STRATEGY
China Has a Central Role in Rising Fortunes of Emerging Markets
September 14, 2007
Christopher Bjorke

China has a central role in the rising fortunes of emerging markets, not just as the biggest and most successful of the countries, but as the engine of other countries' growth. Its expanding economy has a voracious appetite for raw materials and other products from emerging markets.

Developing nations are providing a greater part of the power behind the global economy and creating healthy conditions for investing, according to three noted economists. But the increasing connections between developed and developing markets carry their own areas of risk.

"Whichever way you want to look at it, the rest of the world is starting to catch up," said Geoffrey Bell, executive secretary of the Group of Thirty financial consultancy.

Bell spoke at the closing session of AFP's Global Corporate Treasurers Forum in Washington, D.C., in May. He was joined by high-ranking executives from the International Monetary Fund and the International Finance Corporation.

The strength of emerging markets, China and India in particular but other Asian nations and Latin ones as well, are contributing more to the growth and stability of the world economy, panelists said. In addition, increasing acceptance of predictable and investment-friendly policies have created a boom in cross-border financial flows.

Decoupling from the U.S.

Bell spoke of the "decoupling" of the American economy and the rest of the world. The perception once existed that when the United States sneezed, the rest of the world caught a cold.

"Those days are gone and I suspect they won't come back," Bell said. His projections see healthy growth in the U.S. at 2%, with the rest of the world growing at 5%. "I believe that it would take a serious slowdown, perhaps a recession in the U.S., whereby the rest of the world re-coupled with the United States."

Jaime Caruana, who oversees research on monetary and capital markets for the International Monetary Fund, spoke of the surge in cross-border capital movements and its increasing flow into emerging markets.

"Firms said that [foreign direct investment] is expected to continue growing, and that governance reforms in many emerging markets had improved their attraction as investment destinations, with China attracting the lion's share of total FDI inflows to emerging market countries," he said, citing data gathered in an AFP survey for the International Monetary Fund. "Perhaps a little more surprisingly, a primary motivation behind FDI was to gain presence in faster growing markets, rather than for immediate profit."

China has a central role in the rising fortunes of emerging markets, not just as the biggest and most successful of the countries, but as the engine of other countries' growth. Its expanding economy has a voracious appetite for raw materials and other products from emerging markets. This is especially evident in Latin America, said Frederick Jaspersen of the International Finance Corporation.

"It's benefiting handsomely and riding the wave of the commodity boom," he said. "Peru is approaching Asian rates of growth."

Risks remain

The success of the developing world is good news for both the billions of people who live there, but also for the developed world's investors, producers and exporters. However, uncertainty and risk have not gone away.

Caruana identified three areas of concern for global economic health, both in international economies and in the United States.

The acceptance of certain fundamentals by governments and central banks have eased worries of international investors and buoyed capital inflows in many parts of the world. There are still "pockets of vulnerability" in many emerging countries, Caruana said, such as cases in which increased inflows are swelling spending deficits and growing household credit threaten to produce an excess of bad loans.

Caruana also saw evidence of declining lending standards in the current problems in the U.S. sub-prime mortgage market and in the growth of the leveraged loan market that is fueling private equity and leveraged buyout deals.

"By themselves, none of these risks constitute a direct threat to global financial stability, but a sufficiently adverse event affecting any one of them could spark a reappraisal of risks in other areas," he said.

In Latin America, despite the improved health of many economies, stability has not improved everywhere and neither have ease-of-business conditions, Jaspersen said. Venezuela, for example has seen a government nationalization and inflation rates around 20%.

"It's not easy to open a business in Latin America, but it's very difficult to close a business and downsize workforce if necessary," he said.

Bell also saw potential shocks in a few crisis scenarios-in oil prices, U.S. dollar value, or a financial meltdown somewhere. But overall, his outlook contrasts with his profession's reputation as the dismal science, he admitted.

"I do sound optimistic about the world economy," he said.

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