China, Other BRICs Need European Quick Fix

by: Carlos X. Alexandre

As we hop from Greek elections to the G20 summit in Los Cabos, Mexico, only the characters change, not the problems. As a quick side note, the result of the French elections, with Hollande solidifying his power, will prove to be a bigger obstacle in the future.

We're now focused on a group of twenty individuals trying to find solutions while sipping margaritas and delivering extremely vague headlines. If one follows these events, the summary (pdf) from the 2006 G20 meeting in Melbourne, Australia, will quickly highlight how these gatherings resemble an old and tired TV show rerun. The theme six years ago was "Accord for Sustained Growth," and the current objective is not much different, albeit the added focus on Europe's debt crisis. The draft communiqué obtained by the Associated Press says it all, or not.

The leaders will announce the "coordinated Los Cabos Growth and Jobs Action Plan" to achieve those goals, although the draft does not provide details of the plan. It throws its support specifically behind greater government spending as a response to a worsening global economy and says that countries with the budget resources stand ready to spend more.

Keynes is the 21st member. In addition, the announcement that some countries will contribute to the IMF is always met with fanfare.

China is pledging $43 billion while India, Russia, Brazil, and Mexico told the G-20 they'd commit around $10 billion each. Turkey committed $5 billion, and a handful of others offered around $1 billion.

However, the key word is "pledge," and the disclaimers must be taken to heart, even considering that the amounts mentioned will be consumed in a sunny afternoon.

The IMF won't be able to tap the new funds until after its existing $380 billion in lending capacity is nearly exhausted and only when the countries actually lend the IMF the money. That could take months. Also, since the IMF will need to hold some of the new money back in insurance reserves, the new cash boost will roughly double the IMF's lending ability to around $700 billion.

What is apparent is that the BRICs are increasingly pressured by the global state of economic affairs, despite assurances from a variety of experts and pundits over the last two years that the developing nations were the only game in town, mostly because populations are so large that growth was unavoidable. If that was the case, then Portugal should be economically stronger than Switzerland. But today the view is slightly different.

The World Bank lowered its forecast for global growth in 2012 to 2.5 percent and warned that developing countries faced a long period of financial market volatility and weaker growth.

Real estate market bubbles have delivered plenty of rags-to-riches stories fueled by the "this time is different" premise, but have also devastated economies worldwide, not to mention armies of unsuspecting individuals. To capture the global picture and provide "small" examples, Japan, U.S.A., and Spain come to mind. Why would China be any different? It's not, and the CNN Money article "Will China's real estate bubble burst?" provides a recent appraisal of the situation, while we haven't seen the end of this movie.

Buyers were snapping up sparkling new condos faster than developers could build them. Investors were grabbing two, three, four apartments each, hoping to cash in on skyrocketing prices. But then the music ended. Prices started to slide. Developers were stuck with empty buildings. Homeowners saw their wealth begin to slip away. Sound like the United States in 2007? Nope. It's China in 2012.

But one of the core issues in China is the unreliability of data, and government's interference doesn't help the issue, as reported by Caixin.

China's statistics bureau recently launched a new electronic platform to gather market data directly from enterprises in the compilation of economic indicators.

But for some local governments, giving up old habits won't be easy. The use of administrative power to massage figures in a positive light is standard procedure among many local governments. To this end, it is not uncommon for companies to keep several different versions of a financial report. The result of this has been woefully inaccurate readings on the Chinese economy.

And if reading China Daily truly fulfills one's need for self assurance, here's a great article that even cites Jim O'Neil from Goldman Sachs (NYSE:GS).

Since the outburst of the financial crisis, the BRICS, with its power of "withstanding the shakings of the world's economic foundations" and emerging more robust than ever, has seriously drawn attention of the world.

But the other side of the coin is a bit different, as highlighted by Bloomberg, seriously questioning the envisioned self sustainability and advertised BRICS' robustness.

O'Neill, chairman of Goldman Sachs Asset Management, says his thesis that Brazil, Russia, India and China would together increasingly buoy the global economy faces "a more challenging test" as investors dump the countries' stocks. China pared its growth target to the lowest since 2004, Standard & Poor's may cut India's investment-grade credit rating, Brazil is on pace to expand less than 3 percent for a second straight year and falling oil prices may hurt Russia.

Forget China, because Brazil is a better proxy and a superior measurement stick. Although the GDP of Brazil is only 35% of China's, it does so with less than 1/6 of the Chinese population. And if one hasn't noticed, the Selic rate (central bank rate) has dropped from 12.5% to a record low of 8.5% in less than one year, and the start of the rate reduction took place while inflation was still above 7%. Brazilian inflation is now 4.99% and the deflationary pressure continues.

Thus the call for Europe to fix itself and preserve a large part of the BRICs' economic cash cow will grow increasingly louder, because the core reality is that the addiction to the export model always comes back to bite one in the wallet. Why is that? Because when we're happy economic campers, we become too absorbed and blinded by the current taste of roasted marshmallows, and never once devise a plan B and think about what happens when the bag is empty.

Meanwhile, Jose Barroso, the President of the European Commission, stated unequivocally that he wasn't at the G20 to "take lessons in how to handle the economy," and he looked quite irritated on TV. Time for the BRICs to look for domestic growth models, if one can be found, that is.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.