China has been the major reason why emerging markets have underperformed, and a Chinese credit crunch may not be far off either, said Ing's Maarten-Jan Bakkum.
Since 2010, China has been the major reason why emerging markets have trailed behind developed markets. After the gigantic credit injection in the Chinese economy in 2008 and 2009 to help it cope with the world credit crisis, growth started faltering in 2010. The slowdown continues to this day.
In the first half of this year, Chinese growth still amounted to 6.8%. The lower growth and increasing concerns for the sustainability of high growth in China have exerted substantial pressure on commodity prices in recent years. This has had a negative effect on major commodity exporters, such as Brazil and Russia.
In addition to the direct negative impact of lower Chinese growth on the country’s trading partners, there is a further complication for the emerging world. Since 2008, aggressive stimulus measures have caused an explosive rise in the level of debt in the Chinese economy.
As a percentage of GDP, Chinese debt has risen by no less than 70 percentage points over the past five years. This sharp rise is unprecedented and is causing a great deal of pressure on the financial system.
Capital flows to the emerging world have gradually dried up over the past two years. This is a result of the great imbalances in many emerging countries and the expectation that the US central bank will slow down its money-printing scheme in the coming quarters. It is also a response to the China risk.
However, in recent weeks, there have been some positive signs from China indicating that economic growth is recovering slightly. Stabilising growth would be good news for the emerging markets; after all, concerns regarding China had grown considerably over the past few quarters.
It would mean that the emerging markets will be able to make good some of their losses in the near future. On the other hand, a couple of quarters of slightly better growth will do little to change the outlook for the coming years.
The growth slowdown will continue and the risk of a Chinese banking crisis, with major consequences for the entire emerging world, remains too great to ignore.
Maarten-Jan Bakkum is a senior emerging market equity specialist at ING Investment Management
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