Emerging markets face test after tide recedes

Former Goldman Sachs star analyst O’Neill used the first letter of the English names of Brazil, Russia, India and China to create a homophonic word for “brick” in 2001, and later added South Africa , due to the high growth potential, he predicted that the world's economic center of gravity would shift to these emerging market countries. Later, the Chinese added a word "gold" before the word "brick", so Huang Chengcheng's BRIC became a new word hanging in the mouths of Chinese people. 12 years later, analysts at Goldman Sachs competitor Morgan Stanley (Morgan Stanley) launched the "Fragile Five": Brazil, India, South Africa, Indonesia and Turkey, so three of the BRICs were on the list and finally reported. Goldman Sachs was the one-shot feud that dominated.

O'Neill, who has left Goldman Sachs, recently said in Brazil that if he can correct the word BRIC, he will only leave C: China, but without the other three letters, it will not be a "brick". India's performance this year is the worst among the BRICS. Due to the chaotic political situation in recent years, the fiscal and current account deficits have continued to rise, and the international oil price has remained high, which has made India an oil importer even worse. Foreign investment plummeted, causing the rupee to depreciate sharply. India's central bank dumped foreign exchange and bought rupees on a large scale, but the foreign exchange reserves of $290 billion on hand were obviously not enough to cope with the crisis. From the beginning of May to the end of August, the rupee depreciated by 20%. India's growth does not depend on exports like other emerging markets, so the benefits of currency depreciation on exports are limited.

Among these countries, Brazil and South Africa rely on the export of natural resources, and the weak commodity market has severely hit the economy. After reaching a high of 7.5% in 2010, Brazil's economic growth has plummeted, and it is expected to grow only about 2% this year and next. Brazil's private investment rate is too low, accounting for only 18% of GDP, and has long relied on foreign capital and borrowing to make up the current account deficit. The outflow of these international liquidity has accelerated this year, the currency real has depreciated by 14%, and inflation is on the rise. A few years ago, the Brazilian Finance Minister shouted that the inflow of foreign capital was too strong. market, defending the shaky real. Although Brazil has foreign exchange reserves of 370 billion US dollars, Russia used to have the second highest foreign exchange reserves in the world. O'Neill said that China's annual growth rate is expected to be around 7.5%, although it is lower than the previous 8%, it can still create 1 trillion US dollars of wealth, if the United States is to create the same wealth, it must grow by 3.75%, while the US economy is expected to grow only 1.5% %.

O'Neill's remarks are obviously an affirmation of China's pivotal role in the global economic outlook and an endorsement of the "soft landing" of China's economy. In the past few years, thanks to China's 4 trillion economic stimulus plan, the large demand for metals and energy has supported the income of countries that rely on commodity exporters. Except for emerging market countries such as Brazil and Argentina, Australia has benefited a lot. So shallow that the Australian dollar is linked to the Chinese economy, and 76% of Australia's exports are to Asia. A slowing Chinese economy and Southeast Asian countries hit by foreign capital outflows have pushed the Australian dollar down 14% since the start of the year.

What's wrong with emerging market countries? Will the Asian Financial Crisis of 1997 be repeated? How will China's foreign trade be affected?

This round of crisis began in May this year, Bernanke hinted that the Fed would launch quantitative easing monetary policy, which means that US interest rates will gradually rise, the dollar will appreciate, resulting in a sharp rise in asset prices in emerging markets due to arbitrage withdrawals. fluctuation. Since the end of May, international capital outflows from emerging market countries have exceeded $3.3 billion, according to Lipper Fund Research. This year, the Malaysian ringgit, which is adjacent to China, has fallen by 8.6%, the Thai baht and Singapore dollar have each depreciated by 5%, while the RMB is still appreciating against the US dollar, hitting new highs since the exchange rate reform in 2005. The shadow of the effect gradually deepens.

Most international analysts believe that a repeat of the 1997 Asian financial crisis is unlikely. These countries that have been hit by the disaster currently have flexible exchange rates and considerable foreign exchange reserves. As well as regional mutual assistance mechanisms, they can reduce risks, but they also point out some old structural problems, such as insufficient infrastructure, uncompetitiveness, political corruption, wealth gap, backward education, etc., and begin to put the blame on these on the country itself.

When investing in emerging markets is all the rage, analysts' favorite tune is the rising middle class in emerging markets. These growing populations bring consumer demand that drives sustainable economic growth and political stability. . Those premises remain unchanged, but the gap in investment returns between emerging and developed markets has narrowed as the US and European economies show signs of recovery.

In the short term, emerging markets have limited ability to accumulate defensive risks over the years, and their confidence is still insufficient, which may once again create opportunities for international speculators to block them. In the tide of divestment, some investors believe that the economy of emerging markets, even if it decelerates, is higher than that of developed countries, which is a good opportunity to increase positions. The problems in Europe seem to be no longer a concern, but the external debt problem remains, the US macro data is cloudy and the recovery is sluggish, which may once again lead to capital flows to emerging markets.

After several financial crises, analysts' words no longer have many followers. September 15th was the 5th anniversary of the collapse of Lehman Brothers. At that time, most famous people believed that the subprime mortgage crisis had no suspense to solve other problems smoothly since the U.S. government took Freddie Mac and Fannie America into ownership. Looking back, this prediction was not much better than the nonsense of the warlock.

The currency devaluation of emerging market countries, especially when the economic recovery of developed countries is weak, brings competitive pressure to Chinese enterprises engaged in foreign trade. In the face of inflation and high interest rates brought about by depressed currencies, these countries rely on printing money to make up for the shortfall, and they will be drinking poison to quench their thirst; if they rely on import restrictions and capital controls, it will lead to inefficient allocation of resources, affecting long-term growth, and affecting the Chinese region. Trade is also bad.

It has been five years since the 2008 financial crisis. During this period, in order to increase liquidity to save the market, the developed countries reduced the interest rate to zero, and too much hot money turned to emerging markets. Now that the tide has receded, those "naked swimmers" are showing their true colors. Although China is still standing, it is alone. Faced with an uncertain future, we must plan ahead.