• 28/09/2017

It is time to remove China from “Emerging Markets”?

It is time to remove China from “Emerging Markets”?

By Stephanie Tsui

The so-called “Emerging Markets” are now too big for investors to ignore, contributing more than 50% of global output. However, since China’s economy is almost as large as all other emerging markets combined, experts suggest remove China from the category of emerging market and create a separate category for it alone.

According to the World Bank’s 1989 definition, an emerging market is a country with gross domestic product (GDP) per capita of $13,000 or less. “But GDP is simply a “wealth” statistic, a country with $12,999 in GDP per capita is very different from one with $1,500,” says Peter Marber, Head of Emerging Markets Investments at Loomis, Sayles & Company. Marber, having studied emerging markets for more than 20 years, adds, “Clearly we need more categories of countries than two, like advanced and emerging.”

Marber calls for a multi-dimensional method of classifying markets, taking into account nine indicators to produce a ranking of countries’ socioeconomic maturation. The nine specific criteria included GDP, population size, competitiveness, credit ratings, stock market penetration, currency valuations, health, education, and political climate.

He batched 100 countries that are statistically most similar into 10 clusters. Countries in Group 10 with the highest scores are more resilient to potential shifts and shocks, while countries in Group 1 with the lowest scores are more vulnerable to an array of risks.

By studying the period between 2003 and 2013, five years before and after the 2008 financial crisis, he found that five economies didn’t fall well into the 10 cluster groups because of their outsized endowments in particular areas. The five economies included U.S., because of its large and wealthy population; China and India, due to their huge population; Hong Kong, due to its high wealth, strong financial development and small population; and Qatar, because of its wealthy and small population.

“China has a credit rating similar to or better than most advanced economies (AA- Standard & Poor’s), while also having the world’s second-largest stock market and an economy that ranks second in size to the U.S. in nominal terms… the only country that is remotely comparable to China is the U.S.” says Marber.

On the other hand, Marber found that most “emerging” countries rose up the ranking during the decade while some “advanced” economies slipped. Among the big advancers was Ghana, which climbed from Group 1 to Group 5, while big losers including Iceland, Ireland, Italy, and Spain all slipped from Group 10 down to Group 8.

“Indeed, because many “emerging” countries have closed many socioeconomic gaps and converged with “advanced” ones, it is now tough to say where “emerging” ends and “advanced” begins. …Both the developed, western economies and “emerging markets” have shifted towards more middle ground,” concludes Marber. BM