The case for taking China out of emerging markets

China’s size, economic power and maturity set it aside from other emerging countries

Jonathan Stapleton
clock • 2 min read
The case for taking China out of emerging markets

Pension scheme investors should start thinking of China independently of other emerging markets, Pictet Asset Management says.

In a paper on emerging markets, Pictet Asset Management head of emerging market debt Mary-Therese Barton and macro strategist Christopher Preece said there are good reasons to think of China separately from the rest of the emerging market universe.

They said that, although the country still falls well short of developed market status, China's size, economic power and the maturity of parts of its economy set it aside from other emerging countries.

Barton and Preece said: "While, for most investors, it's almost impossible to think about emerging markets without putting China front and centre, they might be better served by separating the two - by putting China in one box and the rest of the emerging universe in another."

The paper added that many emerging economies are now at least as well placed on various social indicators as China was 30 years ago when its economy really started to take off - suggesting that they too are in a good position for strong, sustained development.

What's more, Barton and Preece said they are likely to be better placed to register improvements on ESG metrics - noting that, while China has made improvements, questions about how committed it is to meeting Paris and COP26 measures leave other emerging economies looking potentially more attractive.

EM debt

Looking at emerging market debt in particular, Barton and Preece added that China played a major role in the development of the market, particularly following its accession into the World Trade Organization in 2001 - adding that China's ever bigger role in global trade has made it an economic engine for the emerging world.

But it said that China has turned increasingly inward at the same time as other emerging countries are starting to outgrow their role as mere cogs in the Chinese economic machine.

It noted the EU is a bigger trading partner, in aggregate, with emerging market economies than China - making up 21.3% of total export exposure of emerging countries, while China makes up 18.8%. At the same time, the EU and the UK account for 52% of capital provision to EM.

Barton and Preece noted: "Clearly, economic linkages between China and the rest of the emerging universe are strong. But it's important not to overstate these ties."

The pair also cautioned on China's dominance in drawing capital from around the world - noting there was a risk it has started to financially crowd out other emerging markets, despite its low weighting in emerging bond indices.

Barton and Preece added: "A reappraisal of China relative to the wider emerging universe could yet see this reverse, with increasing flows heading elsewhere."

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