The View | Don’t blame China for emerging market wobbles
It’s no surprise the jump in yield from China’s benchmark 10-year government bond – 4 per cent for the first time since September 2014 – and the central bank’s injection of US$47 billion into the financial system have been viewed as a sign of a serious deterioration in sentiment towards emerging markets
The surprise 2 per cent devaluation of the yuan on August 11, 2015, is an event which still sends shivers down the spines of emerging market investors – and with good reason.
Fears about a significant slowdown in China’s economy and concerns about the credibility of the country’s policy regime led to a sharp sell-off in emerging market assets.
The MSCI Emerging Market Index, the leading equity gauge for developing economies, plunged nearly 18 per cent between early August 2015 and mid-January 2016, while money gushed out of emerging market bond and equity funds, resulting in net outflows of nearly US$80 billion for the whole of 2015.
So it is not surprising the jump in the yield on China’s benchmark 10-year government bond, which last week touched 4 per cent for the first time since September 2014, and the central bank’s injection of US$47 billion into the financial system – the largest intervention since mid-January – have been seized on by market commentators as a sign of the seriousness of the recent deterioration in sentiment towards emerging markets.
China’s crackdown on debt-financed growth, coupled with signs that policymakers’ deleveraging campaign is dampening economic activity and putting China’s bond market under strain, are being viewed as the catalyst for the recent price declines in emerging markets.
The Shanghai Composite is currently higher than where it stood a month ago (and is still up nearly 10 [er cent since mid-May), China’s capital flow was positive in the first half of this year, and the yuan is up more than 4.5 per cent against the dollar since the start of 2017
That the sell-off is occurring amid falls in China-sensitive commodity prices, particularly industrial metal prices, is reinforcing the perception that China is mostly to blame for the current jitters in emerging markets.