China to lead recovery in emerging markets – analyst
November 19, 2013, 4:38 am

China’s economy rebound to 7.8 per cent growth in the third quarter [Xinhua]

According to a senior official at HSBC’s Global Asset Management division, China is now well-positioned to recoup investor focus as it leads emerging markets in economic recovery.

“”China [will lead a rotation into emerging market stocks] because it’s one of the cheapest emerging markets in the world and it’s one of the most profitable,” Bill Maldonado, HSBC chief investment officer in the Asia-Pacific region, told the Reuters Global Investment Outlook Summit in Honk Kong on Monday.

He said that China’s social and economic reforms made it a lucrative market.

Last week, senior cadres of the ruling Communist Party met for the four-day Third Plenary Session of the 18th Central Committee and approved a reform agenda that would overhaul the world’s second largest economy by “comprehensively deepening reform” and allowing markets to play a “decisive” role in allocating resources.

China’s new leadership had also earlier stressed on reducing government intervention and moving away from archaic preferential policies. They also discussed fiscal and tax reform, greater transparency, and the encouragement of competition in a bid to drive innovation.

According to the National Bureau of Statistics (NBS), China’s economy beat expectations and registered growth at 7.8 per cent in the third quarter.

Growth had fallen to 7.5 per cent in the second quarter on dampened global demand for Chinese goods.

Maldonado said that while investors were worried about China’s prospects last year, the consensus on reform to have emerged from the Third Plenary Session restored much confidence.

In its latest report released on Monday, global brokerage house UBS upgraded China to “overweight”, saying Third Plenum reforms will likely cause China to outperform Asia for the next few months.

“China in our view takes centre-stage at least for a few weeks,” underlined the report.

A boost for BRICS?

Emerging economies that appeared to teeter on the verge of untenable deficits and flight of both domestic and foreign capital have in recent weeks regained the momentum they lost during the summer of discontent.

When Chairman of the Federal Reserve Ben Bernanke announced in May that the US may bring to a halt its $85-billion stimulus package – also known as quantitative easing – a number of emerging economies that had enjoyed the effects of extra funds in the market watched their markets and currencies take off in free fall.

Investors turned to developed markets and kept their extra cash closer to home.

But emerging economies and founding BRICS members Brazil and India, which suffered considerable currency devaluation over the summer, have rallied back through a number of economic policies and good news from the US Federal Reserve.

The delay in the US Federal Reserve’s tapering of its stimulus programme has helped reduce funding risks in the near term in India, according to a new Morgan Stanley Research report.

“Externally, the Fed’s decision to defer the taper of QE [quantitative easing] and the resulting pullback in US 10-year bond yields helped reduce the pressure on real rates and FX [foreign exchange],” the report said.

India’s Finance Minister Palaniappan Chidambaram is predicting up to 5.5 per cent growth in 2014 [AP]

Foreign markets have long speculated about when the Fed decides to begin tapering its $85-billion stimulus scheme. Both the outgoing Fed chief Ben Bernanke and the White House nominee to replace him Janet Yellen have not commented on a date.

Both have said they are waiting for the US economy to become more robust, with unemployment rates falling to seven per cent from the current 7.3 figure.

In the meantime, Deutsche Bank report said foreign institutional investors (FIIs) have recouped around 25 per cent of the capital flight seen over the June-August period, when India witnessed a sharp bout of FII outflows of $4 billion.

IMF Director for the Asia and Pacific Department Anoop Singh believes economic growth in India will “recover significantly next year”.

On Monday, India’s BSE (Bombay Sock Exchange) benchmark Sensex rose over 301 points in early trade on Monday on sustained buying by funds amid a firm trend in other Asian bourses.

The 30-share index rose by 301.61 points, or 1.48 per cent, to 20,701.03 points with all sectoral indices, led by banks and realty, gaining up to 2.60 per cent. The index had gained 205.02 points on Thursday following improved prospects buoyed by China’s announced reform package.

There was similar buoyancy in Brazilian markets on Monday.

Brazil’s benchmark Bovespa stock index rose 1.44 per cent to 54,223.57, its highest level in nearly two weeks, as shares of iron-ore miner Vale SA and state-run oil company Petroleo Brasileiro SA both gained nearly 2 per cent, Reuters reported.

Like its BRICS trading partner India, Brazil reacted positively to news of a delay in US Fed tapering. But the greatest boost to Brazil’s economy is likely to come from China’s reforms initiative.

Brazil is China’s largest trading partner in South America, while China is Brazil’s largest trading partner and largest export and import market.

China and Brazil signed a $30 billion currency swap deal in March this year, which they say will safeguard against any future global financial crisis.

China has also started to play a bigger investment role in Brazil’s oil sector.

Last month, two Chinese energy firms won a 35-year production sharing contract to develop a pre-salt oil discovery in Brazil’s Libra oil field.

On Monday, the Brazilian real rose 2.2 per cent against the US dollar, the highest gain in two months.

The BRICS Post with inputs from Agencies