By Sunny Oh
Unlike the aftermath of the 2008 global financial crisis, emerging markets aren’t likely to benefit as China’s bounces back from the COVID-19 pandemic.
That’s the view from Robin Brooks, chief economist at the Institute for International Finance, who warned in a Thursday note that market bulls looking for reflation may be disappointed if they are for a China-fueled rebound much like that seen in the aftermath of the 2007-2009 recession, when policymakers in Beijing unleashed a flood of fiscal spending that helped to lift commodity exporters in Asia and Latin America.
In a Thursday note, he said the divergence in China’s rebound and the growth doldrums in the rest of the developing world could thus see overseas money managers funnel their assets into China at the expense of other emerging markets.
“This recession is so much deeper in big part due to China. That is because China is not repeating its 2009 infrastructure stimulus, which lifted global growth, commodity prices and – by extension – the terms of trade for many EM commodity exporters,” said Brooks.
After the 2008 crisis, China looked to cushion its economy from the ravages of the global financial crisis, building new skyscrapers, bridges and apartments. Neighboring and far-flung emerging economies exported oil, copper and other raw materials to feed this construction boom.
Now, Brooks says there has been no repeat of the stimulus spending that presaged a commodity super-cycle, and sent prices for emerging market assets soaring.
“The lack of a similar stimulus in 2020 is a key factor weighing on the recovery in non-China EM flows now,” said Brooks.
Indeed, most positive growth in the emerging market economies so far this year has come from China, as the lockdowns and strong public health response paved the way for a more substantial recovery in industrial activity.
Equity returns have mirrored their diverging growth trajectories. The iShares MSCI Emerging Markets Ex-China /zigman2/quotes/205767250/composite EMXC +0.72% exchange-traded fund is down 6.3% year-to-date, versus a gain of 22.8% for the iShares MSCI China ETF /zigman2/quotes/206267952/composite MCHI +0.30% . The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.87% is up 6.7% over the same stretch.
China’s growing weight in benchmark indexes that channel investor decisions where to allocate money across the world have also bolstered inflows into the world’s second largest economy at the expense of its peers.
Even though major central banks, including the Federal Reserve, have engaged in loose monetary policy, usually a boon for higher-yielding, riskier assets in emerging markets, this policy support has not translated into significant inflows for the rest of the emerging market universe after the first-quarter of 2020.
In contrast, investment inflows to Chinese markets have increased by around 5% in the second quarter, with foreign investors plowing a record $33.5 billion into Chinese bonds.