Beijing - While the world’s attention has been gripped by politics in the US and Europe in recent weeks, China has been quietly cementing its new found influence on financial markets.
In a week when US Federal Reserve officials surprised investors by putting an interest-rate hike on the table for the March 14 to 15 policy meeting, emerging markets have taken those signals in stride.
That’s a big change from May 2013, when the prospect of tapering the Fed’s quantitative easing saw a disorderly exodus of capital from those markets.
So what’s changed? This time around, China is offering markets an anchor - both in its stable growth and greater policy clarity.
As chances of a Fed increase in March climb, emerging-market stocks and bonds have avoided a sell-off.
Case in point: equities from South Korea to Malaysia rallied last week even after one of the Fed’s biggest skeptics about the global economy’s strength signaled the US might be strong enough to withstand tightening soon.
The latest data out of China suggest continued solid growth.
Support
“The resilience of China that we’ve seen in terms of the growth data has reassured emerging-market investors that the emerging economies can weather a rate hike by the Fed,” said Rob Subbaraman, chief economist for Asia excluding Japan at Nomura Holdings in Singapore.
“It would be a very different story if China was slowing.” The turn in commodities, partly driven by China but also by oil diplomacy, has also offered support, he said.
China’s stability itself may play a role in an accelerated schedule of Fed rate increases - look no further than the speech last week by board member Lael Brainard.
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Chinese policy makers’ actions “appear to have stabilised growth and calmed fears of financial instability stemming from a sudden large devaluation in the renminbi”, Brainard said in a speech that predicted “it will likely be appropriate soon” to raise the US benchmark rate again.
China’s economic stability, further confirmed with a strong manufacturing purchasing manager index report last week, has also allowed the People’s Bank of China to shift gears from stimulus to liquidity-tightening mode.
That has in turn given support for a yuan that had been pummeled in 2015 and 2016 by capital outflows.
Hold off
Worries over China’s exchange-rate intentions back then had ripple effects across global markets, with Fed chairperson Janet Yellen in September 2015 citing concerns about Chinese policy-making in delaying a rate increase. Renewed upheaval in January 2016 served as a backdrop to a Fed decision to hold off on a hike.
“The Fed, in addition to its historic focus on unemployment and inflation in the US, is factoring in volatility in global markets,” said Thomas Finke, chairperson and chief executive at Charlotte, North Carolina-based Barings, which oversees more than $271billion (R3.52trillion). Regarding China, “the fears that it was decelerating faster may be less than a year ago”, Finke said.
How long the stability in markets - especially in the emerging economies that have historically been vulnerable to capital outflows when US rates rise - can last may continue to rely on China.
And the outlook there could always change.
As Brainard herself alluded to, Chinese authorities continue to grapple with addressing a debt pile that has ballooned to more than 260percent of the economy’s size.