Tyndall Monthly Commentary: China: External Discipline

The above quote was offered to us by a highly experienced US macro hedge fund manager and there is much in the statement that is true – the late-1980s Fed tightening cycle ultimately caused immense problems for the ASEAN economies in particular. Thereafter, 1994 was a calamitous year for Mexico; 1996-8 was a bad time for the emerging markets (EM) in general (and the Federal Reserve Board (FRB) had only hinted that it might tighten on that occasion); 2000 represented a very challenging time, as was 2004; and even more recently the FRB’s on/off Quantitative Easing Policies have generated volatility within the EM markets, amongst others. 

Separately, when asked by a journalist recently how we would identify an EM, we responded (admittedly only semi-seriously) that it would be a country whose markets could be heavily manipulated/influenced by capital flows from foreigners and if there is any truth in our rather cynical categorisation, this would explain why EM equities seem to be much more correlated with global credit and capital market conditions than their own perceived economic growth rates.   

Moreover, there is often a tendency for an EM that is in receipt of large capital inflows to become addicted to these flows. In the early 1990s, much of Asia received what were by the standards of their day unprecedented levels of capital inflows that first lifted the asset markets but which then also led many Asian companies and even individuals to change their models of behaviour (that is, by wasting capital and credit lines on grandiose projects and allowing operational inefficiencies to creep into their systems) and therefore to become addicted to this foreign capital as their own internal cashflow generation capabilities were compromised.