Slow growth in the Chinese economy continues to put pressure on commodity prices and makes a growth recovery in emerging markets almost impossible. China’s trade relations with the rest of the emerging world have simply become too important. On top of that, many emerging markets have relied heavily on cheap money from the US and Europe, and the subsequent credit boom. Since 2014, emerging markets have seen net capital outflows, which mean that the inevitable deleveraging is underway and a clear end of it is not yet foreseen.

China’s declining demand and the normalization of US monetary policy put considerable pressure on the emerging economies. Most emerging markets are vulnerable, due to the excessive credit growth in prosperous years and the deteriorating economic policies of more government intervention and rising budget deficits. A recovery in growth is therefore not expected this year or next.

These prognoses are for a scenario of a sustained but controlled Chinese slowdown. If the Chinese authorities are unable to stop the capital flight and the renminbi will devalue significantly, the risk of a systemic crisis will increase substantially. The unprecedented increase in credit as a percentage of GDP, of no less than 100 percentage points in seven years, will then prove to be unsustainable. In this risk scenario, the emerging world is off far worse. The recent turmoil on financial markets can be explained by a gradual pricing in of this scenario.

The high volatility in the Chinese stock markets and the clumsy attempts of the authorities to stop the falling prices, have only added to the nervousness about China’s future. What is worse is that China’s capital outflow has forced the Chinese government to change course towards the renminbi. Beijing now tries to gradually devalue the currency, against the US dollar and against a basket of currencies of major trading partners. This leaves the currencies of other emerging markets even more vulnerable than they already were. In recent years, a stable renminbi was pretty much the only support for those currencies. Further turmoil in the currency markets seems obvious. And with ever weaker exchange rates in the emerging world, the five-year-old emerging markets crisis is getting closer to a climax.

ENDS

Disclaimer
The elements contained in this document have been prepared solely for the purpose of information and do not constitute an offer, in particular a prospectus or any invitation to treat, buy or sell any security or to participate in any trading strategy. This document is intended for press use only. While particular attention has been paid to the contents of this document, no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof. Any information given in this document may be subject to change or update without notice. Neither NN Investment Partners B.V., NN Investment Partners Holdings N.V. nor any other company or unit belonging to the NN Group, nor any of its officers, directors or employees can be held directly or indirectly liable or responsible with respect to the information and/or recommendations of any kind expressed herein. The information contained in this document cannot be understood as provision of investment services. If you wish to obtain investment services please contact our office for advice. Use of the information contained in this document is solely at your risk. Investment sustains risk. Please note that the value of your investment may rise or fall and also that past performance is not indicative of future results and shall in no event be deemed as such. This document is not intended and may not be used to solicit sales of investments or subscription of securities in countries where this is prohibited by the relevant authorities or legislation. Any claims arising out of or in connection with the terms and conditions of this disclaimer are governed by Dutch law.