China has displaced the United States as the key driver of emerging market returns and is largely responsible for depressed liquidity in the asset class.
The policy of the Chinese central bank has ensured that liquidity is “lacklustre”, according to measurements by analytics firm CrossBorder Capital, which claims the liquidity level is consistent with GDP growth of less than 5%. “This is a 'hard economic landing," says the firm in a report.
CrossBorder Capital predicts the Chinese central bank will maintain its stance until well into 2015 or “until the excesses of shadow banking have dissipated”, meaning low Chinese liquidity will continue to blight emerging market returns for some time.
“Selective EM investment may make sense, but we do not yet favour a general return to the sector,” says the firm. “It is safer to build exposure during a rebound investment phase.”
According to a CrossBorder Capital index, Chinese liquidity is at 28.8, while overall emerging market liquidity is “very weak” at 18.5. In contrast, developed market liquidity is at 63.9, according to the firm's index.
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