GLOBAL - Investors' allocation to emerging markets should be underweight due to the possibility of a crisis generated by China's credit boom, it has been claimed.
Currently, China is experiencing excessive liquidity driven by capital inflows, coupled with easy lending practices. This environment was similar to that prior to the 1998 financial crisis in Asia.
Julien Garran, head of asset allocation, Legal & General, noted China was in a slightly different position due to its substantial current account surplus and low inflation.
The US$1trn in currency reserves also makes an external currency induced crisis unlikely. However, Garran said only half of this sum has been ringfenced. The rest went into the economy and in turn led to the increase in money growth and bank lending.
It was Garran’s belief that China’s precarious state was a result of the country’s actions to solve the problems generated by the last crisis.
“This situation has left China vulnerable, not to an external currency crisis, but to a domestic credit crunch,” he said.
Although he forecast a domestic crisis, Garran advocated investors holding off on emerging markets investment, especially when compared to investment in the US or the UK.
“Some countries like Germany and Scandinavia are very exposed to Chines export and therefore I would take an underweight position when it comes to asset allocation,” he concluded.
By Angele Spiteri Paris
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