commodity prices buoyant. However, this
came at a cost. China’s rapid boomwas fuelled
by trillions of dollars of debt as its domestic
companies invested – particularly in
infrastructure – while restrictions on individual
borrowing were gradually eased.‘There has
been a credit bubble of epic proportions in
China,’ observes Neil Shearing, Chief
Emerging Markets Economist at Capital
Economics.‘I’ve never seen credit flood in as
fast as it did into China over the past seven years.’
Since March 2014 the cycle has turned,
with more than $300 billion of capital, on
official estimates, flowing out of emerging
markets.The commodity price cycle has now
turned downwards, hitting those countries
that are heavily dependent on commodity
exports, such as Russia and Brazil, while
benefiting net importers.
Moreover, as Haldane observes, where
money has led, growth has followed. But now
that growth is slowing down. Indeed, the
I
n September, in a speech to the
Chamber of Commerce in Portadown,
Andy Haldane, the Chief Economist
of the Bank of England, warned that
we could be moving into the third
stage of the financial crisis: the emerging
market crisis of 2015.
The financial crisis that began in 2008 was
caused by a build-up of global liquidity,which in
turn inflated, then deflated, capital flows, credit,
asset prices and growth in different markets and
regions.This pattern, suggested Haldane, shares
many similar characteristics with what is
happening in emerging markets now.
Immediately after the crisis,more than
$600 billion of capital moved out of crisis-
affected developed markets, straight into
emerging markets.As capital moved, growth
followed. Since 2010, annual growth in these
areas has averaged 6%, three times the level of
developed countries
1
.
In fact, emerging markets have accounted
for 80% of global economic growth over the
past five years, with China alone accounting for
half
2
. It could be said that China’s rapid growth
effectively bailed out the rest of the world from
the global financial crisis as demand fromChina
fuelled sales atWestern companies and kept
International Monetary Fund expected
emerging market growth to have slowed
to below 4% in 2015,marking the fifth
consecutive year of declining growth.This has
come on top of the downturn in the
commodity price cycle, high levels of debt,
political instability and the recent rise in US
interest rates (the US currency also being the
one in which most emerging markets borrow).
It could, Haldane suggests, create the perfect
emerging market storm.
So are investors right to be wary of
emerging markets?While the slowdown in
growth is undoubtedly a concern, the prospect
is already reflected in financial markets.This has
been particularly noticeable in China, where
shares on the Shanghai Stock Exchange lost
almost half their value between June and
September 2015.This followed a prolonged
rise and, even after that precipitate fall, the
market is still ahead of where it was in the
summer of 2014.There are also lingering
12
|
THE INVESTOR
ANALYSIS
turn
forthe
worse?
With emerging market
growth slowing, are
we en route to another
financial crisis?
By Heather Farmbrough
Getty Images
