China’s Hyped Decoupling From Emerging Markets May Prove a Blip

(Bloomberg) — A gulf between Chinese stocks and the rest of emerging market stocks has opened in recent weeks as the recovery from the pandemic changes. Fund managers say the break-up period may be short-lived.

Read most from Bloomberg

Chinese equities are seen making up lost ground as extreme pessimism about its economy is waning and officials take more steps to revive growth. At the same time, people’s enthusiasm for equities of other developing countries may subside in the midst of a global slowdown, which could lead to a re-establishment of their ties with China.

Zhikai Chen, Head of Asian and Global Emerging Markets Equities at BNP Paribas Asset Management, said, “I have seen this decoupling story many times over the past two decades, it never ends, which is equivalent to $504 billion globally. End of June. “From a trade flow perspective, and how big the Chinese economy is to commodity demand, it’s a heroic assumption.”

The MSCI China Index is down nearly 6% over the past month, while the MSCI gauge, which tracks the rest of emerging markets, has jumped 7% over the same period. The same disparity has surfaced in bond markets, with Chinese debt yielding less than 1%, compared to a 4% return for emerging markets.

Valuations for Chinese stocks have become so depressed that there is plenty of room for a rebound if sentiment stabilizes. Officials signaled their intention to boost growth last week, with the central bank unexpectedly cutting a key policy rate. The government may implement more pro-development measures ahead of the National Party Congress later this year, as President Xi Jinping seeks a third term.

Meanwhile, doubts are mounting about the rest of the emerging markets.

The dollar has begun to strengthen again from a low set earlier this month, slowing foreign fund inflows into developing countries as a whole. Financial conditions are also tightening globally as central banks raise interest rates to rein in inflation, weighing the growth outlook for many emerging economies. Close ties to the slowing US economy are also set to drag down performance.

READ: Dollar Ends Strong Week on High Note to Resume Debate on Peak

Emerging markets outside China, David Chao said, “most probably due to over-optimism that the US economy is not going to slow as expected and that the Fed will not have to tighten monetary policy so much.” Global market strategist in Hong Kong at Invesco, which oversaw $1.45 trillion as of July. “I’m not sure I buy it.”

In Asia, South Korea and Taiwan look particularly vulnerable as spending slashed by its biggest customers such as Apple Inc., underscoring the slowdown in demand for the chips, whose manufacturers are index heavyweights.

That said, some areas of EM outside China may continue to outperform, with Indonesia and Brazil being financially supported by energy stocks and India, which are prospering amid a revival in domestic demand.

due to reconnection

The gap between China and other emerging markets will also begin to close as the slowdown in the world’s second-largest economy extends to its closest trading partners such as Korea and Malaysia.

Read: South Korea’s Tech Exports Drop in Sign of Cooling Global Demand

Ian Samson, a fund manager, said, “In the long term, whether emerging markets can ‘decoup’ to outperform slow China depends on their initial valuation and whether they have access to Chinese homes and infrastructure to build.” There are growth drivers outside of commodity exports.” At Fidelity International in Hong Kong.

Read most from Bloomberg Businessweek

©2022 Bloomberg LP

Leave a Comment