January 26, 2014

What Do Emerging Markets Have In Common?

A reader asked, “Does the stock market’s futures worry you?”

From USA Today. “Wall Street is a world away from Turkey and Argentina and the other developing economies dotting the globe. But recent news of financial tumult and plunging currencies in some emerging markets, coupled with bad memories of past crises over the past 20 years that began in Mexico, Asia and Russia, has imported a boatload of financial angst back to the United States.”

“Hot money can turn cold. Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.”

“A crisis in confidence could surface. Financial stability is built on confidence, and sentiment can shift quickly if confidence erodes, says Joe Quinlan, chief market strategist at U.S. Trust. ‘A declining currency is the clearest sign of investors bolting for the door; it’s a vote of no confidence that usually sparks sell offs in other assets, both credit and equity,’ says Quinlan. ‘And because investors still view emerging market assets as homogeneous, a swooning currency or asset class in one emerging market usually prompts sell offs in other emerging markets, raising the odds of contagion.’”

The China Money Network. “The author is Standard & Poor’s Ratings Services’ director of financial institutions ratings, Liao Qiang: The potential failure of a collective trust program distributed by Industrial and Commercial Bank of China Ltd. (ICBC) could expose the vulnerability of China’s banking industry. We are inclined to believe that the RMB3 billion collective trust program will fail, because Chinese policymakers have long recognized the moral hazard stemming from “make-whole” practices and the detrimental impact to economic balance. We do not expect ICBC to bail out the program.”

“If the collective trust program is bailed out by some stakeholders other than ICBC, the moral hazard and potential problems in the system will still continue to grow. While our BICRA on China is unlikely to face immediate downward pressure, a good opportunity of instilling market discipline will have been missed.”

“We expect Chinese banks to take differentiated positions toward distressed wealth management products they have distributed. Chinese banks are unlikely to bail out high-yield wealth management products unless the banks happen to be the originator of the products.”

“In China, trust companies or unregulated non-bank entities originate most high-yield wealth management products. We view mass-market wealth management products as term deposits in disguise. We expect timely and sufficient liquidity support from the banks from which these products originate.”

“We continue to view China’s shadow banking more as a symptom than a cause of some emerging systemic risks to the banking sector and the wider economy. In our view, Chinese banks have already accumulated high credit risks on their balance sheets. But distorted growth in shadow banking could lead to further unintended buildup of credit risks that banks may not fully appreciate. Certain parts of the shadow banking sector, notably trust companies, may prove to be the weak link of China’s financial system.”

Bits Bucket for January 26, 2014

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