consolidation,” said an RBS analysis, to reduce deficits and reassure investors the country isn’t a candidate for default. New Delhi is focusing on pushing through politically difficult reforms that would boost foreign investment, open up closed sectors and spur infrastructure spending.

Brazil, with its history of hyperinflation, is also on guard for a resurgence in inflation, which may limit its potential for growth in the coming year. A number of Brazil analysts say that the country’s mix of high tax rates, poor infrastructure and heavy government intervention in industries gives it a natural speed limit of around 3.5% a year. Attempts to push the economy to go faster through stimulus spending would also speed up inflation.

“There are too many economic bottle necks right now,” says David Beker, a senior economist at Bank of America BAC +3.10% based in São Paulo.

The country’s leaders have tried to rely on their ties with other Brics nations to help out economically. President Dilma Rousseff was in Russia to meet with PresidentVladimir Putin in December 2012 and invited Prime Minister Dmitry Medvedev to come to Brazil for the annual Carnival celebration in February.

But Brazil’s efforts haven’t yielded much more than photo ops so far. The biggest disappointment for Brazil has been China’s refusal to buy more Brazilian goods. China has declined to allow giant Brazilian ships designed specifically to bring iron ore to Chinese ports to dock, citing safety concerns, though critics say China wants to retain much of the shipping business for Chinese carriers.

Russia has its own problem, including the woes of the European Union, Russia’s main trading partner and the largest buyer of Russian oil and gas.

As for South Africa, the country’s violence remains a barrier to growth. Since police shot and killed 34 platinum miners near Johannesburg in August, labor turmoil has crippled the mining industry and hobbled manufacturers. Standard & Poor’s Ratings Services and Moody’s Investors Service downgraded South Africa’s debt in the past three months, saying they feared the government wouldn’t be able to quell the unrest and wider social tensions.

Looking to give the group more cohesion and economic purpose, the BRIC nations have proposed to create a Brics development bank, but even that effort has come to highlight the group’s divisions.

Liu Youfa, vice president of the China Institute of International Studies, a Chinese government think tank, attended a September session of Brics academics in Chongqing, China, whose aim was to fill in details of the bank proposal. The bank’s financing would be reserved for member nations, including funding for big infrastructure projects and engineering contracts, he said. Construction would benefit China, whose firms build roads, dams and airports around the globe.

But other countries have different plans for the bank. South Africa wants the funding to be available for other developing nations. India, which proposed the development bank, likes the idea of infrastructure financing but fears that China wants to run the bank mainly to make yuan loans and further the international use of China’s currency, “One country wants to dominate due to its financial standing, which would not be acceptable to the others,” said Brahma Chellaney, an analyst with the Centre for Policy Research, a New Delhi think tank.

Where to locate the development bank has become another battle. Mr. Liu says India wants the bank headquartered there, while China would “very much appreciate it” if the bank is located in Beijing, Shanghai or Chongqing. China is expected to chip in the largest share of the financing and “money talks,” he said. Mr. Liu said he believes the disputes will be ironed out eventually and the Brics bank will be established in the next several years, though not in 2013.

—Patrick McGroarty in Johannesburg, John Lyons in São Paulo, Alexander Kolyandr in Moscow and Romit Guha in New Delhi contributed to this article.

A version of this article appeared January 2, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: Hopes Dim Around Brics as Engine of Growth. 

 

German Companies Look Far Beyond Ailing Euro Zone

By NINA KOEPPEN, The Wall Street Journal

Perrot GmbH & Co. KG

A 7.5-ton hour hand is installed on a Perrot clock on a skyscraper in Mecca in 2010.

CALW, Germany—Perrot GmbH & Co. has been making bell-tower clocks for 150 years, but the order from Saudi Arabia was on a new scale: a 140-foot-diameter clock, installed at a height of more than 1,300 feet, in the heart of the holy city of Mecca.

The family-owned company from the Black Forest is building its exports beyond its traditional European base, expanding ties with fast-growing developing countries. The geographical shift is happening at many of Germany’s 270,000 manufacturing companies, which are gaining customers in the emerging economies of Asia and Latin America and reducing their dependence on the shrinking euro-zone economy.

German firms are increasing the amount of business they conduct with emerging economies at the expense of European countries. Dow Jones’s Nina Koeppen explains why companies like car-maker Volkswagen have led the push into new markets. Photo: Perrot GmbH & Co.

Perrot’s oversize dial for Mecca Royal Clock Tower Hotel—the world’s second-tallest skyscraper, after the Burj Khalifa in Dubai—is visible from more than five miles away. But the project “has made us visible all across the Arab world and beyond,” said Johannes Perrot, who runs Perrot together with his two brothers.

For German industry, “the trend of unlocking new markets will continue, given rapid economic growth and solid capital investment in emerging markets,” said Ilja Nothnagel, a foreign-trade adviser at the German Chambers of Commerce and Industry in Berlin.

Blue-chip companies such as car maker Volkswagen AG VOW3.XE +0.29% have led the hunt for markets beyond Europe. But a growing number of small and midsize German companies, especially those operating in niche markets, are decoupling from Europe too.

“If we relied on the euro zone only, the company would be on a less-stable footing,” said Stefan Klebert, chief executive of Schuler AG, SCUN.XE +0.54% a maker of specialist presses for coins, automotive parts and other metal products.

Perrot GmbH & Co. KG Perrot’s oversize clock for the Mecca Royal Clock Tower Hotel in Saudi Arabia has a 7.5-ton hand, installed in 2010.

German companies’ reputation for quality engineering, a sought-after mix of specialized equipment and high-end goods, and years of effort to boost competitiveness are making German goods popular in fast-growing developing countries. The so-called BRIC countries—Brazil, Russia, India and China—are expected to power global economic growth next year, while the euro-zone economy is forecast to contract again in 2013. German exports to the BRIC countries have increased almost sevenfold since 1996, totaling €121.2 billion ($156.7 billion) in 2011.

“We are currently observing a continental drift in global economics,” said Ralph Wiechers, the chief economist at Germany’s VDMA engineering federation, which represents about 3,100 midsize companies. “German engineering companies by now sell three times as much to the BRIC countries than to the periphery states of the euro zone—or Italy, Spain, Ireland, Portugal and Greece,” he said.

Sabine Herold, a managing partner at DELO Industrial Adhesives,FUL +0.95% said her company is drawn to the growth potential of markets in China and Southeast Asia. “We supply special adhesives for electronic and microelectronic industries, and they are foremost in Asia,” she said. DELO, which is based in Windach, Germany, near Munich, employs about 300 people.

German exports for this year through October rose 4.8% from a year earlier, boosted by 11% growth in exports to countries outside the European Union, according to data published Monday by Germany’s official statistics office. In contrast, exports to the euro zone fell 1.2%.

As Europe’s biggest economy becomes less dependent on its traditional markets in the euro zone, some Germans are even beginning to question whether Europe matters as much to Germany as it used to. Some euro-skeptic commentators such as the author and former Bundesbank director Thilo Sarrazin argue that Germany’s future interests lie beyond Europe.

Most German companies say European markets are still a major part of their business. France is expected to stay Germany’s biggest trading partner in the next few years. But growth, increasingly, is coming from elsewhere. China is likely to replace France as the top destination for German exports by 2030, according to a recent report on the global trade outlook by economists at HSBC HSBA.LN -0.28% .

The euro zone’s share of total German exports fell to 37.6% in the first three months of this year, compared with 51.6% in 1991, according to Germany’s statistics office.

“Future growth will be mostly outside the euro zone,” said Mr. Klebert, the CEO at press maker Schuler. “Therefore, Asia—particularly China—the U.S. and Brazil are key markets for us,” he added. Schuler today generates about one-third of its sales in Asia, compared with just 5% in 2000.

Schuler, whose business also supplies presses for the production of aerosol cans, is counting on the huge potential of China’s consumer market. “With a population of 1.3 billion people, there’s expanding demand in China for hair spray and deodorant—that’s where we come in,” Mr. Klebert said.

Perrot also operates with much broader reach now. Over five generations the Perrot family has gone from making clocks for village churches in the Black Forest, to equipping spires in Switzerland and other European countries, to supplying far-flung global markets.

Being from Calw, a stronghold of the devout Christian Pietist movement, helped Perrot win the confidence of its Muslim customers, Mr. Perrot said. “We are very organized here. Our workshop is clean and tidy and there aren’t any pinup girls on the walls. That’s what our customers respect,” he said.

Perrot has recently supplied large clocks for cathedrals in St. Petersburg, Russia, and Brazil’s São Paulo state, as well as hotels, train stations and public buildings around the world. The company is aiming to break into the Chinese market next. It is already the unlikely export champion of the small town of Calw, previously known mainly for being the birthplace of Nobel-laureate novelist Hermann Hesse, who was an apprentice mechanic at Perrot.

As well as developing countries, the U.S. is again becoming a source of growth as its economy recovers. German exports to the U.S. rose 21% in the first three quarters of this year compared with the same period a year earlier.

Germany’s exports have been growing faster than the country’s overall economy since the early 1990s, a trend that economists expect to continue for many years. The country has become increasingly dependent on foreign customers. Exports of goods accounted for 41% of German gross domestic product in 2011, compared with 30% in 2001 and 22% in 1991, according to data from the statistics office.