In 2015, a picture of a Chinese fruit vendor trading stocks with a laptop at his stall went viral on social media. The number of Chinese with margin trading accounts — in which investors are extended huge amounts of credit to bet with — had exploded so far that even street-market grocers felt it was normal to place leveraged bets on equities.
It became a bit of a symbol of the economic and financial turmoil in China and much of the rest of the developing world: Growth has slowed, but debt is sloshing around like never before.
Goldman Sachs recently published a piece of research that boldly described events in the world’s emerging markets, or EM, as the “third wave” of the financial crisis that began in 2008.
The first wave was the US subprime-housing crisis, and the second wave was the eurozone sovereign-debt crisis.
Emerging markets are undergoing what is euphemistically referred to as rebalancing. China is the biggest part of this move, as its economy shifts away from government-driven investment toward consumption.
The past several years of monetary-policy easing in the advanced economies led to enormous capital flows into emerging markets, as cheap money was borrowed to invest in countries where growth was faster than the sluggish pace of the West. Those days are coming to an end. And that puts the developing world in a bind.
Commodity prices — the backbone of EM economies — surged during the 2000s. Even after the financial crisis, commodities rallied from early 2009 into the middle of 2011. Since then, prices have slumped by nearly 50%.
Goldman suggests that the “high levels of debt risk” could push countries into “a tailspin that threatens global growth.” That’s not their expectation, but it’s the concern.
Even since the financial crisis, the world has racked up another $50 trillion in debt outside the finance sector, much of which is owed by corporations in the developing world. We’ll find out how those newly leveraged businesses cope with their growth slowdown only as it happens over the coming years.
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