With two hundred Fortune 500 companies already established there, Chengdu is quickly becoming the “Western frontier” for financial services in China. With over 57 banks, 65 insurance companies and 44 securities houses based in Chengdu, a dramatic increase in private equity as well as other areas of investment, and a new Financial Outsourcing zone being established, the inner West of China will be the driving force in the nation’s growth in the coming decade.

Recent investment by Australian companies in Chengdu reflects the growing recognition of the role Western China has to play in China’s future. Examples include Cochlear, BlueScope, Rheem, Accenture and ANZ.

In January 2012, the City of Chengdu led a delegation to Sydney to attend the annual Chinese New Year Parade and participate in the Business Forum. I was fortunate to have the chance to meet most of their senior Government officials and business leaders.

Here is a summary of some presentations of the opportunities for co-operation identified between Sydney and Chengdu, presented by senior members of the Chengdu delegation involved in their financial services sector.

Chengdu Financial Work Office

Speaker:  Ren Ruihong, Division Chief, Banking and Insurance, Chengdu Financial Work Office

The following five characteristics illustrate Chengdu’s competitive advantage as the Western Chinese hub for financial services and the opportunities for growth and collaboration with Australia:

1. Very Competitive Financial Institutions - With over 57 banks, 65 insurance companies and 44 securities companies already established in Chengdu, the Inner West will be the driving force in the nation’s growth in the coming decade.
2. Specific Outsourcing Zones – ANZ has built up a presence outsourcing its Chinese language call centres to Chengdu. There is a diverse range of BPOs including data centres, fund settlements, bank card centres and Research and Development.
3. Active Capital market – Chengdu has a joint property trading centre with 47 publicly listed comoanies with total market value of RMB 50billion, a strong focus on start up enterprise and the highest level of securities trading amongst the Western cities. 
4. Rich in talent – the professional talent pool is highly concentrated in Chengdu, in Chengdu with over 42 local higher educational institutions,
5. Government Services and Support – in areas such as private equity funds, funds management, rural banks, home loans, accounting, law and asset appraisal

JinTai Property Insurance Co. Ltd

Speaker: Deng MingXiang, Chairman of JinTai Property Insurance Co. Ltd.

Opened on 28 January 2011, JinTai Property Insurance Co. Ltd is the first insurance company founded in SiChuan province and has $1.5billion registered capital. With a growth strategy to expand within China over the next 3-5years, JinTai’s growth will not stop there. With a firm international strategy in place, JinTai employs foreign employees to support their international and strategic growth plan. A government controlled entity, JinTai is the leading insurance company for major infrastructure projects in SiChuan. They offer two main types of insurance (1) property loss, liability, credit guarantee and (2) health & accident insurance. JinTai Property Insurance Co. Ltd is looking for partnerships in Australia – is this an opportunity for your business?

Bank of Chengdu

Speaker: Tian HuaMao, Deputy Secretary of the Party Committee, Bank of Chengdu Co., Ltd, President, Bank of Chengdu

The Bank of Chengdu is a leading financial institution with AUD$500million capital. It has a workforce of 4,000 people and total assets $28billion. With a total profit of AUD$4million, the Bank of Chengdu is the top commercial bank in the South West of China. A strong focus on the SME sector in the local area, including high tech and energy industries, the aims to target the rural and urban areas.

Chengdu Investment Holding Group Co. Ltd.

Speaker: QinJian, Investment Director

With JinTai Property Insurance and Bank of Chengdu as the biggest shareholders of the company and $10billion in assets, Chengdu Investment Holding Group Co. Ltd is a space for Australians to watch for opportunities for outbound investment, with investment totalling RMB10billion. As both an investment and finance platform, the Chengdu Investment Holdings Group Co. Ltd. is an institution for Australian companies to assist with management of funds.

With the support of the Chengdu delegation to Sydney, we are now in the process of planning a Financial Services Mission to Chengdu, Chongqing and Shanghai in China to explore investment opportunities, build new connections in these 2nd tier cities and learn about their plans to grow and expand their local financial services sector. More details will be circulated soon but, in the meantime, pencil in the dates (17th October - 27th October 2012) and let us know if you have an interest in coming.

In December 2011, I was invited to speak at the annual Conference of Chartered Secretaries Australia (CSA) in Sydney, an opportunity to discuss corporate governance and risk mitigation, and to prepare their members for some of the challenges that lie ahead for Australian (and other) companies that seek to do business or invest in the four "BRIC countries".

In my presentation, I addressed the three common challenges associated with conducting business in emerging markets:

• Corruption
• Credit Risk
• Cross-Cultural

I believe that Company Secretaries have a vital role in preparing their boards, management and staff for the complexities and challenges involved in doing business offshore, and from those I spoke to afterwards, my presentation raised issues which require more focus and attention.

A summary of my presentation was published in the Feb 2012 issue of "Keeping Good Companies", the official publication of CSA.

To download a copy of the full article as a PDF, please click here

Last week I was in Hong Kong leading our annual Australian Mission to the Asian Financial Forum, an event that gets bigger and bigger each year with over 2,000 delegates attending from around the Asian region.

The Hong Kong Trade Development Council (HKTDC), led by Executive Director, Fred Lam (pictured with me above) does a fabulous job in hosting such a large gathering of financial services professionals, including hosting high profile plenary speakers and panel discussions, a "Deal Flow" session designed to match investors with interesting projects from around the world, and a number of networking and business matching events. It's the perfect start to the New Year.

Hong Kong's role as an international financial services centre is now undisputed. In December 2011, the World Economic Forum’s fourth annual Financial Development Report ranked Hong Kong in first place, above the US and UK. Hong Kong is the first Asian financial centre to achieve this position, bolstered by strong scores in non-banking financial services such as IPO activity and insurance. The results remained relatively stable among the rest of the top 10. Singapore’s decline to 4th place is a result of the securitisation markets drying up and a weakening banking system. Australia, Canada and the Netherlands maintained their positions at 5th, 6th and 7th place, respectively. Japan and Switzerland traded spots in the rankings to place 8th and 9th overall. Norway jumped into the top 10 because of strong IPO activity.

Here are three key observations gained from attending the Asian Financial Forum in 2012:

1. Hong Kong is fully recognised by China as their international financial centre

Whilst Shanghai will one day become an important international financial centre, many senior Chinese officials and business leaders continue to stress the importance of Hong Kong as the facilitator and intermediary for investment business between China and the rest of the world. Hong Kong's role in the internationalisation of the RMB was a particularly hot topic at the AFF following a visit to Hong Kong in November 2011 by China’s Vice Premier Li Keqiang and the announcement of new changes to the legal framework governing yuan-denominated trade and financial transactions between Hong Kong and mainland China. Mainland Chinese entities are now expected to issue even more renminbi-denominated (known as "dim sum") bonds in Hong Kong following the implementation of these new measures, which is likely to exceed the RMB 88 billion (US$13.7 billion) worth of these bonds issued in 2011. UK Chancellor Exchequer, George Osborne, trumped the Conference by announcing a co-operation agreement for London to work with Hong Kong to trade the yuan internationally, an opportunity which has apparently been offered to Australia aswell, without a response so far.

My take on all this is that Hong Kong is the largest, most important and dynamic financial services centre in the Asia Pacific region, supported by the "wall of money" moving in and out of China. The numbers speak for themselves. Australia's local financial services industry needs to quickly work out how they can participate in this, rather than continuing to promote the credentials of Sydney as a regional hub. Responding to Hong Kong's invitation to participate in RMB trading would be a good start, and there are many other opportunities for our leading players to participate in the sector. The race to be the regional hub is well and truly over.....it's time to accept this and get on board!!

2. Hong Kong has an important role to play in facilitating Indian investment into China

This was an interesting comment from Indian entrepreneur, Mr K.K. Modi, Chairman of the K.K. Modi Group, during the Panel Discussion on Global Investment Opportunities on Day 1, which was not widely picked up by the media. Mr Modi made the point that India as a country and Indian entreprenuers are keen to invest and do business in China, but for a wide range of historical, cultural, language and other differences, they find China complex and difficult to understand. Hong Kong, on the other hand, shares a similar colonial history with India, an English rule of law, an established bureaucracy, and a wide range of common values and shared experiences. In addition, there are over 20,000 Indian expats living in Hong Kong, many of whom run successful businesses and are experienced in managing cross-cultural relationships with their Chinese counterparts.

Bearing in mind, the importance of the China/India relationship in the future (and intra-BRIC trade for that matter), Hong Kong has an important role to play as a intermediary of two-way business and investment between these two economic super-powers. Mr Modi urged Hong Kong to focus more on working with India to facilitate trade and investment into China. I don't expect Hong Kong to be slow in meeting this challenge. Watch this space!

3. Don't forget Guangzhou and the Pearl River Delta region!

In the rush to Shanghai and Beijing, foreign investors, entrepreneurs and business leaders often forget the importance of the nine cities which make up the Pearl River Delta economic zone, and particularly the largest city in the region and the provincial capital, Guangzhou. On the third day of our mission we visited Guangzhou's new financial district which is transforming the city into a striking, attractive and modern city which is now regarded as the most liveable city in the region and a serious alternative to Hong Kong for those whose focus is on China but prefer to live in the south. Many of my Hong Kong friends, and some of the senior Chinese bankers I met during our visit, confirmed that they prefer living in Guangzhou to Hong Kong, an idea which was unthinkable only 10 years ago!

In 2010, the Pearl River Delta accounted for:

• 12.2% of the annual growth of China's GDP
• 4.2% of China’s total population
• 9.4% of China’s GDP
• 10.3% of China’s gross industrial output
• 27.4% of China’s total exports
• 9.8% of China’s total retail sales of consumer goods

Please make a note of the dates of next year's Australian mission to the Asian Financial Forum: 13th to 17th January 2013 and contact us at support@thinkglobal.com.au for more information....

In the meantime, please watch our short video podcast this month from Hong Kong and Guangzhou:

Here follows a summary of a presentation I gave earlier this month to the Australian Tourism Export Council Meeting Place 2011 in Sydney:

The BRIC Tourist

Currently spending twice the amount of the average tourist, the BRIC tourist market is set for strong growth in the coming decade as travel becomes affordable to a new emerging middle class of over two billion people.

Last year, the number of visitors from Brazil, Russia, India and China increased by 6.4%, 7.1%, 13.0% and 28.2%, respectively. Is the Australian Tourism Industry prepared for this?

Here are some thoughts on how to attract the new BRIC Tourist:

Follow the money!

In the next decade, the tourism market for Chinese visitors alone is forecasted to be worth A$6 billion to Australia, with almost 1 million Chinese visitors forecast to visit Australia in 2020. The Chinese tourist contributes twice as much value as the Japanese, with total inbound economic value (TIEV) having increased on average by 17.1% per year for the past ten years (a contribution to the Australian economy of A$7,287 per person).

Indian tourists also spend on average more each day than other nationalities. The total inbound economic value of an Indian tourist has increased by 14.9% per year for the past ten years. Indian tourists spend, on average, $73 per night and $4,607 per visit. For the next decade, the TIEV for Indian tourists is forecast to grow 6.7% year on year, moving the Indian tourist from Australia’s ninth to our fifth most valuable inbound market.

In 2010, Russians spent $26.5 billion abroad. As the BRIC country with the highest GDP per capita and the lowest levels of debt, the Russians have high purchasing ability and a relatively large luxury consumer market which is predicted to reach the size of Germany’s by the end of this decade.

Education policies requiring Brazilian students to study English are fostering outbound education tourism. Australia is a popular destination for young Brazilians due to our outdoor way of life, beaches and cultural similarities. In addition, Brazilians devote a large portion of their income to discretionary spending and choose to live for the present!

Casting a Wider Net

Unlike in the past, when the tourism industry has relied on above-the-line advertising and travel agents to attract business, the No. 1 source of information for one-third of Chinese, Indian and Russian tourists is the Internet. Even more compelling is the knowledge that, unlike western travellers who usually plan and book their travel many months in advance, Chinese tourists booked their flights within one month of their date of travel.

The importance of reaching potential BRIC customers via online promotional material and marketing campaigns will be a necessary competitive edge for all travel companies in the future.

However, traditional methods of marketing and search engine optimisation are of little significance for BRIC tourists, in particular the Chinese. As an example, the Chinese population’s most popular search engine is Baidu, the Chinese equivalent of Google.  It is therefore very important for the tourist industry to establish a presence in local popular Chinese search engines to attract the lucrative mainland Chinese market.

Revamping the Product

With such alluring growth figures, it is going to become even more important for all tourism companies to develop products that have direct appeal to the BRIC tourist. The BRIC tourist differs quite significantly from their stressed out Western counterparts in that they want to cover as much of Australia in as short a time as possible! A typical day may include a photo stop at Bondi Beach in the morning, followed by a bus trip to the Blue Mountains in the afternoon and then an evening at the casino. This contrasts with Western tourists who typically enjoy sunbathing and relaxing on the beach. With over one fifth of outbound Chinese tourists being labelled as ‘Self Challengers’, Australia is a popular destination for those attracted to adventurous pursuits, being pushed outside their comfort zone and those who are attracted to some of Australia's more remote areas.

Recruitment

There are approximately 150,000 Chinese students studying at universities in Australia, almost 70,000 Indian students, 18,000 Brazilian students and 1,500 Russians, but very few of them successfully find work in Australian companies after they graduate. These students not only have valuable cross cultural and language skills, but also Australian knowledge, experience and qualifications and possibly even high level connections in their home country. With the limited time available until their visa expires, many students are forced to return home if they cannot find suitable employment in the short period available, and this results in a loss of talent and valuable skill setswhich could otherwise be retained in Australia – particularly in the tourism sector.

A good place for Australian tourist companies to start in developing a strategy to attract new BRIC tourists is to review their recruitment policies to attract international students who, after a short period of training and on the job experience, will significantly enhance their ability to tackle the BRIC market.

Business Tourism

The market for business tourism is largely untapped, but with 87% of business travellers staying longer than the ordinary tourist, both before and/or after their business engagements, the business tourism market presents numerous opportunities for the tourist sector. In 2010, business travel from Brazil increased by 59% due to the rapid growth of Australia's energy and resources sector and the desire amongst Brazilian companies to learn from Australia's success.

Why not tailor a tourism package that incorporates business meetings, site visits or even networking events for the more entrepreneurial and business-minded BRIC tourist? With numerous delegations coming to Australia from Mainland China every week, is this a niche opportunity for local tourist companies to start tapping into?

Seasonal Differences

Whilst a seemingly obvious point, it is important not to underestimate the power of seasonal differences, particularly to attract Chinese and Russian tourists. The peak months for Chinese tourist arrivals to Australia are in January and February which, amongst other things, is caused by their desire to avoid the harsh winter climate and travel over the Chinese New Year Season. For Russian tourists, December and January are the peak months for tourist arrivals as they seek to escape the harsh Russian winter.

Tourism companies should focus their marketing and promotional activities to attract Chinese and Russian visitors during our warm summer months.

Cultural Differences

Whilst there are distinct cultural differences between Australia and the BRIC countries, Australia is uniquely placed and well positioned to take advantage of our exclusive position as the only western country within the BRIC region.

With over 1 million Chinese Australians (either born in China or of Chinese ancestry), large numbers of business migrants arriving each year from all of the BRICs, our growing number of international students and our strong cultural and historical ties throughout the region, Australia is a truly multi-national, multi-lingual and multi-cultural society which has so much to offer the BRIC Tourist.

“Speak with one Voice”

In the words of Geoff Dixon, Chairman of Tourism Australia, Australia's tourism industry needs to “speak with one voice” when marketing overseas. Unlike other sectors, The tourist industry is highly fragmented in Australia which means that collaboration, rather than competition, to attract the BRIC tourist will result in everyone having the chance to share in a much bigger pie.

As an example of this, in 2010, Italy, France and Spain signed an agreement to work jointly to attract BRIC tourists, a partnership which would have been unthinkable a decade ago.

Also, in Pattaya, Thailand, high end luxury resorts have been collaborating to attract the Russian Tourist, a innovative strategy which has met with almost immediate success. By introducing Russian street signs, Russian restaurants and developing training courses for hotel staff and waiters to learn Russian language and cultural differences, Pattaya is now attracting large numbers of big spending Russians.

The BRIC tourist presents an unprecedented growth opportunity for the Tourism Industry....what is your BRIC strategy?

It is now exactly 10 years since Jim O’Neill, then the newly appointed Head of Economic Research at Goldman Sachs wrote a research paper “Dreaming with BRICs” in which he predicted that the global economy in the coming decades would be propelled by the growth of four populous and economically ambitious countries: Brazil, Russia, India and China, and famously coined the acronym “BRIC”.

Whilst Jim had already gained recognition and widespread respect for his previous work as an economist and currency analyst, he acknowledges that his career has now been shaped in large part by this simple term. Whilst many eyebrows were raised at the time by some of his more dramatic predictions, notably the one that China would overtake the US to become the largest economy in the world within 30 years, the BRIC concept is now almost a household term, widely recognised within the media, academia, business circles and certainly by the investment community.  At the end of 2009, Jim’s BRIC research was widely acclaimed as the “Call of the Decade”.

With the benefit of 10 years since he first invented the BRIC acronym, it is worth pausing to reflect on how much the world has changed since 2001. As Jim wrote this week in an article in the UK Telegraph in which he reflects on the progress of the BRICs over the last decade:

“All four of the BRIC countries have exceeded the expectations I had of them back in 2001. Looking back, those earliest predictions, shocking to some at the time, now seem rather conservative.

The aggregate GDP of the BRIC countries has close to quadrupled since 2001, from around $3 trillion to between $11 - $12 trillion.

The world economy has doubled in size since 2001, and a third of that growth has come from the BRICs. Their combined GDP increase was more than twice that of the United States and it was equivalent to the creation of another new Japan plus one Germany, or five United Kingdoms, in the space of a single decade.

Some observers say the effect of the BRICs on the world economy has been exaggerated because their growth was primarily driven by exports to the developed markets, as well as the rise in commodity prices.

Exports certainly played a major role for China, but since the 2008 credit crisis and the consequent fall in demand in the US and elsewhere, that is no longer the case.

For India, domestic demand has been the driver throughout the last decade, and increasingly it is the domestic consumer as well as an increase in infrastructure spending that is fuelling growth in the BRIC economies.

The credit-fuelled growth in US demand certainly played its part in their ascent, but even since 2008, and despite the ongoing US struggles, the BRIC economies have continued to power ahead.

However you choose to interpret the data, the importance of the BRICs in global economic growth is beyond dispute. Personal consumption in the BRIC countries has skyrocketed. In China, between 2001 and 2010, domestic spending increased by $1.5 trillion, or roughly the size of the UK economy.

The increase in the other three was about the same, perhaps slightly more. BRICs now account for probably close to 20% of world trade compared with less than 10% in 2001”

Whilst the BRIC idea was first dreamt up as an investment idea or theme, designed to challenge the thinking of investors and their professional advisers, even Jim has been surprised by how quickly the BRIC countries themselves have started collaborating via their annual BRIC, now “BRICS” to include South Africa, Leaders Summit which has met every year since 2009 to discuss opportunities for political, economic and even trade collaboration.

The recent BRICS Leaders Meeting in China in April 2011 laid the tracks for greater “intra-BRIC” trade and investment co-operation in the years ahead.  This is vital to the global economy and should be occupying the minds of all forward thinking business leaders, investors and entrepreneurs.

“Intra-BRIC trade”, or trade among the BRIC members, has grown at the rate of 30% per annum since 1999 and now accounts for 8% of global trade. During the last 10 years, intra-BRIC trade increased nine fold, compared to global trade which only doubled over the same period.

In recent years, Intra-BRIC trade has been mainly characterised by Russia and Brazil supplying natural resources to satisfy the industrial and infrastructural needs of India and China. However, this is likely to change. Watch out for more investment and trade deals between the BRICs as they create their own trading bloc and invest in eachother’s capabilities.

10 years later, it is time to acknowledge Jim O’Neill’s vision, foresight and thought leadership. But as he reminds me from time to time, the BRIC idea has a long way to run yet!

The recent G20 Summit in Cannes, France, provided evidence, if ever it was needed, that the balance of global economic power has dramatically shifted eastwards. The big question in the media was "Can China save the Eurozone?", an idea that would have been laughed at only 5 years ago!

It now seems that the very survival of the European, if not the global economy, depends on China's willingness and ability to:

• support the financial package to save the Eurozone, and
• maintain their own economic growth levels so as to ensure continuing growth in Asia and the countries that most depend on China for their exports (particularly the large resources countries: Australia, Canada, Brazil etc)

China seems to be making all the right noises on both issues. They have already indicated their willingness to offer support to the Eurozone by increasing their contribution to the International Monetary Fund (a fund which ironically was established by the G7 countries to support emerging economies) and there is general confidence that they will manage a "soft landing" of their economy from GDP growth of 10.4% in 2010 (a level which was creating an over-heating, particularly in the property sector) to the 30 year long term average of 8.5% in 2012. Most seem to predict a growth rate of 9.2% in 2011.

I was interviewed on SBS Mandarin News Australia which provides an interesting perspective on these issues from a Chinese perspective (with subtitles). Please click on the link below to watch this:

It is true that nowadays, China makes the headlines around the world almost every day; and multinational companies are starting to put the world’s second largest economy at the centre of their strategies. It is becoming common for people that I know here who work as country managers for multinational companies to have to report directly to the CEO in Europe or the US, unfortunately implying many sleepless nights spent on conference calls and intercontinental flights.

For journalists, like many expats living in China (myself included), it is obviously exciting to work in a place that gets so much attention and for good reasons, that is rapid expansion and not street riots. But there is a downside to this newly-gained focus; news coming from China almost always brings with it anxiety, and it is striking how rumours, bogus news and misguided interpretations about what’s going on in this country float around, both inside China and abroad. It’s good that we are a team on the ground in Shanghai that can do our own research work and cross-check all information.

In China, the pace of change is very fast. And there are, after all, not that many people following and understanding this country. Could this be the reason why there are such extreme differences in interpreting what’s going on here? Indeed, after spending one year in China, I can’t help being amazed at what I call “the bears and the bulls dichotomy” that prevails for every single event or development of some significance.

To illustrate this: China’s third quarter GDP growth rate came out last week at 9.1% year-on-year. It was just marginally below forecasts, but triggered a sell-off in the markets, and alarming headlines about China inevitably facing a hard landing and about its unsustainable investment and cheap export-driven growth model. First of all I would say that 9.1% is good. Secondly, the leaders of the country themselves want the economy to slow down, orchestrating a “slower but higher quality growth”. But had growth been 9.5%, the reaction would have been just as strong: although instead there would be big concerns about China overheating and the risk of further tightening…

Another obvious example is how people read the real estate market indicators, such as prices and inventories. Are prices going down or seeing slow-down in growth? Then the bears talk about the collapse of the property market and huge problems facing property owners, real-estate developers, local governments and the whole of China, while the bulls celebrate the fact that Beijing is succeeding in cooling down the overheated property market, that it might mean the end of the tightening period and that we can nevertheless trust that long-term underlying demand will keep creating massive opportunities anyway . Are prices going up? Then the bears flag up for a “housing bubble”, “ghost cities” and “social unrest”; whereas the bulls would tend to focus on the increasing wealth of the Chinese and the fact that despite tightening, the property market (the largest asset class for the Chinese population) still looks good.

Not only economic development is subject to the dichotomy. On the political side, you will hear those praising the stability of the political regime in enabling better economic ruling at the same time as you will hear warnings that no dictatorship is able to maintain order in a country with surging wealth disparities, an economic slowdown, a booming Internet sector and rampant inflation. Internationally there will be the hopeful ones – may they be governments or companies - expecting a rescue from Chinese knights. And there will be the suspicious minds criticizing the Chinese for opportunistic and/or politically-motivated outbound FDIs.

There is no black and white and there is no absolute truth. One thing that is for sure is that Chinese demand has become more important given the weakness of the US and Eurozone, and everyone seems to worry more about what’s going on in China. In the long term, increased interest combined with a genuine interest in understanding the underlying trends, is good – China deserves it. In the short term, I really think the bears are getting too much traction and that is one of the main reasons why Chinese equities’ valuations are close to 2008-09 lows. Then again, that creates an excellent entry point for investors that can have a long-term perspective.

The rapid economic decline of the US and western Europe, fuelled by indecisive and frightened politicians, massive debt and a bloated sense of entitlement, has accelerated the process (first predicted by Jim O’Neill of Goldman Sachs as early as 2001, and now referred to as “the end of the great divergence” by Niall Ferguson in his recent TED lecture in Edinburgh) of transforming the global economy to one which is dominated by four countries – Brazil, Russia, India and China (The "BRIC" countries). Not far behind, although starting from a much lower base, is Continental Africa, referred to as the “last great emerging market “ in our most recent issue of Insights (click here to read it)

What we don’t know, and is very hard to predict at the moment, is how painful this transition will be.  Will Germany accept the horrible reality of a $2 trillion deficit in southern Europe and take decisive action by paying a figure which represents two-thirds of their total GDP into the system to save Greece and other ailing economies, and prop up the banks that will become insolvent in the event of a sovereign default? Or will the politicians prefer the “death by a thousand cuts” approach which has prevailed so far? Will the US face up to its own insolvency (with its total debt now at 100% of GDP and rising) and make serious and meaningful cuts to its Federal Budget? Or are we simply putting off the day when the US faces its own major debt crisis which will be too large for any other country to rescue and lead to a deep and painful global recession? As each day goes by it isn’t hard to paint a very pessimistic scenario for the future, despite the hope that sense will eventually prevail. Volatile investment markets simply reflect the confusion, fear and panic that exists throughout the investment community.

Unfortunately, this all happened much sooner than it was meant to! The BRICs are still relatively small economies (though growing rapidly) and are nowhere near ready to prop up the whole global economy. In any case, they are all going through their own internal transformations so as to be able to maintain economic growth despite the absence of the American consumer, the engine that has fuelled global growth for the last 50 years or more.

The key BRIC trends to be following to feel confident and optimistic about the future are as follows:

Domestic Consumption
China’s transition from an export driven economy to one which is dominated by domestic consumption (with urbanisation, rising wages and the development of a world class services industry as key drivers) is the focus of the 12^th Five Year Plan and was the subject of the July issue of Insights (click here to read it).  India’s economy is already dominated by strong domestic spending, and Brazil’s wealth of resources, agriculture and renewable energy offers a high degree of self-sufficiency.

However, Russia has the largest consumer class amongst the BRIC countries, the highest GDP per capita, the lowest level of debt, and now leads the whole of Europe in the sale of key consumables eg pharmaceuticals, mobile phones, broadband and even beer (catching up with Vodka as the beverage of choice amongst Russians!). According to the recently released Forbes survey of billionaires, Moscow has more billionaires (79) than any other city in the world (the closest is New York with 58) and Russia accounts for a third of Europe's 300 billionaires, and 15 of the world's 100 richest people. Not surprisingly, retail sales in Moscow now exceed Paris and London, and by 2025 the consumer market in Russia, which is now approx. 142 million, is expected to be larger than Germany’s, one of Europe’s largest markets.

Intra-BRIC trade
The recent BRICS Leaders Meeting in China in April 2011 laid the tracks for greater “intra-BRIC” trade and investment co-operation in the years ahead.  This is vital to the global economy and should be occupying the minds of all forward thinking business leaders and entrepreneurs.

With a combined GDP of $8.7 trillion in 2010, the BRIC economies already account for 45% of global economic growth, and the combined BRIC share of world trade increased from 6.9% in 1999 to approx. 14.2% in 2008. Furthermore, BRIC collective trade with the world increased almost six times from $790 billion in 1999 to $4.4 trillion in 2008.

Intra-BRIC trade, or trade among the BRIC members, has accounted for the fastest growth rate in global trade in the last decade, and is expected to continue as the BRIC economies become more dominant. According to the IMF, intra-BRIC trade, which is valued at more than $170 billion, has grown at the rate of 30% p.a. since 1999 and now accounts for 8% of global trade. During the 10-year period up to 2009, intra-BRIC trade increased nine fold compared to global trade, which only doubled over the same period.

In recent years, Intra-BRIC trade has been mainly characterised by Russia and Brazil supplying natural resources to satisfy the industrial and infrastructural needs of India and China. However, this is likely to change. Watch out for more investment and trade deals between the BRICs as they create their own trading bloc and invest in eachother’s capabilities.

Strong Leadership
You have to admit that western style democracy is looking pretty sick at the moment! With hung parliaments all around the world, short parliamentary terms, continuous electioneering, disengaged and disgruntled voters, and career politicians looking after their own interests, the will to engage in structural reform and long term planning has virtually disappeared. It is not surprising that the west is in such a mess!

In contrast, the political systems of China and Russia (now with the prospect of Putin serving as President until 2024, having first been elected President in 2000) look remarkably strong, stable and effective, despite the way they are portrayed in the western media. And Brazil’s recent economic success can largely be credited to the successful 8 year terms of two reforming, pragmatic and popular Presidents, Fernando Henrique Cardoso and Luiz Inacio Lula da Silva.

The question now is whether India, the largest democracy in the world, will be able to remove the stifling influence of Government bureaucracy and consensus to allow their entrepreneurial culture to thrive. India’s growth rate of 10% p.a. would be much higher with decent infrastructure and less Government interference, and the hope is that India’s reforming Prime Minister, Manmohan Singh and his successors can be allowed to finish the job of transforming India into a modern economy. With its young demographics, entrepreneurial flair, technological excellence and strong domestic demand, India will surely reach its true potential and demonstrate that democracy (famously referred to by Churchill as “the worst form of government except all those other forms that have been tried”) is still alive and well!

Innovation
Here lies the big question for the BRICs to address....and for the US and the developed world to ponder. Will the next Steve Jobs be Chinese? Will Bangalore in India take over where Silicon Valley left off? Will Brazil become the world’s clean source of food, energy and transportation? Will Russia put the first man on Mars?

It’s too early to know for sure, but the BRICs benefit from “latecomers advantage”. The opportunity to leapfrog technological advances, capitalise on knowledge and past experiences, tap into existing networks and, above all, learn from the mistakes of those who have gone before.  They also have the funds to spend on research and equipment which is rapidly running out in the west.

So, here lies the key to the future. As so eloquently put by Seth Godin in his recent blog entry, The forever recession (and the coming revolution) “the future is about gigs and assets and art and an ever-shifting series of partnerships and projects”. It’s not a zero sum game…..we can innovate and they can innovate…the rest can be outsourced or ignored.  Let’s fix the debt problems quickly, take the pain, start again and get on with the innovating! The BRICs will lead the way…we all must follow.

New visitors to Brazil can be excused for thinking that all of the local action is in Rio de Janeiro, and it often comes as a surprise (and possibly a disappointment) to find that you need to spend most of your time in the concrete sprawl of Sao Paulo (pictured above) which is actually the business and financial centre of Brazil's rapidly growing economy.

However, as noted in this week's Economist magazine, Rio or Sao Paulo?, things are changing. Last year Rio received $7.3 billion in foreign direct investment - seven times more than the year before, and more than twice as much as São Paulo, and with planning for the Rio Olympics 2016 now in full swing, Rio is starting to attract new investment, businesses and attention from around the world. There is evidence of this everywhere, from rising rents, hotel prices and the frequency of flights to Rio.

Having been intimately involved in running the business legacy programs for Sydney 2000 and Beijing 2008, our initiative Brazil Access knows what transformation can take place in a city as a result of the opportunity to host an Olympic Games. Not just in tourism, infrastructure and new sporting venues, but also in business, investment and trade. The host city has a unique and special opportunity to showcase their own, and the country's, business credentials to the world and, unlike Athens who failed to organise themselves properly for this in 2004, both Sydney and Beijing created new jobs, investment and business from leading players in many different countries. The Olympic sponsors derived the greatest benefit from this.

Rio will be transformed in the next 5 years as they plan, prepare and host the Olympic Games. By 2020, perhaps multi-national companies will even establish their Brazil HQ in Rio?