The recent announcement of a single digit 2013 Chinese growth rate (7.7% to be exact) sent many investors with money abroad into a selling frenzy. Fears of a slowing Chinese economy made investors question not only their ventures in China, but also their investments in China’s main source of resources: commodity-rich emerging markets. As a result, emerging markets suffered tremendously this past month.
The natural question to ask after seeing such investor uneasiness, is how much of it is justified? I disputed the legitimacy of some of the China and EM doubt toward the end of my last blog post, but I want to elaborate more on it in this one.
In a recent WSJ article, executive chairman Adam Molai of Savanna Tobacco, a Zimbabwean cigarette maker, put it nicely:
“When times are great, people smoke more. When times are difficult, people smoke more.”
I would venture to argue that a similar inelastic-demand claim applies to most commodities being bought by China, not just tobacco. The fact of the matter is even though the growth rate has slowed, Chinese demand for commodities from its emerging market suppliers has been either growing or stable. And the data backs it up:
- “China’s iron-ore imports totaled 73.4 million tons in December, close to the record a month earlier and up almost a fifth from the beginning of 2013.”
- “Australia-based Rio Tinto, one of the world’s largest producers of iron ore, is planning to increase production by nearly a quarter by 2017, based largely on its outlook for China. It estimates Chinese demand for steel rose 7.5% last year compared with 2.2% the year earlier.”
- “In September, state-owned China Power Investment Corp. signed a $6 billion deal to mine bauxite in Guinea, which holds up to half of the world’s reserves of the aluminum ingredient.”
Furthermore, even within China there is possibility for growing demand. As the article points out, Chinese migration to the cities has been increasing. This inevitably leads to more demand for new housing and infrastructure in metropolitan areas.
Lastly, even if we were to accept that Chinese demand for foreign resources is slowing, this is still not a good enough argument to move so much money out of emerging markets. The reason being many African emerging markets, such as Angola (Africa’s second biggest oil producer behind Nigeria), are experiencing significant growth in their middle class populations. This growth will compensate for some of the decreased Chinese demand as middle class Africans begin to buy more consumer goods.
In summary, it’s strange to me to see such a capital outflow from emerging markets. Steady Chinese demand for foreign commodities, growth in Chinese migration to metropolitan areas, and the growth of emerging markets’ middle class populations should convince investors to come back sooner rather than later. I think that within the next couple of months we will begin to see capital flow back into emerging markets as investors realize their mistake.