The causes behind the current meltdown in global equities, commodity prices and EM currencies are complex, inter-connected and at times self-reinforcing. But at the heart of the problem lies the inability of policy-makers from Washington to Beijing to engineer a more robust path for economic growth in which the private sector can believe in. This problem, which is largely structural in my view, has been compounded by cyclical challenges including stretched positioning in riskier assets and historically weak equities in August, as well as country-specific concerns in Malaysia, Brazil and Russia to name but three.
In China, the two historical engines of growth – fixed investment and exports – are spluttering. Large scale fixed investment in infrastructure and property, fuelled by aggressive credit growth, has led to ever-diminishing returns and is now causing the private sector and banks much pain. Unfortunately for China, weak global demand has in tandem depressed Chinese exports (see Figure 1). Chinese investors have subsequently been looking for an alternative source of return on investment and turned to equities, fuelling the euphoric performance of Chinese stocks until mid-June.
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