Saturday 11th October, 19:00 HKT
Still not sure why emerging markets have collapsed recently? Want to know if there’ll be a recurrence of the steep drop in global markets following the Fed’s previous QE tapering announcement? These graphs below will answer all your questions.
And in this case it’s nothing to do with the dollar’s sharp increase in value (once everyone realises the Fed will start a new round of QE, then there’ll be an immediate drop in the dollar). The real reason is China’s slowing credit growth.
The following is taken from a Goldman Sachs investment research report:
“The main challenge currently facing emerging markets GDP growth is the slowdown in China’s economy. In the run up to the turn of the century, China was the main driver of growth for many of the emerging markets. By 2007, China’s real GDP growth had reached 14%. Therefore China’s importance has increased, as can be seen in the 1990’s, when the economic growth of emerging markets became increasingly dependent on China’s economic growth. It’s now widely accepted that there’ll be a slowdown over the coming few years, so investors will need to look elsewhere for new drivers of emerging markets growth.”
In other words, China has been the most important factor in emerging markets growth, and during that time China’s credit expansion played the key role. But now China is no longer following this policy.
So what’s the current situation? Goldman Sach’s “Wavefront Growth Basket” shows a recent steep drop in economic growth.
The bottom line is either China kickstarts 1 trillion dollars of new credit every quarter (in reality this will be difficult as the number of bad loans has already passed the Ponzi Finance point on the Minsky chart), or emerging markets will really feel the pain. Developed markets will also be aware of this. And if the Fed understands this point, then in 4-6 weeks they’ll resort to doing what their best at, which is printing money.
For more background reading, see this article from Emerging Markets.
Disclaimer: This is a translation of an article from Chinese media. Translator has not seen the original research report cited in the Chinese article.
(Article not to be republished without permission or citation).