China Pulls Back From Funding Other Emerging Markets

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By John Richardson

IT important to be relentlessly realistic about the risks no confronting emerging markets in general, now that China is focusing much more on its own internal problems and needs.

One of these risks – reduced funding of infrastructure and other projects in the emerging world by Chinese banks – was highlighted in this excellent article by Henny Sender of the Financial Times. The chart above illustrates how, in the case of hydroelectricity capacity, China has played a vital role in funding investments in Cambodia, Laos and Myanmar.

In her article, Henny points out that:

  • Until recently, China Development Bank, and to a lesser extent China Export Import Bank, lent money to companies and governments in places where the availability of capital was low, the tenure short and the cost high. They helped companies from Petrobras in Brazil to telecoms firms in Bangladesh and India, to the governments of countries in Africa and Latin America, obtain financing. When borrowers suffered repayment problems, the Chinese banks were more willing to roll over loans and less willing to seize capital than their western counterparts.
  • But the two Chinese “policy banks” are now stepping back. As Beijing puts pressure on its banks generally, mainland credit is being tightened both at home and abroad.

She added that this withdrawal was occurring at the same time at western lenders,  such as Citigroup, JPMorgan and HSBC, become less willing to lend to credit-starved parts of the world because of new regulatory concerns. And, of course, the tapering of quantitative easing by the Fed will give western banks even more pause for thought because of the resulting reduced availability of new credit supply.

The conclusion to Henny’s article is something else that is worth printing out, pinning on to your boardroom wall, and discussing at every one of your meetings.

“On a macroeconomic level as well as a financial level, China is also less supportive,” she wrote.

“Real GDP growth in China slowed to 1.4% quarter- over-quarter for the three months to the end of March, according to government data published last week, while imports rose a mere 1.6% for the period compared to a year ago. In the month of March, imports fell 11.3% compared to March 2013,” she added.

“All this suggests China’s role as the engine of growth for the world, and particularly for emerging markets, is likely to diminish in the future. And the sharper the tightening and slowdown in China is, the worse for the rest of the world. Possible replacements have yet to emerge – perhaps there are none.”

Some people will argue that countries such as Brazil, Indonesia and India can fairly quickly replace China’s lost momentum.

But no matter where you look, the data doesn’t seem to support this support this view. For example, in benzene, China consumed roughly 10m tonnes  in 2013, according to ICIS Consulting. This compares with around 700,000 tonnes in Brazil, approximately 350,000 tonnes in Indonesia and in the region of 500,000 tonnes in India.

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