BRICS? China’s Economic Strategy is Propaganda-driven in the Geopolitical Rut.

Blain’s Morning Porridge May 24^th 2023: BRICS? China’s Economic Strategy is Propaganda-driven in the Geopolitical Rut.

“A BRIC-a-brac shop is all monsters and dust, with everything priced above its proper value.”

There is a myth BRICS nations now exceed the GDP of the G7 West. It’s propaganda to boost a story of de-dollarisation, anti-G7 rhetoric and how China and its allies will create a stronger, more equal global market. It’s like watching Stags fight for dominance.

Yet again apologies for lack of comment yesterday – again let down by technology as my laptop went rogue.

I was thinking yesterday that the Game of Geopolitics is like watching the Red Deer come off the hill for the Rut – when the Stags fight to gain control of the herd. The dominant alpha male gets to mate with all the hinds.

This somewhat unusual take on geopolitics, trade, growth and geo-economics was triggered by reading a commentary from Ray Dalio of Bridgewater – a description of how empires rise, peak and are inevitably overtaken by the next rising power. It’s a familiar theme, and one very similar to one proposed years ago by David Murrin in his “Breaking the Code of History”. (If you get the chance, read David’s stuff – here.)

Dalio concluded the replacement of the USA by China is inevitable, and that during such periods there are associated conflicts. Many agree that’s happening, and some form of conflict is inevitable. As a result the world and markets seem split into two separate camps:

• The hawks who reckon China and the West are on an inevitable collision course, and that tensions will ratchet higher over Tech and Taiwan – a “sell” China argument.
• The doves who expect the globe to settle into new trading blocks on the basis conflict does not have to be inevitable while China and South-East Asia will emerge as the most investible region on the planet – a “buy” China perspective.

As usual, I sit somewhere in the middle. Its more complex, nuanced, and wider than we think. There are massive geopolitical shifts underway, but they may not be the one we expect, and they may not necessarily mean the end of all things – just some new directions and opportunities. On a global scale, it’s just like the deer rut season: this is going to be a period of rising uncertainty and potential conflict as the stags battle for dominance.

The last big empire transition occurred while the previous incumbent, the British Empire, and the next, the USA, were very closely aligned from 1910-1945. They remain so. The global World Wars of the 20^th Century were about other nations – think of them as lesser stags – seeking their chances to dominate the herd. Broadly, Japan and Germany saw the transition between an overextended British Empire and an inward-looking USA to stake their power plays – both failing disastrously.

Now the world is changing again. There will be the dominant alpha-male (the US) holding court over the herd. Around it will be the lesser males – like Russia and Iran, and runts like North Korea all looking for opportunities. One wiser challenger observes closely.

This time it’s been the ageing old decrepit stag on the edge of the rut, Russia, that made the first play. The Russians misread the signals, concluding the US was riven by internal political polarisation and were encouraged it had again become isolationist by its embarrassingly uncoordinated pull-out from Afghanistan. They struck at Ukraine – expecting an easy win. We all know how that has played out. Maybe Iran will be next to make a play?

Watching the action has been the real challenger stag – China.

What they’ve seen in Ukraine will have likely confirmed it’s still too early for them to challenge the West militarily. Although they are probably well ahead of the Russians in terms of competence, and have tech that could severely damage US Carrier Task Forces, they will see the need to evolve and reform their tactical and strategic doctrines, raise the professionalism of their forces, and ensure they are cleansed of any taint of the corruption that’s afflicted the Red Army.

If they can’t guarantee to win the rut militarily, they will challenge on the battlefield of economics – and this is where the rut gets very interesting. China is assembling its own economic alliances. It has to because China has a massive economic problem: its economy may already have peaked on the back of its negative demographics.

The Middle Kingdom has to work out how it pays for being global hegemon when its economic might is under challenge from the next hi-growth Stag. It’s work force will inevitably become internally focused. Or, China could become the major beneficiary of AI – enabling a rise in productivity, realising workers into the care sector, while AI may also dramatically speed up new drugs and treatments for an ageing population, the core of China’s problems. There are a lots of ifs and hopes in that..

Which is why China is playing a very different game in terms of economic propaganda and soft-power projection. Everyone is very aware how China embarked on a series of hearts and minds campaigns to garner economic soft-power over the last 30 years. It started, badly, in Africa, where China largely failed to establish much of a presence.

They are trying again. Best known is the Belt and Road. Today, the Chinese are signing deals with the Taliban in Afghanistan to develop its mining and mineral resources – something the West paid little attention to. They promise not to interfere domestically, or lecture their hosts – again something the West is want to do. The Chinese are pragmatic; untroubled with Western concerns judging the legitimacy, morality or gender politics of other nation’s regimes. The West, especially the EU, has burnt bridges around the globe telling emerging nations what they must and must not do to boost ESG for the privilege of dealing with Yoorp. No one likes being patronised by elderly white guys from their colonial past.

Now China is firing on a third front. In recent months I’ve seen a host of Tweets and postings about how the BRICS nations (Brazil, Russia, India, China and South Africa) have now overtaken the G7 in terms of global GDP. There is a very slick animation doing the rounds on Linked-In showing the remorseless decline of the West versus the growing economic might of BRICS – which, let’s face it, is a China proxy.

One particular theme, widely disseminated by Silk Road Briefing in March says the five BRICS now account for 31.5% of Global GDP, while G7 is only 30%. By 2030, they say BRICS will be 50% of global GDP.

Interesting and complete bollchocks.

I called up the data from the World Bank. Estimates for 2023 GDP are very different:

• • G7         $46 trillion = 43% of Global GDP
  • BRICS  $27 trillion = 25% of Global GDP
• China makes up 70% of BRICS share of GDP

What I do accept is BRICS Nations are growing faster than G7.

Let me wander back in time a bit..

Back in the 1980s, during one of my periodic flirtations with a singularly unspectacular career in financial journalism, I interviewed a fascinating economist from Swiss Bank Corp, Jim O’Neill. The plain speaking Yorkshireman was “quote-gold” for scribblers like myself. He went on to become chief economist for Goldman Sachs, and memorably coined the BRICS moniker in 2001. It was a stroke of PR genius and made him among the best known economists on the planet. He is now Lord O’Neill of Gatley in the UK’s House of Lords.

His BRICS concept was simple: nations with large populations that can organise them effectively will inevitably become economically significant. He picked 5 to watch. He was nearly spot on – South Africa is irrelevant. Now BRICS is a “thing”, and an organisation in its own right – with its own new development bank (based in Shanghai of course). There is a queue of swiftly developing and rich nations queuing up to join – and generally these are the same nations that were persuaded to oppose sanctions on Russia. They claim to be unaligned – meaning they clearly are – with China via BRICS.

The attractions of BRICS to nations like Egypt, one of many seeking to join, is to lessen their dependence on Western dominated financial institutions. Egypt is currently negotiating yet another bailout/support package with the IMF, which is demanding significant economic reforms and liberalisation. 42% of the world’s population live in BRICS nations, but they have less than 15% of the voting rights in the World Bank group. The belief there is an alternative to Washington controlled money is an attractive one to struggling regimes.

It’s not just high population emerging nations in Africa and richer ones in Asia and Latin America to join the BRICS club, but de-dollarisation is a theme attracting resource rich “Stan” nations of the former Soviet Union to seek better terms of trade, and for Saudi and the UAE to sell oil on diversified new terms to China and India.

The fact Mexico and Argentina are both on the list of nations seeking BRICS membership should be a wake up for the US – and maybe a China play to distract Washington re the Monroe Doctrine. The attractions of no-strings-attached finance from China and the BRICS Development Bank versus hectoring American money, plus easy trade terms, may seem very attractive.

Recently Jim O’Neill was on BBerg commenting the BRICS group should be focused on common interests like climate finance, improving healthcare and boosting trade. He agreed: “the dollar plays a too dominant role in global finance”. Dollar debt destabilises the domestic monetary stability of emerging nations. It’s a problem to be addresses in a global forum.

However… Just how successful can the BRICS Bloc be? They are a pretty diverse bunch of nations:

• China and India are in direct competition. It’s entirely likely India will catch up and supersede Chinese GDP in the next 15 years. They are in conflict on the borders. Trade agreements are one thing – India playing second fiddle to China while seeking to win Chinese export orders is another.
• Russia – for all the noise about selling oil and gas to China – is a busted flush. It will become at best a resources warehouse for China. Many believe Siberia, and its vast resources, will end up as part of China.
• Brazil is a more difficult one to place within BRICS. Its manufacturing sector has already been gutted, and its commodity exports are priced in dollars. De-dollarisation will bring further destabilisation, in an already unstable economy, transitioning to use China where the RMB remains state controlled.
• South Africa is an irrelevance within BRICS – although I have actually met nice South Africans I hope they will forgive me that its a tiny economy likely to get smaller as a result of kleptocracy.

When Jim O’Neill coined BRICS it was to illustrate an economic thought – I doubt anyone believed it would ever become a genuine movement. What China is doing now is to weaponise BRICS for the Geopolitical Rut as a counter to the G7 West. It is selling a concept attractive to many non-G7 nations with a gripe against the West, telling them they can repeat the successful economic trajectory of China in a new global trading and monetary environment… that will largely be China dominated.

Interesting times indeed.. .

No time for five things this morning.. .

Out of time, and back to the day job..

Bill Blain

Strategist – Shard Capital