Investment by the global giant is altering world economic power

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Thursday, 01 October 2009 16:04

Commenting on the recent performance of emerging market bonds and currencies, the main focus of the Dromeus Global Opportunities Fund, Jason Manolopoulos, Fund Manager at Dromeus, assesses how China and global liquidity levels will affect the global recovery.

“China has recently been the tail that has been wagging the dog,” Manolopoulos said. “By instructing its banks to increase lending, reaching $670 billion in the first quarter, the global economy has been filling up its tank in China and hoping another pit-stop won’t be needed until other countries find their footing again.
“To give an idea of the vast amounts involved, the Industrial and Commercial Bank (ICB) of China quadrupled its lending during the first 90 days of this year, China Construction Bank (CCB) tripled it on a year-on-year basis and the Bank of China doubled the amount of new loans.

“Indeed, I wouldn’t have been surprised to see the US relegated in a newly-written quote saying: ‘When China sneezes, the world catches a cold.’ But, just a thought, can China continue to grow consistently without creating huge overcapacity whilst other economies are still suffering and consumers are increasingly turning to saving as their key activity? The jury is still out on that one.”

The other engine of global recovery seems to be global liquidity levels, Manolopoulos continued. Money such as the euro442bn one-year money the ECB auctioned at one per cent in June has been recycled mostly in bond buybacks and other securities transactions – effectively disguised money printing by the ECB. Hopefully, central banks have learnt their lessons for the credit crisis, that beyond a certain point they cannot remain indifferent about the levels of asset prices, he noted.

“Indeed, we could only be at the half-time mark of the liquidity/re-leveraging cycle rather than the last 5 minutes or even overtime. However, with some bonds trading at +110 per cent of par, and absolute yields getting low, the stage could well be being set for future volatility and serious disappointment.
“Some emerging market bonds and currencies remain an attractive proposition. But, although the party may well continue for some time yet, we won’t be leading the party without some serious thought.”