Building the BRIC Wall- Decreasing Reliance and
Increasing Trade.
ABSTRACT
The ascension of highly developed countries in the
world economy has been dwarfed by the consequences of the 2008 financial
crisis. Investors from all over the world have increasingly started to shift
their focus from developed to developing countries due to higher growth
prospects. Of these developing countries, Brazil, Russia, India and China
(BRIC) stand to gain prominence as world economic superpowers by the middle of
this century. This study investigates if the BRIC nations have become less
affected by economic shocks from developed countries and less dependent on
developed nations to achieve their desired growth. Also investigated is whether
the utilisation of trade in their local currencies may encourage more stable
growth and if so, which currency of either of the BRIC nations should be used.
What was discovered is that that the major bourse of each BRIC nation has
become less correlated with the MSCI G7 index from the period 9 January 2007-31
December 2009 to 4 January 2010-5 August 2011, two periods of quintessential
economic shock, and the annual volatility of each BRIC currency decreased by a
larger amount than the trade-weighted exchange index of major currencies against
the U.S Dollar from the one said period to the next. This provides support that
the BRIC nations have been somewhat sheltered from external shocks in developed
countries and the decreased volatility of their currencies may provide
direction for inter-BRIC trade with local currencies. Through criteria such as
currency stability, economy size and trade activity it is the Chinese Yuan
which may be the most likely candidate to be used in inter-BRIC trade.
Keywords: BRIC; Economic shocks; International trade;
Developed Markets; Reserve Currency
INTRODUCTION
The BRIC nations consisting of Brazil, Russia, India
and China are an economic force that is attracting the world’s attention in the
face of dreary prospects for the world economy as a result of the recent
financial crisis. The lacklustre economic growth and increasing retired
population in developed economies set a platform for the reliance on the
advancement and growth of the BRIC economies. In a very pertinent study by
Wilson and Purushothaman (2003), it is noted that the combined Gross Domestic
Product (GDP) of the BRIC nations may be higher than that of the G6 developed
nations by 2050. This is indicative of a changing global economic environment.
The 2008 financial crisis and the ensuing economic
turmoil have changed the world economic landscape. Existing economic structures
of emerging markets have moved away from traditional export-led growth and have
been superseded by internal drivers of demand in these countries (Kregel,
2009). The BRIC nations are no exception and in an economic bloc where many of
the needs required for economic growth can be met from mutual reliance within
that bloc, the result is in amassed growth with decreasing reliance on
developed nations. Biggemann and Fam (2011) note that Brazil, India and Russia
account for 18% of China’s imports which as a group makes them China’s most
prominent trading partner.
The United States Dollar
(U.S Dollar) is the main international reserve currency and is used to
facilitate majority of inter-country trade around the world. The attributes to
the development of this system is described by McKinnon (2001), being that post
World War Two conditions contributed to the U.S Dollar being needed to restore
price-level stability which required other currencies to be pegged to the U.S
Dollar. The discussion around the candidacy of the currency that should be used
as the most prominent international reserve currency and the use of the U.S
Dollar as the world’s primary reserve currency is vast. Examples of research
based on this such as Brenner (2006), and even as far back in time as Blinder
(1996), amongst many others, discuss the waning of the U.S Dollar in this
regard. This relates to one of the numerous BRIC objectives, to decrease the
prominence of the U.S Dollar in trade and as a major reserve currency (Carbaugh
and Hedrick, 2009).
If the BRIC nations are to
conduct trade with each other without the use of the U.S Dollar and instead
develop a system where trade is facilitated with the Brazilian Real, Russian
Rouble, Indian Rupee or Chinese Yuan, the question arises as to which of those
currencies should be utilised.
This article will discuss
the BRIC nations and their decreased reliance on developed economies for
economic growth and development. It will then discuss concepts around whether
that economic development and growth can be more stable and sustainable without
the utilisation of the U.S Dollar in inter-BRIC trade and finally which
currency of Brazil, Russia, India or China would be the optimal currency to be
used in inter-BRIC trade.
The
structure of the rest of the article is as follows: First, the literature review will discuss
literature related to the U.S Dollar standard and possible alternatives,
followed by the concepts surrounding a currency union and finally the
possibility of the establishment of a common BRIC currency to be used to
facilitate inter-BRIC trade. This will be followed by the methods and
procedures used in the study and the results and discussion related to these
methods and procedures. Finally the
article will conclude with a brief summary of the article and the findings of
the research as well as a possible guideline for future research on the topic.
LITERATURE
REVIEW
The U.S
Dollar standard is a contentious issue amongst much of the developed as well as
the developing world. Therefore it is
par for the course that previous literature has attempted to address the validity
as well as the longevity of such a financial system, with many mixed viewpoints
amongst some, and unanimity
amongst others. Trade between Brazil, Russia, India and China is largely
facilitated using the U.S Dollar, and these countries wish to eradicate this
system.
Van den
Spiegel (2005) explores the theme that the U.S Dollar as an international
reserve currency is Post-Bretton ‘financial architecture’ and the world’s
economic, financial and political environment has changed dramatically since
then, leading to the notion that the existing financial system needs to adapt
to the increased globalization that has developed. This has been supplemented
by the introduction of the BRIC nations
to the ‘leading economies’ group, which will have a large impact on the global
economy’s financial system. This
sentiment is echoed by Carbaugh and Hedrick (2009) that Brazil, Russia and
China are unashamedly pushing for discussion around the phasing out of the U.S
Dollar as the major reserve currency.
A strong
debate from China against the U.S Dollar standard is not surprising, given that
China’s massive holding of American assets is extremely vulnerable to future
U.S inflation which is being aided by its series of quantitative easing methods
and its concern surrounding the catastrophic U.S current account deficit seems
justified. America’s loose monetary policy without much doubt increases this
concern, not to mention the proven lack of U.S corporate governance and
accountability, evidenced by the 2008 sub-prime crisis. Yeoh (2010) affirms
that bad governance practices in the private and public sector in the U.S made
a major contribution to the 2008 crisis, revolving around a plethora of
corporate misconduct such as reckless debt-leveraging, dubious financial
reporting, and remuneration incentives of unprecedented quantities.
In terms of
Russia’s stance, Johnson (2008) points out that Russia has no incentive or
interest, given its minimal trade with the America, to support the U.S economy
and it feels that moving away from the U.S Dollar standard will create more
stability in Russia. Russia’s vulnerability to fluctuations in the price of
crude oil due to its dependence on oil revenue and the bitter reminder of the
Russian financial crises of 1998 and 2008 is certainly a further reason for the
need for economic stability in Russia.
If Special
Drawing Rights (SDR) are to be more prominently used as reserve currency, as is
encouraged by nations such as Russia and China, Carbaugh and Hedrick (2009)
outline that it would promote stability for the value of China’s holdings of
U.S Dollars, but there is nothing that the International Monetary Fund could
produce to support the value of such assets, and its future role as a reserve
currency is extremely unlikely. Whereas Ekpenyong (2007) explores that although
the U.S will discourage the emergence of a monetary system that would put the
U.S Dollar as a major reserve currency under threat, the competitive nature of the
Chinese and further co-operation of emerging economies may see the rise of the
SDR as a major currency in world trade and finance.
Studies by
Dobson and Masson (2009) observe the possibility of the Chinese Renminbi, the
name of the principle unit of currency in China which is the Yuan, becoming a
world currency due to the emergence of China as a major player in the world
economy. Although due to its strict capital control procedures and lack of deep
and liquid financial markets, it is very unlikely at this time. One has to pose
the idea of whether the stability of China’s economy is of more importance at
present than their currency being at the helm of international investors, which
would result from the Renminbi’s international prominence.
As the U.S
Dollar standard is so prominent in East Asia and the U.S Dollar being the main
invoicing currency in this region, price stability is of paramount importance
in inter-Asian trade which begs the question of whether doing away with the U.S
Dollar standard is a possibility for this region. McKinnon (2004) explores,
quite ambitiously, the concept of an ‘Asian Euro’ developing which would float
freely against the U.S Dollar.
Alternative
proposals to the U.S Dollar standard such as highlighted by D’Arista (2004) in
the form of the International Clearing Agency is proposed to lead to financial
stability and growth in the global economy as the current U.S Dollar standard
requires policies in favour of export-led growth, which could have a severe
impact on the global economy. Another
proposal by Arestis, Basu and Mallick (2005) discusses, perhaps
unrealistically, that financial integration can be solved by a worldwide single
currency and a single monetary authority, but there are extreme difficulties in
achieving this. Contrary to the notion of alternatives to the U.S Dollar
standard, as America remains a major consumer and producer in world markets and
homogenous goods remain a major part of trade within these world markets, the
U.S Dollar standard will continue to be utilized, as concluded by Goldberg and
Tille (2008).
What has
been clearly identified by the above literature is that alternatives to the U.S
Dollar standard have been considered, and theoretically these alternatives may
gain prominence over time, but the omnipresence and functionality of the U.S
Dollar as a reserve currency, and in the context of inter-BRIC trade, will not
easily be displaced. To facilitate the ease of trade without the use of the U.S
Dollar between the BRIC nations and to promote the growth of these nations, the
concept of a common BRIC currency used in inter-BRIC trade, such as in the
spirit of the ideals of a currency union.
A currency
union is when two or more countries adopt the same currency for use in trade
between these countries as well as in trade with other countries. Examples of
currency unions that exist today include the CFA Franc Zone, the Eastern
Caribbean Currency Union, the Rand Monetary Union, and of course the most
widely recognisable union being the European Monetary Union (E.U).
The advantages and disadvantages of countries adopting
the same currency has been noted by Alesina and Barro (2002) and Zhao and Kim
(2009), with the advantages being the reduction of transaction costs of trade
between the member states, less uncertainty pertaining to asset and exchange
rate price changes and the main disadvantage being the loss of independent
monetary policy in each member state.
This loss of independent monetary policy is a factor
that Frieden (1998) recognised as one of the major challenges facing the E.U at
its birth stage, as finding a common monetary policy for a group of countries
that came from extremely divergent and discrepant economic, social and
political backgrounds. As the E.U has aged since then, the carrying economic
specifics of the member states have proved the feat of a single currency and
monetary policy extremely trying.
Goodhart (2007) extracts lessons from certain
shortcomings from the E.U in order to set guidelines for prospective currency
unions. Of the most important being the need of the member state to have a
flexible labour market in order to absorb shocks to the economy, highlighting
that the relatively inflexible labour markets in the E.U make it difficult to
adjust to asymmetric shocks to the economy. Coincidentally, Cheng, Gutierrez,
Mahajan, Shachmurove and Shahroki (2007) describe how in fact the inflexibility
of the labour markets in the Brazil, Russia, India and China is a major barrier
to their growth.
Brazil, Russia, India
and China, as were the member states of the E.U before unification, differ in
terms of their monetary and fiscal policies and economic development. The
increased integration between the BRIC economies, their desire for more
stability and representation in the world economy, along with the prospect of
formidable growth lays down the foundation for the possibility of a system of
trade denominated in a common BRIC currency. This could decrease their reliance
on the U.S Dollar and developed nations in the world economy, subsequently
boosting the economic growth of the BRIC nations.
METHODOLOGY
The 2008 sub-prime financial crisis caused a massive
shock to financial markets worldwide. It was a time characterized by distress
and disorder in the world economy. Accompanying such disorder was the increased
volatility in assets and market indices due to the wild uncertainty faced by
industry from national government level down to individual investors. Global
economic uncertainty has certainly remained prevalent. The PIIGS nations
(Portugal, Ireland, Italy, Greece, and Spain) face soaring sovereign debt
yields and have implemented harsh austerity measures due to the sovereign debt
crisis in the Euro Area. The Unites States of America has, for the first time
in history had their debt rating downgraded by Standard & Poor’s from AAA
to AA+ which has had a shuddering effect on the global economy, reminiscent of
the 2008 sub-prime financial crisis previously mentioned (Christopoulos, Mylonakis and
Koromilas, 2011)
As a result of these tumultuous events, the BRIC
nations wish to develop a system of trade that is less dependent on the U.S
Dollar and to bring about economic stability for those regions in the face of
an uncertain and changing global economic environment (Iley and lewis, 2011).
Two pairs of data series were chosen as the
fundamental data in this study. The first pair of data series is the daily
prices of the Yuan, Rouble, Real and Rupee against the U.S Dollar and the daily
prices of the trade-weighted exchange index of major currencies against the U.S
Dollar. These major currencies include the Canadian Dollar, Japanese Yen,
British Pound, Swiss Franc and the Swedish Krona. The second pair of data
series is daily prices of the benchmark index of the major bourse in each of
the BRIC nations namely the Shanghai Composite index for China, the Sensex
index for India, the Bovespa index for Brazil, the Micex index for Russia and
the MSCI G7 countries equity index. The G7 is an economic and political bloc of
highly industrialized and developed nations, namely the U.S.A, France, Germany,
Canada, the United Kingdom, Japan and Italy (Morelli, 2009).
Each of these data series were chosen for two periods.
The first period is 9 January 2007- 31 December 2009 which is the time
surrounding the 2008 financial crisis and the second period 4 January 2010 to 5
August 2011 was chosen to reflect the time surrounding the E.U debt crisis and
the imminent default and downgrade of U.S debt. These two periods were chosen
as samples of quintessential economic shock and by utilising these two periods
a stress-test scenario is created for the data to be tested in.
In addition, the data used in conjunction with the
main data includes the total merchandise export and import figures of all the
BRIC nations for the period 2007-2010 at current prices, in millions of U.S
Dollars. Also included are the GDP figures of all the BRIC nations for the
period 2007-2010 at current prices, in billions of U.S dollars.
The first theme that is addressed in this article is
the progression of the BRIC country’s decreased reliance on developed nations
for economic growth from the one major economic shock to the next and how the
use of the U.S Dollar in inter-BRIC trade may inhibit the ease and stability of
that economic growth.
Firstly, the correlation of the levels of each major
bourse for each BRIC country and the MSCI G7 countries equity index was
calculated for both of the periods of interest namely, 9 January 2007-31
December 2009 and 4 January 2010-5 August 2011. A comparison of the
correlations from one period to the next was made in order to observe if the
BRIC nations have become less affected by economic shocks in developed
countries.
Secondly, the annual historical volatility of the
Yuan, Rouble, Real and Rupee against the U.S Dollar and the annual historical
volatility of the trade-weighted exchange index of major currencies against the
U.S Dollar were calculated for the periods January 2007-31 December 2009 and 4
January 2010-5 August 2011. A comparison of the historical volatility of each
set of data was made and the percentage difference from one period to the next
was calculated. This was done in order to observe whether greater economic
stability can be achieved for the BRIC nations by utilising their own
currencies.
The second theme that is addressed surrounds the
pursuit of discovering the optimal currency of either of the BRIC nations to be
used in the facilitation of trade between them. In this study the criteria that
was used in order to test this is based on the underlying factors that contribute
to a currency being utilised as a medium of exchange in international trade as
stated by Kannan (2009). These criteria are the stability of that particular
currency’s value, the size of the country’s economy that issues the currency
and its percentage of world trade.
For the first criterion, namely the stability of the
country’s value, the annual historic volatility of the currency of each BRIC
country against the U.S Dollar for the periods January 2007-31 December 2009
and 4 January 2010-5 August 2011 were used to determine which currency proved
to have the lowest volatility during these two major economic shocks. The Gross
Domestic Product (GDP) figures for each BRIC nation from 2007 to 2010 were
sourced as a reliable measure of the size of the country’s economy in order to
test the second criterion. And for the third criterion, namely the county’s
percentage of world trade, the total merchandise export and import figures of
each BRIC country from 2007-2010 were sourced as a reliable measure of the country’s
size of trade activity on a worldwide basis.
RESULTS AND DISCUSSION
Economic linkages between developed and developing
countries are inevitable due to the increased integration of financial markets
and international trade. Bekaert and Harvey (2003)
refer to contagion in equity markets being when the markets move more closely
together in periods of crisis. As noted by Iley and lewis (2011) the 2008
financial crisis caused U.S Gross Domestic Product (GDP) to fall 4.1% and
demand from household level upwards has steadily lost strength from the U.S and
the E.U which are massive consumers of world output. Therefore one would
naturally expect a higher correlation between the movements of bourses in
periods of crisis.
The results of the correlation which was calculated
between each major bourse of each BRIC country and the MSCI G7 countries equity
index during the period surrounding the 2008 financial crisis support that the
movements of equity markets in the BRIC nations did track the movements of the
indices of the G7 developed nations during the catastrophic crisis with varying
degrees. This is confirmed by the positive correlations in each case.
In this study it was found that from the period 9
January 2007-31 December 2009 the highest correlation was that of the Russian
Micex index with a result of 0.93. This is an extremely strong-positive
correlation and indicates that the movements of the Russian index versus that
of the G7 indices were close to unison. The second highest correlation was
between the Shanghai Index of China, being 0.75. This is a strong- positive
correlation. The third highest was the Sensex index of India with a result of
0.58 which is moderate-positive and the lowest correlation shared between a
BRIC nation and the G7 nations was the Bovespa index of Brazil with a
correlation of 0.45, which is also moderate positive.
The results of the correlation that was calculated
between each major bourse of each BRIC country and the MSCI G7 countries equity
index during the period surrounding the market turmoil caused by the E.U debt
crisis and U.S fiscal crisis however produces lower correlations. In this study
it was found that from the period 4 January 2010-5 August 2011, the highest
correlation was also that of the Russian Micex index with a correlation of
0.89. This is an extremely strong-positive correlation but nonetheless is lower
than that of the previous period. The second highest correlation was that of
the Sensex index of India with a correlation of 0.45, which is lower than that
of the previous period. The Shanghai index of China dropped considerably to a
correlation of 0.22 and it was found that the Bovespa index of Brazil was
completely uncorrelated with MSCI G7 index.
Aloui, Aissa and Nguyen (2011) state that growing
internal markets in the BRIC nations have reduced their reliance on economies
such as the USA and the E.U and thus have reduced their exposure to shocks in
these external markets. In this study the focus lies more on how the BRIC
nations have reduced their reliance on developed nations holistically and that
is why the MSCI G7 index of the G7 developed nations has been used. The results
of the correlation which was calculated between each major bourse of each BRIC
country and the MSCI G7 countries equity index during the period 4 January 2010
to 5 August 2011 confirm that movements between the bourses of the BRIC nations
and the G7 nations have become less correlated as compared to the period 9
January 2007-31 December 2009. This confirms that markets of the BRIC nations
have been somewhat cushioned against shocks of external markets in the G7
developed nations.
The theory of ‘decoupling’ suggests that due to the
diminishing dependence of the emerging markets on the economy of the U.S, the
effects of economic shocks and recessions in the U.S no longer affect the
emerging markets as severely (Dooley and Hutchison, 2009). Fernandez and
Nikolsko-Rzhevskyy (2010) use real-time data from 1960 to 2007 and employ a
correlation analysis to gauge the extent to which economic fluctuations in the
U.S have affected economic fluctuations in other countries which resulted in a
gradual decrease in economic synchronicity between them. It was discovered that
increased globalization and financial deregulation between non-U.S markets has
caused an increasing lag in the response to economic fluctuations in the U.S.
As consumer demand and economic growth has decreased
sharply in developed nations since the 2008 financial crisis, growth in the
BRIC nations has remained relatively robust. Bar India, each other BRIC nation
has a healthy trade surplus and each nation holds huge amount of foreign
exchange reserves coupled with strong internal consumer demand (Biggemann and
Fam, 2011). These elements hold the BRIC nations in good stead to drive their
economies forward whilst the developed economies lag behind. It is with this
theme that the U.S dollar functioning as the unit of account in inter-BRIC
trade can only serve has a hindrance to BRIC objectives of growth and stability
due to the uncertainty of the conditions of the developed world in the future.
The results in this study of the annual historical
volatility of each BRIC currency against the U.S Dollar shows a decline from
the period 9 January 2007-31 December 2009 to 4 January 2010-5 August 2011. As
the Chinese Yuan is pegged to the U.S Dollar the movement of the value of the
currency stays within a certain band and therefore volatility is limited.
Nonetheless, The Yuan/Dollar exchange rate decreased in volatility by 0.04%
from 1.84% to 1.80%. The Real/Dollar exchange rate decreased in volatility by
9.64% from 19.66% to 10.02%. The Rupee/Dollar exchange rate decreased in
volatility by 3.87% from 9.87% to 6% and the Rouble/Dollar exchange rate
decreased in volatility by 2.92% from 10.58% to 7.66%. The annual historic
volatility of the trade- weighted exchange index of major currencies against
the U.S Dollar decreased by 2% from 9.51% to 7.51%.
The decrease in the volatilities of the Real, Rupee
and Rouble decreased by a larger amount than the trade-weighted exchange index
of major currencies against the U.S Dollar. These results provide support that
the BRIC currencies have decreased in volatility by a larger percentage than
trade-weighted exchange index of major currencies against the U.S Dollar from
one economic crisis to the next. This also supports that greater stability and
growth of the BRIC nations may be achieved by using their local currencies for
trade.
Blinder (1996) states that the dominant role of the
U.S dollar as an international reserve currency is it’s use for the pricing of
goods and services in international trade. It is a highly liquid asset and the
centrality of the U.S in international trade supports the function of the U.S.
What has been repeatedly emphasised in this study is that the BRIC nations wish
to conduct trade with less reliance on the U.S Dollar. If a common BRIC
currency is to be utilised, either in the form of the Yuan, Rupee, Real or
Rouble and is to perform the function of the unit of account between the BRIC
nations in trade, the volatility of this currency should be at a minimum. This
is particularly important during times economic stress, such as the periods
that have been focused on in this study. Referring back to the underlying
factors that contribute to a currency utilised as a medium of exchange in
international trade as stated by Kannan (2009), namely the stability of that
particular currency’s value, the size of the country’s economy that issues the
currency and its percentage of world trade, the results of the tests of these
criteria follow.
The results of the annual historic volatility of the
currency of each BRIC country against the U.S Dollar shows that the currency
with the highest volatility for both of the periods under study is the
Brazilian Real with historical volatilities of 19.66% and 10.02%. The second
highest volatility comes from the Russian rouble with historical volatilities
of 10.58% and 7.66%. The third highest volatility comes from the Indian Rupee
with historical volatilities of 9.87% and 6%. The lowest volatility of the BRIC
currencies during the two periods is the Chinese Yuan, with historical
volatilities of 1.84% and 1.80%
At face value it seems that on the basis of the lowest
volatilities during the two periods observed, the Chinese Yuan would be the
most likely utilised in inter-BRIC trade. Although there is uncertainty as to
the exact way that the Yuan is managed, ostensibly it is assumed that the Yuan
is pegged to the U.S Dollar in order to keep the value of the Yuan within a
certain range (Ma and McCauley, 2011). This renders the historic volatility of
the Yuan against the Dollar unmeaningful in determining whether that currency
should be used based solely on its relative volatility.
With reference to Table 1, it is evident that China
has the largest U.S Dollar value of exports and imports of the BRIC nations.
This indicates that China is involved in the highest percentage of world trade
of all the BRIC nations. With reference to Table 2, the GDP of China has far
exceeded that of Russia, India and Brazil from 2007 to 2010. This shows that
China is the largest economy of the BRIC nations. To supplement this it has
already been observed that due to the value of the Yuan being kept within a
certain range it is the most stable of the currencies of the BRIC nations. Thus
the criteria based on Kannan (2009) indicate, ceteris paribus, that the Chinese Yuan should be the country utilised
in inter-BRIC trade.
It must be noted that there are certain impediments to
the development of a system of trade between the BRIC nations based on the
Chinese Yuan. Dobson and Masson (2009) highlights that the Yuan is not
convertible and the financial system in China is highly undeveloped and tightly
regulated. Also noted is that the capital controls in place are gradually being
relaxed in order to offset the amount of foreign currency reserves held by
China and there is a gradual liberalisation in the ability of banks and
non-financial companies to hold foreign assets. It would be absolutely
essential for China to allow more flexibility with regards to its currency for
it to gain prominence in inter-BRIC trade.
It is well known that the Chinese Yuan is considered
undervalued in its current state. It is suggested that China keep the Yuan
artificially weak in order to keep its exports competitive (Xu, 2008). If
greater flexibility of the Yuan takes it is probable that it would appreciate
in value. Zhang and Fung (2006) assess the impact of an appreciation of the
Yuan. What is discovered is that an appreciation of the Yuan would cause
supplementary inflationary pressures in China. This would be due to higher
import costs from a higher real exchange rate as well as an increase in China’s
domestic consumption.
China’s response the 2008
financial crisis was in the form of a 600 Billion U.S Dollar stimulus package
(Diao, Zhang and Chen, 2011). The massive stimulus package coupled with loose
monetary policy that was implemented to offset the adverse effects of the 2008
financial crisis has resulted in economic overheating and higher inflation in
China (Poon and Wong, 2011). ‘Hot money’ is a term for the movement of capital
from one country to another in order to make short term monetary gains from
interest rate differentials or exchange rate movements (Chari and Kehoe, 2003).
This is something that China has been plagued with. The rampant appreciation in
stock prices and the real estate sector in China as a result of such capital
inflows are major attributions to the growing inflation in China (Guo and
Huang, 2010). Xu and Chen (2011) provide figures to support this. It is
estimated that hot money inflows in the second quarter of 2009 reached a
staggering 123 Billion U.S dollars. This in conjunction with an expansionary
monetary policy boosted the home price growth index in China by 4.7% in 2009.
The already prevalent
inflationary environment in China would be exacerbated by an appreciation in
the Yuan, which would be required for it to be utilised in inter-BRIC trade. If
the authorities in China can create a mechanism in which inflation can be
curbed whilst maintaining a more flexible currency regime, the Chinese Yuan can
be developed to accommodate trade with the other BRIC nations. The acceleration
of the gradual process of financial market liberalization and Yuan convertibility
in China is also essential in this regard (Hu, 2008).
CONCLUSION
By
using the correlation of the major bourse of each BRIC nation and the MSCI G7 index as a proxy, it
was discovered that the BRIC nations have become less affected by economic
shocks of developed countries from the period surrounding the 2008 financial
crisis to the period surrounding the E.U crisis. What was also discovered was
that the annual
volatility of each BRIC currency decreased by a larger amount than the
trade-weighted exchange index of major currencies againstt
the U.S Dollar from the period surrounding the 2008 financial crisis to the
period surrounding the E.U crisis
This provides support that the BRIC nations have been somewhat sheltered from
external shocks in developed countries and the decreased volatility of their
currencies may provide direction for inter-BRIC trade with local currencies.
The
post-2008 U.S financial crisis proved how vulnerable the world economy is to
shocks in the U.S Markets. The consequences have created scepticism around the
quality of corporate governance as well as the economic and social
responsibility of the highly industrialised and developed economies of the
world. With this lack of faith in the ability of developed nations to produce
reliable and accountable platforms for investors to allocate funds and achieve
their objectives, a shift of focus to developing nations and more narrowly the
BRIC nations has taken place. The progression of solid and stable structures to
stimulate inter-BRIC trade with less reliance on the demand dynamics of
developed nations may aid in the economic growth of the BRIC nations. Added to
this, the development of a system of trade that is not facilitated by the U.S
Dollar but rather the Yuan, Rupee, Rouble or Real would allow trade to be
independent of the U.S Dollar and aid in stable and sustainable economic
growth.
It
was found that the Chinese Yuan would be the most viable currency to be
predominantly used in inter-BRIC trade, but the lack of financial market liberalization and
restricted Yuan
convertibility in China is a major barrier to
this. Future research into the changes in China’s economy that would enable
greater internationalisation of the Yuan and the promotion of its use in
inter-BRIC trade will be of much value in promoting the BRIC objective of
conducting trade without the use of the U.S Dollar.
REFERENCES
Alesina, A. & Barro, R.J. (2002). Currency
Unions. The Quarterly Journal of
Economics, 117(2), pp. 409-436.
Aloui, R.,
Aissa, M.S.B. & Nguyen, D.K. (2011). Global financial crisis, extreme
interdependences, and contagion effects: The role of economic structure? Journal
of Banking & Finance, 35(1), pp. 130-141.
Arestis, P., Basu, S. & Mallick, S. (2005). Financial Globalization: The Need for a Single Currency
and a Global Central Bank. Journal of
Post Keynesian Economics, 27(3), pp. 507-531.
Bekaert, G. & Harvey, C.R. (2003). Emerging markets finance. Journal
of Empirical Finance, 10(1-2), pp. 3-55.
Biggemann, S. & Fam, K. (2011). Business marketing in BRIC
countries. Industrial Marketing Management, 40(1), pp. 5-7.
Blinder, S. (1996).
The Role of the Dollar as an International Currency. Eastern Economic Journal, 22(2), pp. 127-136.
Brenner, R. (2006). The U.S. Dollar and Prosperity: Accidents Waiting to
Happen. CATO Journal, 26(2), pp. 317-332.
Carbaugh, R.J. & Hedrick, D.W. (2009). Will the Dollar be Dethroned
as the Main Reserve Currency? Global Economy Journal, 9(3), pp. 1-14.
Chari, V.V.
& Kehoe, P.J. (2003). Hot Money. Journal of Political Economy, 111(6),
pp. 1262-1292.
Cheng, H.F.,
Gutierrez, M., Mahajan, A., Shachmurove, Y. & Shahrokhi, M. (2007). A
future global economy to be built by BRICs. Global Finance Journal, 18(2),
pp. 143-156.
Christopoulos, A.G.,
Mylonakis, J. & Koromilas, C. (2011). Measuring the impact of financial
crisis on international markets: An application of the financial stress index. Review of European Studies, 3(1), pp. 22-34.
D’Arista, J.
(2004). Dollars, Debt, and Dependence: The Case
for International Monetary Reform. Journal
of Post Keynesian Economics, 26(4), pp. 557-572.
Diao, X.,
Zhang, Y. & Chen, K.Z. (2011) The global recession and China's
stimulus package: A general
equilibrium assessment of country level impacts. China Economic Review, May 2011, pp. 1-17.
Dobson, W. & Masson, P.R. (2009). Will the Renminbi become a world
currency? China Economic Review, 20(1), pp. 124-135.
Dooley, M. & Hutchison, M. (2009). Transmission of the U.S. subprime
crisis to emerging markets: Evidence on the decoupling-recoupling hypothesis. Journal
of International Money and Finance, 28(8), pp. 1331-1349.
Ekpenyong,
D.B. (2007). Can the Special Drawing Right (S.D.R.) become an acceptable
reserve currency of the International Monetary Fund (I.M.F.) in the midst of
strong resistance by developed countries captained by the U.S.A.? Critical
Appraisal. Journal of Financial Management and Analysis, 20(1), pp.
1-15.
Fernandez,
A.Z. & Nikolsko-Rzhevskyy, A. (2010). The changing nature of the U.S.
economic influence in the world. Journal of Policy Modeling, 32(2), pp.
196-209.
Frieden, J. (1998). The Euro: Who Wins? Who
Loses? Foreign Policy, Autumn 1998,
pp. 24-32+34-40.
Goldberg, L.S. & Tille, C. (2008). Vehicle currency use in
international trade. Journal of International Economics, 76(2), pp.
177-192.
Goodhart, C.A.E. (2007). Currency unions: Some lessons from the
euro-zone. Atlantic Economic Journal, 35(1), pp. 1-21.
Guo, F. & Huang, S. (2010). Does “hot money” drive China's real
estate and stock markets? International
Review of Economics and Finance, 19(3), pp. 452-466.
Hu, F. (2008). The Role of the Renminbi in the World
Economy. CATO Journal, 28(2), pp. 219-224.
Iley, R.A. & Lewis, M.K. (2011). Has the global financial crisis
produced a New World Order? Accounting Forum, 35(2), pp. 90-103.
Johnson, J. (2008). Forbidden fruit: Russia's uneasy relationship with
the US dollar. Review of International Political Economy, 15(3), pp.
379-398.
Kannan, P.
(2009). On the welfare benefits of an international currency. European
Economic Review, 53(5), pp. 588-606.
Kregel, J. (2009). The global crisis and the implications for developing
countries and the BRICs: Is the "B" really justified? Brazilian
Journal of Political Economy, 29(4), pp. 341-356.
Ma, G. & McCauley, R.N. (2011). The evolving Renminbi regime and
implications for Asian currency stability. Journal of the Japanese and
International Economies, 25(1), pp. 23-38.
McKinnon, R.I. (2004). The East Asian dollar standard. China Economic
Review, 15(3), pp. 325-330.
McKinnon, R.I. (2001). The problem of Dollar encroachment in emerging
markets. Journal of Policy Modeling, 23(3), pp. 301-319.
Morelli, D. (2009). Capital market integration: Evidence from the G7
countries. Applied Financial Economics, 19(13-15), pp. 1043-1057.
Poon, C. & Wong, F. (2011). China's monetary policy and its
transmission mechanisms before and after the financial tsunami. Chinese
Economy, 44(3), pp. 84-108.
Van den Spiegel, F. (2005). Will the role of the Dollar as the international
reserve currency be challenged? International Economics and Economic Policy,
1(4), pp. 293-304.
Wilson, D. & Purushothaman, R. (2003). Dreaming with BRICs: The Path
to 2050. Goldman Sachs Global Economics Paper, 99.
Xu, X.E. & Chen, T. (2011). The effect of
monetary policy on real estate price growth in China. Pacific-Basin Finance Journal, 20(1), pp. 62-77.
Xu, Z. (2008). China's exchange rate policy and its trade balance with
the US. Review of Development Economics, 12(4), pp. 714-727.
Yeoh, P. (2010). Causes of the global financial crisis: Learning from
the competing insights. International journal of disclosure &
governance, 7(1), pp. 42-69.
Zhang, J. & Fung, H. (2006). Winners and losers: Assessing the
impact of Chinese Yuan appreciation. Journal of Policy Modeling, 28(9),
pp. 995-1009.
Zhao, X. & Kim, Y. (2009). Is the CFA franc zone an optimum currency
area? World development, 37(12), pp. 1877-1886.
