Market
Realist 8-12-14… “BRICS are drifting away from US and European monetary
structures”
2014/08/13 by
Had
to happen, baby!!
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BRICS
are drifting away from US and European monetary structures
By Mike Kane – Disclosure • Hedgeable • Aug 12, 2014 11:59 am EDT
By Mike Kane – Disclosure • Hedgeable • Aug 12, 2014 11:59 am EDT
The
BRICS countries (Brazil (EWZ), Russia, India (EPI), China (FXI), and South Africa) are slowly but surely
drifting away from the 20th Century monetary and political structures setup by
the U.S. (SPY) and Europe (EZU), as characterized by Russia’s G8 membership being
revoked in the wake of the events in Crimea. The G7, as it is now known,
is at odds with Russia’s Vladimir Putin, but that rift applies to the entire
BRICS coalition — a group that seems to be growing stronger and more focused as
leader of the Emerging Markets.
There
have been a slew of recent moves within the BRICS network. Russia and China
inked a $400 billion, 30-year natural gas partnership, forged
a bilateral inter-bank agreement to deal in local currencies, and
announced plans to create a new credit rating system to counter
the Western agencies. China is diversifying away its U.S. dollar
exposure, China and Brazil finalized a local currency swap, and leaders
from the group of nations just met for the sixth annual BRICS Summit in Brazil.
Market
Realist – The above graph shows China’s holdings of U.S. Treasuries (IEF), which have been declining consistently
over the past year. China is steadily diversifying away from the dollar.
According
to a government report released in June, China’s (FXI) holdings of U.S. Treasuries (TLT) declined for the third straight month in
June 2014. China held 1.26 trillion in U.S. debt as of April 30, 2014,
according to the report. This is an $8.9 billion decline from March.
This fact is particularly significant given that China (FXI) is the largest foreign holder of U.S.
Treasuries (IEF). According to data compiled by Bloomberg,
analysts have seen this decline in holdings for three consecutive
months.
China
and Russia are also disintegrating from the standard credit rating procedures
by agreeing to establish a rating agency on joint projects and international
services. The rating agency would use similar tools and criteria for assessing
creditworthiness as the existing agencies. This move came in response to the
countries’ fears that negative feedback from agencies could prove harmful
to their economies.
China
and Russia also signed a momentous deal in May 2014. China agreed
to purchase $400 billion of natural gas from Russia. This strategic deal
comes as Russia finds itself isolated due to tensions with Ukraine. The
deal should help China ease its gas shortages and reduce its dependence on
coal.
The Russian
government–controlled Gazprom will supply 38 billion cubic meters of gas
annually to state owned China National Petroleum Corp.,
which will cater to almost one-fourth of China’s current annual gas
consumption (150 billion cubic meters).
U.S.
Treasury Secretary Jacob Lew has appealed to China to desist from taking steps
that might be contrary to sanctions. However, the government has recognized
China’s need for energy.
According
to a joint statement from Russia and China on the partnership and strategic
cooperation, Russia and China are planning to bypass the dollar and increase
the volume of direct payments in their national currencies. This would threaten
the dominance of the petrodollar and could be a huge blow to the economy if
other nations follow suit.
Read on
to the next part of this series to find out how the BRICS summit has led to
setting up an alternative to institutions like the World Bank and IMF.
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