Description
The Emerging Economies and Chinese Risk Capital
The Emerging Economies and Chinese Risk Capital
By: Amit Bhushan Date: 24
th
July
204
The glo!al "capital #o$s% mo&ement !eha&ed much the same e&en $ith the
gro$th o' emerging economies in Asia or else$here( The rise o' Japan or 'or
that matter Tai$an or )orea only meant that much o' the accumulated
'oreign currency $as pour !acked into the de&eloped economies o' the
*nited +tates , Europe( The petro-dollars accumulated !y oil-rich nation also
largely !eha&ed in the same manner( This $as !ecause o' relati&ely smaller
domestic appetite o' the economies and relati&e a!undance o' ra$ materials
or primary goods( Any return 'rom in&estment $as e.pected to !e earned
through participation in speculation in con/unction $ith sophisticated money
managers operating out the de&eloped $orld 0nancial markets( There $as
little incenti&e to directly undertake risks in the other emerging economies
and i' any such risk $as deemed to !e $orth taking it $as undertaken &ia
suita!le &ehicle in the *nited +tates 1, Europe2 so that element o' protection
is a&aila!le and o'ten in colla!oration $ith the Transnational corporation
operating 'rom there( +uch arrangement $as deemed to !e more secured
and a degree o' lo$er returns $as deemed as accepta!le price 'or risk
mitigation( The "kno$ledge% o' the risk managers in the in&estment !ank to
mitigate risks and manage re$ards 'or the in&estors $as much appreciated ,
hugely re$arded( The practice ensured that "pri3ed properties% $hich once
$ere centers o' great economic acti&ity continued their eminence in terms o'
&aluations e&en a'ter the economic acti&ity had receded( Also during any
crisis in any part o' de&eloping $orld4 capital 'rom the locality tended to #ed
"!ack% to the de&eloped $orld economies $hich $itnessed an increase in
currency &alue and lo$ering o' the interest rates( 5uch o' the de&eloping
$orld also got accustomed to recei&ing "capital% payments 1, also trade
payments2 in de&eloped $orld currencies mainly *+D and $ere a!le to
commit ser&icing such capital in *+D or other de&eloped $orld currencies(
The rise , rise o' China in the later years has !egun to change the shape o'
the capital #o$s4 a !it( 6ith a large domestic market4 China%s appetite 'or
primary commodities $as much more than anything in the past( Thus China
!egan the chase 'or primary commodities !y o7ering 0nance and technical
support to de&elop mines in resource rich countries( 8nitially4 its competitors
1corporate2 in the !etter de&eloped $orld tried to compete4 !ut soon reali3ed
that to compete $ith China they re9uired to match the Chinese cost as $ell
as o7er similar terms to the !ene0ciary nations( The Chinese model $hich
consists o' a mi. mostly +tate o$ned companies com!ined $ith state
supported tycoons taking direct e.posure in the !ad lands o' emerging
markets initially 'or the mineral resources and no$ increasingly 'or lucrati&e
in'rastructure deals especially $here near monopoly is likely to e.ist 'or
coming 'e$ years has taken o7 ground( The Chinese in&estors $ere also
happy to make in&estments in *+D and take payments 1'or ser&icing
in&estments2 in "commodities% pro&ided it $ere suita!ly "priced%( The di33y
commodity markets $ith e&er rising commodity price ensured that they
reached their goals 'aster then many o' them anticipated and there'ore
de&eloped a stake in higher commodity prices in the 6estern 5arkets( 6e are
thus almost continuing $ith the era o' high commodity prices e&en $ith many
ne$ mines and ne$ production sources !eing pressed to ser&ice the demand
$orld$ide( 1As a practice4 this is common in traditional !ullion merchants in
8ndia4 $ho calculate pro0t as increase in their holding o' !ullion and translate
this into currency at pre&alent price $hich is actually notional2( This is so
!ecause not many players $ere 'acing any shortage 'or needed commodity
during the price !uild up !ut they only had an e.pectation !uilt up 'or e&er
rising commodity prices $ith the markets:consumers also agreeing to play
along( The synchroni3ed action o' the commodity markets also caught up
$ith property markets in the de&eloped $orld especially the *+ , Europe as
$ell as in China $hich $ere $itnessing sustained !oom and e&er rising
employment , thus demand 'or housing properties(
;o$e&er the !alloon got pricked $hen it $as reali3ed that property loans in
*+ $ere not !acked !y ade9uate cash #o$s or enough collateral 1to co&er 'or
price risks2 and some !anks decided to mo&e a$ay 'rom such 0nancing( This
cascaded soon into a 'all in property prices across *+ , Europe and the
central !anks had to step in to print currency to recapitali3e the !anks(
8deally this action should ha&e resulted in de&aluation o' the currencies o' *+
and European nations !ut much o' the emerging economies e.cluding China
chose to de&alue their o$n currencies almost in proportion so as not to loose
on the demand 'or their produce $ith consumers in these countries and to !e
a!le to support paying !ack 'or the capital support recei&ed earlier( The
Chinese additionally are attempting at !uilding an international market 'or
their currency !y increasing its acceptance as an international trade currency(
This also led countries such as Japan and other "emerged economies% to get
their act together and maintain their competiti&e pro0le and some o' them
$ent in 'or de&aluation o' their currencies( This act has continued to keep the
commodities markets propped up( 5any corporate in other countries also
$ent ahead to adopt the 1Chinese2 model to their ad&antage( Also the
citi3ens 'or the *+ , Europe escaped the like impact o' in#ation on them 1due
to actions in emerging market $hich did not $ant a receding o' the demand2<
ho$e&er the citi3ens o' the emerging markets 'aced in#ation as $ell as
impact o' reduced demand and a !it lo$er price 'or the commodities( This
has led to the clamour 'or rising economic nationalism and many o' these
economies ha&e !ecome candidates4 ripe 'or political change(
6hat $e are $itness to is a !acklash $here people $ant much more
transparency 'or the resources !eing e.ploited 'or especially e.ports and
their 'air share and participation in the economic acti&ity 1$hich they 'eel is
cornered !y corrupt politicians2( They $ant greater &alue addition in the
home country $ith la$s
olicies to ensure support 'or the same( Also4 the
emerging countries ha&e reali3ed that many o' them ha&e no$ much lo$er
$age rate than China and can pay 'or in'rastructure re9uired to de&elop
manu'acturing and ser&ices in "commodities% o' $hich they ha&e surplus( +o
there is e&er greater demand to raise the sophistication o' their domestic
economies !y getting domestic players to partner $ith 'oreign
players:technology pro&iders and initiated domestic manu'acturing ,
ser&ices( 6e are thus $itnessing a shi't in economic acti&ities e&en as $e
continue to remain in the era o' sustained "high commodity prices% due to
huge #oating money !ack amply !y risk taking appetite $hich has gone a !it
!loated gi&en the nature o' economic acti&ity in the near past( This continues
e&en as $e $itness political distur!ances in *kraine or 6est !ank $hich
earlier could ha&e had price impact on commodities and could ha&e crippled
some economies( The likely $inding do$n o' monetary e.pansion in the
*nited +tates could !e one e&ent $hich may unshackle the markets !ut
$hether it $ill impact the high property prices in China or other markets or
the Commodities or some other areas like e9uity markets in emerging
economies4 $ould !e an interesting thing to $atch( 6hate&er !e the
conse9uence4 the chorus o' rising economic nationalism in the emerging
economies $ill continue to gro$( The corporate4 institutions and
entrepreneurs in the emerging economies need to take position !asis the
gi&en contours so that they can take ad&antage o' the emerging situation(
The push 'or higher &alue addition on commodity e.ports coupled $ith
impro&ement in in'ra in emerging economies $ill ensure that they continue to
im!i!e ne$er technologies and gro$ their nascent capa!ilities4 irrespecti&e
'rom $hich source they are getting technologies or 'unds( E&en in scenario
$here commodity prices tend to 'all and some o' the e.isting operator try to
disengage 'rom the pro/ects4 ne$er players may !e 'rom other capital surplus
locations may !e ready to take direct e.posure in these pro/ects under
suita!le terms( This is so !ecause most emerging markets currencies and
asset &aluation 1non-e9uity2 are at more sustained 'ooting compared to
de&eloped $orld and also !ecause o' the political "need% to raise economic
acti&ity in their markets is much more , this ensures continuity in &aluations(
+ince the competiti&eness o' these economies ha&e impro&ed and many o'
the countries are making sustained impro&ement in sta!ili3ing policies4
processes and supporting in'rastructure re9uired4 so $e may ha&e some
sem!lance o' continuity(
The 'act the China led BR8C+ ha&e decided to continue to support their
domestic 0nancing needs as $ell as needs o' other emerging economies !y
'orming a multilateral !ank is an important step( =oing 'or$ard as the
institution shapes up4 $e $ill get signals as to ho$ acti&ity o' emerging
economies $ill !e molded and guided under the ne$ dispensation( The
'ormation o' the !ank is an unmistaka!le signal that rising "south-south%
capital #o$s $ill !e sustained( The rise o' such !anks $ill de0nitely
encourage other players like petro-dollar countries to &enture out and co-
mingle $ith market participants on their o$n or they may seek guidance $ith
other non-euro:*+ institutions 'or "!etter% deals though this may not !e
possi!le 'or the immediate 'e$ years till the BR8C+ manage to gain the
con0dence o' the markets and ensure some degree o' sanity
rder( The rise
o' Remin!i as a trade currency and its gro$ing acceptance is already a signal
'or $aning =B>:Euro:C;? era( Although the energy rich nations ha&e not
em!raced this as o' yet4 ho$e&er a sustained gro$th in Remin!i is de0nitely
going to impact the demand 'or Euro , others and impact their potential as "a
store o' &alue% in times to come( =ro$ing con#ict in Europe coupled $ith
continuance o' a mild decline in economic acti&ity may start the unshackling
sooner than later( Any escalations are in 'act likely to !e e&en more
counterproducti&e although the political impact o&er the longer term on
glo!al economy remains rather unpredicta!le at this /uncture( 6e also
continue to see resource hungry emerging economies like 8ndia and also
countries like Bangladesh4 8ndonesia4 Ethiopia4 @ietnam4 Aigeria etc( continue
to make sustained pitch to attract "gro$th capital% !y promising to de&elop
markets 'or the manpo$er intensi&e !usinesses in their 9uest to come out o'
economic and political turmoil( The continuance o' political shakeup in
emerging economies is likely to keep the pressure up on glo!al markets to
read/ust economic acti&ities 'or some time to come( 6hat is material is the
point $hen the gro$th o' emerging economies !ecome sel' sustaina!le 1and
ho$2 $ithout causing concerns outside4 is a point to $atch 'or(
doc_392437629.doc
The Emerging Economies and Chinese Risk Capital
The Emerging Economies and Chinese Risk Capital
By: Amit Bhushan Date: 24
th
July
204
The glo!al "capital #o$s% mo&ement !eha&ed much the same e&en $ith the
gro$th o' emerging economies in Asia or else$here( The rise o' Japan or 'or
that matter Tai$an or )orea only meant that much o' the accumulated
'oreign currency $as pour !acked into the de&eloped economies o' the
*nited +tates , Europe( The petro-dollars accumulated !y oil-rich nation also
largely !eha&ed in the same manner( This $as !ecause o' relati&ely smaller
domestic appetite o' the economies and relati&e a!undance o' ra$ materials
or primary goods( Any return 'rom in&estment $as e.pected to !e earned
through participation in speculation in con/unction $ith sophisticated money
managers operating out the de&eloped $orld 0nancial markets( There $as
little incenti&e to directly undertake risks in the other emerging economies
and i' any such risk $as deemed to !e $orth taking it $as undertaken &ia
suita!le &ehicle in the *nited +tates 1, Europe2 so that element o' protection
is a&aila!le and o'ten in colla!oration $ith the Transnational corporation
operating 'rom there( +uch arrangement $as deemed to !e more secured
and a degree o' lo$er returns $as deemed as accepta!le price 'or risk
mitigation( The "kno$ledge% o' the risk managers in the in&estment !ank to
mitigate risks and manage re$ards 'or the in&estors $as much appreciated ,
hugely re$arded( The practice ensured that "pri3ed properties% $hich once
$ere centers o' great economic acti&ity continued their eminence in terms o'
&aluations e&en a'ter the economic acti&ity had receded( Also during any
crisis in any part o' de&eloping $orld4 capital 'rom the locality tended to #ed
"!ack% to the de&eloped $orld economies $hich $itnessed an increase in
currency &alue and lo$ering o' the interest rates( 5uch o' the de&eloping
$orld also got accustomed to recei&ing "capital% payments 1, also trade
payments2 in de&eloped $orld currencies mainly *+D and $ere a!le to
commit ser&icing such capital in *+D or other de&eloped $orld currencies(
The rise , rise o' China in the later years has !egun to change the shape o'
the capital #o$s4 a !it( 6ith a large domestic market4 China%s appetite 'or
primary commodities $as much more than anything in the past( Thus China
!egan the chase 'or primary commodities !y o7ering 0nance and technical
support to de&elop mines in resource rich countries( 8nitially4 its competitors
1corporate2 in the !etter de&eloped $orld tried to compete4 !ut soon reali3ed
that to compete $ith China they re9uired to match the Chinese cost as $ell
as o7er similar terms to the !ene0ciary nations( The Chinese model $hich
consists o' a mi. mostly +tate o$ned companies com!ined $ith state
supported tycoons taking direct e.posure in the !ad lands o' emerging
markets initially 'or the mineral resources and no$ increasingly 'or lucrati&e
in'rastructure deals especially $here near monopoly is likely to e.ist 'or
coming 'e$ years has taken o7 ground( The Chinese in&estors $ere also
happy to make in&estments in *+D and take payments 1'or ser&icing
in&estments2 in "commodities% pro&ided it $ere suita!ly "priced%( The di33y
commodity markets $ith e&er rising commodity price ensured that they
reached their goals 'aster then many o' them anticipated and there'ore
de&eloped a stake in higher commodity prices in the 6estern 5arkets( 6e are
thus almost continuing $ith the era o' high commodity prices e&en $ith many
ne$ mines and ne$ production sources !eing pressed to ser&ice the demand
$orld$ide( 1As a practice4 this is common in traditional !ullion merchants in
8ndia4 $ho calculate pro0t as increase in their holding o' !ullion and translate
this into currency at pre&alent price $hich is actually notional2( This is so
!ecause not many players $ere 'acing any shortage 'or needed commodity
during the price !uild up !ut they only had an e.pectation !uilt up 'or e&er
rising commodity prices $ith the markets:consumers also agreeing to play
along( The synchroni3ed action o' the commodity markets also caught up
$ith property markets in the de&eloped $orld especially the *+ , Europe as
$ell as in China $hich $ere $itnessing sustained !oom and e&er rising
employment , thus demand 'or housing properties(
;o$e&er the !alloon got pricked $hen it $as reali3ed that property loans in
*+ $ere not !acked !y ade9uate cash #o$s or enough collateral 1to co&er 'or
price risks2 and some !anks decided to mo&e a$ay 'rom such 0nancing( This
cascaded soon into a 'all in property prices across *+ , Europe and the
central !anks had to step in to print currency to recapitali3e the !anks(
8deally this action should ha&e resulted in de&aluation o' the currencies o' *+
and European nations !ut much o' the emerging economies e.cluding China
chose to de&alue their o$n currencies almost in proportion so as not to loose
on the demand 'or their produce $ith consumers in these countries and to !e
a!le to support paying !ack 'or the capital support recei&ed earlier( The
Chinese additionally are attempting at !uilding an international market 'or
their currency !y increasing its acceptance as an international trade currency(
This also led countries such as Japan and other "emerged economies% to get
their act together and maintain their competiti&e pro0le and some o' them
$ent in 'or de&aluation o' their currencies( This act has continued to keep the
commodities markets propped up( 5any corporate in other countries also
$ent ahead to adopt the 1Chinese2 model to their ad&antage( Also the
citi3ens 'or the *+ , Europe escaped the like impact o' in#ation on them 1due
to actions in emerging market $hich did not $ant a receding o' the demand2<
ho$e&er the citi3ens o' the emerging markets 'aced in#ation as $ell as
impact o' reduced demand and a !it lo$er price 'or the commodities( This
has led to the clamour 'or rising economic nationalism and many o' these
economies ha&e !ecome candidates4 ripe 'or political change(
6hat $e are $itness to is a !acklash $here people $ant much more
transparency 'or the resources !eing e.ploited 'or especially e.ports and
their 'air share and participation in the economic acti&ity 1$hich they 'eel is
cornered !y corrupt politicians2( They $ant greater &alue addition in the
home country $ith la$s
olicies to ensure support 'or the same( Also4 theemerging countries ha&e reali3ed that many o' them ha&e no$ much lo$er
$age rate than China and can pay 'or in'rastructure re9uired to de&elop
manu'acturing and ser&ices in "commodities% o' $hich they ha&e surplus( +o
there is e&er greater demand to raise the sophistication o' their domestic
economies !y getting domestic players to partner $ith 'oreign
players:technology pro&iders and initiated domestic manu'acturing ,
ser&ices( 6e are thus $itnessing a shi't in economic acti&ities e&en as $e
continue to remain in the era o' sustained "high commodity prices% due to
huge #oating money !ack amply !y risk taking appetite $hich has gone a !it
!loated gi&en the nature o' economic acti&ity in the near past( This continues
e&en as $e $itness political distur!ances in *kraine or 6est !ank $hich
earlier could ha&e had price impact on commodities and could ha&e crippled
some economies( The likely $inding do$n o' monetary e.pansion in the
*nited +tates could !e one e&ent $hich may unshackle the markets !ut
$hether it $ill impact the high property prices in China or other markets or
the Commodities or some other areas like e9uity markets in emerging
economies4 $ould !e an interesting thing to $atch( 6hate&er !e the
conse9uence4 the chorus o' rising economic nationalism in the emerging
economies $ill continue to gro$( The corporate4 institutions and
entrepreneurs in the emerging economies need to take position !asis the
gi&en contours so that they can take ad&antage o' the emerging situation(
The push 'or higher &alue addition on commodity e.ports coupled $ith
impro&ement in in'ra in emerging economies $ill ensure that they continue to
im!i!e ne$er technologies and gro$ their nascent capa!ilities4 irrespecti&e
'rom $hich source they are getting technologies or 'unds( E&en in scenario
$here commodity prices tend to 'all and some o' the e.isting operator try to
disengage 'rom the pro/ects4 ne$er players may !e 'rom other capital surplus
locations may !e ready to take direct e.posure in these pro/ects under
suita!le terms( This is so !ecause most emerging markets currencies and
asset &aluation 1non-e9uity2 are at more sustained 'ooting compared to
de&eloped $orld and also !ecause o' the political "need% to raise economic
acti&ity in their markets is much more , this ensures continuity in &aluations(
+ince the competiti&eness o' these economies ha&e impro&ed and many o'
the countries are making sustained impro&ement in sta!ili3ing policies4
processes and supporting in'rastructure re9uired4 so $e may ha&e some
sem!lance o' continuity(
The 'act the China led BR8C+ ha&e decided to continue to support their
domestic 0nancing needs as $ell as needs o' other emerging economies !y
'orming a multilateral !ank is an important step( =oing 'or$ard as the
institution shapes up4 $e $ill get signals as to ho$ acti&ity o' emerging
economies $ill !e molded and guided under the ne$ dispensation( The
'ormation o' the !ank is an unmistaka!le signal that rising "south-south%
capital #o$s $ill !e sustained( The rise o' such !anks $ill de0nitely
encourage other players like petro-dollar countries to &enture out and co-
mingle $ith market participants on their o$n or they may seek guidance $ith
other non-euro:*+ institutions 'or "!etter% deals though this may not !e
possi!le 'or the immediate 'e$ years till the BR8C+ manage to gain the
con0dence o' the markets and ensure some degree o' sanity
rder( The riseo' Remin!i as a trade currency and its gro$ing acceptance is already a signal
'or $aning =B>:Euro:C;? era( Although the energy rich nations ha&e not
em!raced this as o' yet4 ho$e&er a sustained gro$th in Remin!i is de0nitely
going to impact the demand 'or Euro , others and impact their potential as "a
store o' &alue% in times to come( =ro$ing con#ict in Europe coupled $ith
continuance o' a mild decline in economic acti&ity may start the unshackling
sooner than later( Any escalations are in 'act likely to !e e&en more
counterproducti&e although the political impact o&er the longer term on
glo!al economy remains rather unpredicta!le at this /uncture( 6e also
continue to see resource hungry emerging economies like 8ndia and also
countries like Bangladesh4 8ndonesia4 Ethiopia4 @ietnam4 Aigeria etc( continue
to make sustained pitch to attract "gro$th capital% !y promising to de&elop
markets 'or the manpo$er intensi&e !usinesses in their 9uest to come out o'
economic and political turmoil( The continuance o' political shakeup in
emerging economies is likely to keep the pressure up on glo!al markets to
read/ust economic acti&ities 'or some time to come( 6hat is material is the
point $hen the gro$th o' emerging economies !ecome sel' sustaina!le 1and
ho$2 $ithout causing concerns outside4 is a point to $atch 'or(
doc_392437629.doc