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China dictates the course for emerging markets

In economic terms, China is the most powerful player in emerging markets. The economic state of the Middle Kingdom is therefore charting the course for emerging markets, according to Chief Analyst Bo Bejstrup Christensen.

“If China’s GNP figures are here,” says Chief Analyst for Danske Invest Bo Bejstrup Christensen, raising his hand to eye level, “then the other emerging market countries are here.” He lowers his hand to below hip level.

Bo Bejstrup Christensen is in no doubt about China’s importance for the development in emerging markets. China is still so much larger than the other emerging market countries that in several areas, it makes sense to say China corresponds to the emerging market developments. In fact, in an economic context, China is still larger than all the other emerging market countries combined.

“Of course, there is much more in the emerging markets than China. However, because China is so large compared with the other countries, we believe that the investor psychology works in the way that if China is doing well, the other emerging market countries are also doing well,” says Bo Bejstrup Christensen. He explains that naturally some emerging market countries would benefit more directly from sustainable progress in China than others. And China has improved, according to Bo Bejstrup Christensen.

Business confidence rise
“During the early summer, we favoured the view that the economy had bottomed out and that business confidence would rise once more as an indication of increasing economic growth – even though we are not counting on growth increasing to the previous 8%. Business confidence data at the end of the quarter showed in particular that China is heading in the right direction,” Bo Bejstrup Christensen explains.

It is therefore likely that the Chinese economy will disrupt the flow of negative news that has hit the markets over the past 12-18 months, while growth in the economy has continuously fallen – and business confidence has been further eroded. Following the protracted slowdown, Bo Bejstrup Christensen is now expecting Chinese growth to stabilise at about 6-6.5% a year in the future.
In addition to the positive outlook of stable growth in the Chinese economy, Bo Bejstrup Christensen points out a number of other emerging market countries that have stood out recently. He mentions India as an extremely positive success story. Here, monetary policy has been tightened, and the country’s current account deficit is falling. At the same time, newly elected Prime Minister Narendra Modi achieved a historic landslide election and expectations are high that he can deliver reforms and renewed growth in India.

Turkey tightened monetary policy
Another country experiencing positive development is Turkey, where the authorities have also tightened monetary policy and focused on reducing the unsustainably high lending growth. This means that the current account deficit will fall, though Turkey must remain cautious and not ease its monetary stance again prematurely. Both Turkey and India are examples of emerging market countries that have taken difficult decisions concerning some issues that produce lower growth in the short term, but, on the other hand, steps are being taken to remedy the imbalances that can gradually become more problematic.

However, one location that still has room for improvement is Latin America.

“In Brazil, we have seen no signs of current account improvement. And although monetary policy has been tightened, more tightening will probably be necessary. This could mean that there is not yet room for Brazilian growth just yet,” says Bo Bejstrup Christensen.

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