The Real Tapering Threat Is Not The Fed, but China

by Michael J. Howell25. January 2014 11:50
Emerging Market weakness is supposedly all down to Washington and the threatened tapering of QE policies by the US Fed. Simple but wrong. The evidence from our regular studies of World capital flows tells a very different story. Of course, no one should suggest that Fed tapering when it comes will be positive for EM, but the underperformance is caused by something bigger. 15 years ago EM economies were tied into the US consumer cycle and US policy mattered a lot. Lately EM have moved to supply the Chinese capital goods cycle. In short, Chinese monetary policy now matters and the tapering by China's PBoC (Central Bank) over the past 18 months has had a devastating effect on EM. Chinese policy makers are still struggling to contain the excesses of a boom launched five years ago at the time of the 2007/08 World financial crisis: they may have to wrestle well into 2015 before the tide turns. The result is weak Chinese capex; a fast-slowing economy and continuing fall-out across EM. If the culprit was genuinely American monetary policy surely the smaller Frontier Markets, which are more dependent on dollar capital flows, would now be in the eye of the storm? Yet they like Wall Street have been booming. The EM puzzle is explained by Chinese tapering not Fed, and it may last another year!

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Poor News....Capital Flows to EM

by Michael J. Howell27. March 2013 11:36

Latest End-February data on net capital flows to EM do not make great reading. The late-2012 rally in net inward funds has died out. Both Jan and Feb saw net out flows totalling US$0.5 trillion at an annualised rate. Excluding the BRICs, other EM managed a small US$0.1 trillion annualised net inflow. China looks bad. We have had 10 of the last 12 months showing large net outflows. The only brigt spots are India where inflows continue strongly, Indonesia, Czech, Poland, South Africa and Turkey. Capital inflows are important for monetary conditions since they often lead EM Central Bank policy actions. As we have warned, the strong US dollar is starting to weigh heavily.

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