Markus Jaeger of DB Research -

The "rise of the BRICs" thesis has received much criticism - some of it deserved, some of it undeserved. There is little doubt that major change is afoot, but the thesis is somewhat misleading, as it discounts what will be the most momentous development of the first half of the 21st century: the rise of China.

Naturally, the growing economic importance of India, Brazil and Russia will have important consequences, but these simply don't compare to the implications of China's rise. Economically, financially and politically, China overshadows and will continue to overshadow the other BRICs. China's economy is larger than that of the three other BRICs combined. Both China's exports and its official foreign exchange reserve holdings are more than twice as large as those of the other BRICs combined.

In Washington DC, for example, there is much talk these days about Chinese exchange rate policy and China's rapidly increasing financial prowess, about increasing Chinese military and especially naval capabilities, even about Chinese soft power. Prominent analysts and former government officials, like Bergsten and Brzezinski, are calling for the establishment of a G2 consisting of the US and China. While the proposal has thus far received at best a cautious response in both Beijing and Washington and a generally sceptical response from analysts, it is a reflection of the importance Washington insiders attach to China's growing stature. One may legitimately disagree with the G2 proposal, but China's increasing economic and political weight in world affairs is a reality.

Smashing China

In terms of economic growth, China has been outperforming the other BRICs by a wide margin over the past 30 years. Over the past decade, real GDP growth averaged 10% in China, 7% in both India and Russia and 3.3% in Brazil; and China will continue to grow faster than its peers. A high savings rate, a low level of urbanisation, low per capita income (considerable "catch-up" potential) and, importantly, a successful export-oriented, manufacturing-based development strategy underpinned by strong investment in infrastructure and education will combine to sustain China's superior economic performance. China will also soon become the world's largest economy (by 2025-30). Albert Keidel (until recently at the Carnegie Endowment for International Peace) even projects the Chinese economy to be twice the size of the US economy by the middle of this century!

China will be facing challenges, ranging from gradually deteriorating demographics and questions about environmental sustainability up to potential international trade frictions. Sooner or later economic growth is set to slow from current levels. But the short and medium-term outlook remains favourable relative to the other BRICs and, of course, even more so relative to the advanced economies. Investment ratios in Brazil remain very low. Russia is overly dependent on hydrocarbons and is facing very adverse demographic developments. India will have to overcome domestic opposition to growth-enhancing and growth-sustaining economic reforms and it is not clear yet that the leap-frogging "services revolution" will turn out to be an economically and politically viable development model. For all these reasons, China will continue to outperform the other BRICs over the next couple of decades.

None of this is meant to suggest that the "rise of the BRICs" is not a significant development. It is, but it pales by comparison with the rise of China. China is the 800-pound "panda" in the room. China will become the world's largest economy, and a high degree of economic integration will force Beijing to become more involved in managing global economic and financial affairs. The G2 proposal overestimates Beijing's and Washington's ability to jointly manage world affairs by discounting the growing importance of the other BRICs and the continued relevance of the EU and Japan. However, at the very least, the proposal is an implicit, even explicit recognition that China's rise is significantly more important than the rise of the other BRICs.

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