China debt crisis

Fears of a looming China debt crisis 

Equities around the world got dinged and the yen jumped Wednesday after Chinese money-market rates spiked and a Bloomberg story said China’s biggest banks had tripled debt write-offs. So, what is going on?

Given concerns earlier this year about the Chinese shadow banking sector it would appear that the acknowledgement that there is a problem and Chinese authorities are starting to deal with it has seen some investors take some money off the table in case there are a lot more provisions to come,

It’s no wonder officials and investors are keeping a close eye on the situation. A major hit to the Chinese banking sector is likely to have massive ramifications across the G-20 universe and could have a deflationary impact on global growth. Little wonder then that Aussie saw so much selling pressure in overnight trade as it will likely suffer the most from any drop off in Chinese demand.

After falling sharply in recent days, especially yesterday after the disappointing jobs data, the US dollar is broadly higher today, with the yen the main exception.  It has strengthened by almost 1% today.  

Many are attributing the price action to news that the five largest Chinese banks tripled the bad loans written off in the first half of the year to CNY22.1 bln (~$3.65 bln). Yet, tellingly and importantly, the Chinese banks had already made the provisions and thus did not, reportedly, impact the record profits (~$76 bln) in H1.  

There is some speculation that this is a precursor to a wave of defaults, but in itself writing off the bad loans is a very important step in its own right.  It is a step toward modernization and liberalization.  Provisioning for bad loans and then drawing on those provisions is part and parcel of a modern banking system.    

Precisely why one would sell, say the New Zealand dollar, the weakest major currency today, losing about 1.4% through the European morning, or the Mexican peso, which, with a 0.8% loss is the weakest among the emerging market currencies, in response to Chinese banks writing off bad loans in the first half of the year, is not immediately self-evident.   Indeed, not writing off bad loans, we would argue, was part of the problem.  Writing off bad loans is part of the solution.  For the record, the yuan itself rose to a new 20-year high against the dollar.  

There is another liquidity squeeze in China today.   Corporate tax payments are draining liquidity and thus far the PBOC has not deemed it necessary to counter this.  However, after money market rates jumped the most since July, the PBOC is likely to respond tomorrow.  The 7-day repo jumped 47 bp to 4.05% and the 1-day repo rose 72 bp to 3.80%.  

The PBOC's ability to manage the liquidity conditions seems clumsy and often responding belatedly to clear signals of important imbalances.  Admittedly, at times, the PBOC may be trying to send a signals of displeasure, like it did earlier this year, about wealth management products and shadow banking.  That does not seem to be the intent now.  

The firmer headline CPI, though still concentrated on food prices and not the general price level, and rising house prices has spooked some investors who feared a policy response.   The rise in money markets is not a prelude to a rate hike or a snugging of monetary policy.   That is in fact, the point, there is no policy implication, except to reinforce the perception of the PBOC's difficulty in managing liquidity.  

The rise in money market rates may be a key spur to the largest decline of small company share prices in a year and a half.  The ChiNext index of small companies fell 2.9% today, more than twice the decline of Shanghai Composite.  In comparison, Japan's JASDAQ fell 0.8%, while the Nikkei lost almost 2%.  

It strikes us that many observers seized upon the story to explain the price action throughout the capital markets.  We suspect that if the markets were advancing, many would cite Chinese developments too.  Instead, we suggest there have been some large moves in recent days, and the new positions were in weak hands.  That is to say, the dollar and yen's bounce and the pullback in shares is more a function of market positioning than Chinese banks finally writing down bad loans four months ago, for which provisions were already made. 

Hear the Bond Markets Howl

What to expect ?

Erratic and irrational behavior in the markets puzzled lots of investors.  To understand these patterns and what to expect here some thoughts.

“Thinking About Thinking?”

“Thinking, good thinking that is, is a lonely sport. This may explain why so many of us do it so poorly. Good thinking is also an inefficient process. It takes a lot of thinking to come up with those few good, new ideas that are clearly worth thinking about – ideas that can be exploited in the marketplace. Particularly, as often accurately noted in 1912, ‘Most coming events cast their shadow before, and it is on that intelligent speculation must be based.”

“At the heart of the thinking process is the need to anticipate change correctly, and on a timely basis. Investment thinkers must develop for themselves a model, or systematic perception, as to how markets really work. Those believing strongly in the efficient market hypothesis are, of course, relieved of such undertakings. However, as is becoming increasingly clear, portfolio theory does not fully explain security price movements, either here or abroad, or tell us too much about how to achieve better-than-average performance. Most practitioners of active money management need to improve their thinking procedures.”

... Arthur Zeikel, “On Thinking” (1988)

What does it mean? 

It means that a deep, underground redevelopment, is occurring. He is not apparently seen because currents and force of opposite senses confront one another and fall out, the incidental mingles with the fundamental. 

- The transition in the United States is prepared, the reduction of the purchases of titles, reduction of QE, can be that this reduction will concern the most questioned part, the MBS. 

- Success, success of Japanese politics are doubted, they become nervous 

- They become aware of the unexpected largeness of consequences not wanted of the led monetary policies and contradictions which they carry in them. Of the importance of capital flow and their destabilising character. Perhaps even the myth of the omnipotence of the Central Banks is flaking. 

- A more realistic evaluation on European situation is carried. And, what was put aside during the weeks of speculative euphoria, cost as a boomerang. All the more so as financial status, true, not that of Rajoy or Holland, deteriorates and all the more so as Germany hardens discreetly its conditions of structural reforms. Perhaps that Turkey makes think to the sorcerer's apprentices of social destabilization. 

- They note down the next revision, independent check, strong word is "independent", of balance sheets of the European banks and of the position of Germany which wants that every country audits its situation itself, and makes it at the need by amputating the creditors and agents of banks. 

- They pay attention to the worrying purposes that one neglected until then. 

Two weeks ago, it was Volcker who made a peremptory condemnation of the politics of Bernanke and its phantasms. Some days ago, it was Fisher of EDF of Dallas that demonstrated its disapproval with a barely diplomatic vigour. Then, it was the turn of Esther de la Fed of Kansas City. 

What is not perceptible, and it is the same error as at the time of the crisis of subprimes, it is that very, in reality, in spite of visible diversification, everything is corrélé. The error of the models of risk on subprimes was not to take into account the fact that the subjacent was the same: the accommodation. And that it subjacent, by phenomenon of crowd, could very well follow not linear ways, ways of contagion. 

What is not perceptible in current stage, it is that everything is also corrélé, by means of subjacent discreet who joins all assets, their price, their volatility their risk and it under - ownerless that bursts eyes but which are not seen, it is the currency. 

What is in the middle of any financial transaction, of very market, it is what they receive least, what they want not to see, what the maitres of the world retracts, the currency. We say that opposite force which is in work conceals, distort phenomenon, but we are attending repetition, in the first starts, of a new stage of crisis. New borders are touched.

ABENOMICS

Some Facts : Best of

Abenomics Synopsis

• Year-over-year the is Yen down 21.82% vs. the US Dollar
• Japanese consumer prices are still falling
• Imports jumped 9.4%, up for a sixth straight month
• Exports up 3.8%
• Trade balance negative for 10 straight months
• Largest April trade deficit since 1979

People think Shinzo Abe is a hero because the Nikkei is up.

I think Abe is an absolute economic nutcase who is going to create a currency crisis in Japan if he succeeds in changing the constitution like he desires (and quite possibly even if he doesn't).

See also our website :  Japan : Plan ‘jg’ B

Abegeddon

So, what’s behind this jarring surge in yields, which occurred even as the BoJ began to roll-out its aggressive purchase program? 

In Japan, the term Banzai! literally means “ten thousand years” and can be used to wish someone long life and happiness. But during World War II, “Banzai!” was shouted in battle. It was the Japanese equivalent of “Long live the king!” – but to soldiers on the other side it came to mean a suicidal, hell-for-leather attack.

If the central bankers of the world think they’re hearing a battle cry of “Banzai!” from the lips of their Japanese brethren, they may not be far from wrong, because the Japanese are indeed on a mad charge to fight deflation at all costs. As with all good suicidal charges, at least in legend and lore, once the cry has gone up and the thundering charge has begun, there can be no turning back.

SEE  BANZAI ! Abegeddon and  

there

                         

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Edition

                        
                                                      
                                

Krugman tempted to support Abe : Not Enough Inflation

Olivier Delamarche : 05.21.2013

On assiste en direct au décès du Japon et tout le monde se réjouit. Ça se paiera dans un bain de sang. Ça va se traduire par un effondrement total de la monnaie, la République de Weimar mais au Japon. Bernanke est obligé de continuer les QE, s’il arrête ça sera un effondrement économique. 

As the BoJ prepares to thrill us with even more in its latest policy meeting the following brief presentation covers it all . Christine Hughes sums it all up perfectly, for Japan, "The Math Is Stacked Against Japan - It's Not 'If', It's When." 






Investors, take note… the financial system is sending us major warnings..

Two big events have occurred/ are occurring.
1) Chicago Fed President, Charles Evans who is one of the biggest pushers for QE, stated that the Fed has “the appropriate monetary policy in place” and that the economy is “improving quite a lot.”

2 )The Bank of Japan declaration after a two-day policy meeting.

Regarding #1, Evans has been one of the biggest pushers for more QE. So for Evans to suddenly change his tune and state that the Fed’s current policy is “appropriate,” indicates a significant shift in tone. This goes along with the Fed’s recent hint at tapering QE, which we’ve noted before on these pages. It’s now becoming more and more clear that the Fed is planning on tapering QE in the coming months and is trying to manage down investor expectations.
Which means that stocks are going to be losing some (not all) of their life support.

Regarding #2, The Bank of Japan raised its economic assessment at the end of its two-day meeting on Wednesday, while holding its policy unchanged. The central bank said the measures would continue “as long as it is necessary” to achieve its goal of a stable inflation rate of 2%. It also said that the policy board had voted down a proposal by one member to set a “time frame of about two years” for its “intensive” quantitative easing.

As noted yesterday, Japan is Ground Zero for the great QE experiment. For decades now, Bernanke and his pals have claimed that the biggest problem with the Fed’s actions during the Great Depression was that it didn’t do enough.
Japan, which has now engaged in NINE QE efforts, has finally hit the “enough” stage by announcing a record $1.2 trillion QE plan. To put this in perspective, Japan’s economy is $5.86 trillion, so this single QE effort is equal to 20% of their GDP.

If this plan fails to bring about economic growth in Japan, or worse still fails to bring about growth and unleashes inflation, then it’s GAME OVER for Central Bankers.


FALLING YEN

After Japan's Crash…

Will Japan Trigger a Global Financial Meltdown? Japan’s bond market is officially losing control.We have definitely taken out the multi-year trendline here, making a new high higher after a higher low. This is BAD news as it indicates that Japan’s bond market could be entering a cyclical downturn.  see our website 

If this happens then the great global bond market rig of the last five years is coming to an end. Most analysts have been ignoring bonds because stocks are at record highs.As Japan has indicated, when bonds start to plunge, it’s not good for stocks. Today the Japanese Bond market fell and the Nikkei plunged 7%. The entire market down 7%... despite the Bank of Japan funneling $19 billion into it to hold things together.

Don't get spooked by nowaday's action. Too many investors are easily "brainwashed" when markets move in one direction for too long. Anyone who thought stocks would never have an off day is waking up on the wrong side of the bed today…

Emerging Chronicles

Why You Should Worry About Inflation 

in the Developing Economies

China’s consumer price index rose more than expected in April, while wholesale prices suffered a steeper fall. The April CPI showed a gain of 2.4% from a year earlier, led by a 4% rise in food prices, the National Bureau of Statistics said Thursday.The producer price index, meanwhile, fell by the most since October, dropping 2.6% against a decline of 1.9% in March.

Investors in local currency emerging market bonds should recognize the threat of inflation and consider protecting themselves against it.

While it is difficult to believe that inflation will be much of a problem in the Advanced Economies (AEs) over the next several years, there are reasons to worry about inflation in the Developing Economies (DEs). This should be of particular concern to those contemplating investments in emerging market local currency bonds.

The threat reflects a number of factors:

• Inflation is already high in the DEs. According to the IMF, consumer prices (CPI) rose 5.9% last year.1 Moreover, they have risen at an average 6.4% annually over the last ten years,1 suggesting that inflationary expectations are entrenched and inflation therefore more difficult to bring down.

• The DEs are growing robustly, and have been throughout the global recovery, reducing levels of surplus capacity and increasing the potential for a further acceleration of inflation.

• Price indexes in the DEs are typically comprised differently from those in the AEs, with both food and energy obtaining much larger weights. This makes it difficult for policy makers to control inflation because both are determined by global as well as domestic conditions.

• To the extent that governments and central banks in the DEs influence core inflation, they are currently inclined to run too accommodative a monetary policy to prevent exchange rate appreciation, thereby increasing upside risks.

While there are obviously individual countries in the developing world that boast low to moderate inflation, consumer prices generally rose quite quickly in the DEs last year. Prices rose 4.5% in Developing Asia, 5.8% in Central and Eastern Europe, 6.0% in Latin America and 10.7% in the Middle East and North Africa.1 Moreover, the numbers were not overly distorted by extreme outliers (one country experiencing hyper-inflation and thus distorting the average) as the median inflation rate in the DEs was 4.9%.

The relatively poor inflation performance in the DEs is not new. Indeed, over the last 10 years, consumer prices have risen at an average annual rate of 6.4%. Such a protracted period of relatively high inflation affects inflationary expectations, effectively embedding them into the wage bargaining and producer pricing processes. Until these expectations unwind, policy makers will find it difficult to lower inflation.

The DEs have grown relatively robustly during the global recovery. Using the IMF’s purchasing power parity aggregates, real GDP has grown at an average annual rate of 6.3% over the last three years, and while it slipped to 5.1% last year, it is projected to reaccelerate by about 0.2 percentage point to 5.3% this year.1 The speed and persistence of growth suggests that output gaps have already narrowed and will narrow further this year, posing an upside risk to inflation.

The CPI is often disaggregated into food, energy and core. In AEs, food and energy typically obtain weights of around 15.0% and 7.0%, respectively, leaving the core index at around 78.0%. However, in DEs, food can obtain a weight of 50.0%, and energy of 20.0%, leaving core at just 30.0%. Given that the price of food, and particularly energy, are heavily influenced by global as well as domestic economic and other conditions, policy makers in DEs have a much more difficult task controlling inflation. Moreover, given the capacity for large and sudden swings in food and energy prices, headline inflation is inherently volatile in the DEs.

Although some countries such as China, are attempting to become more balanced, DEs typically depend on exports to drive growth. Hence they fret about international competiveness. Given the extremely accommodative monetary stance of the AEs, the DEs are currently apt to keep monetary policy easier than domestic economic conditions would otherwise dictate in order to prevent exchange rate appreciation and the associated loss of export competitiveness. (That partly explains why the recent policy moves by Japan were met with such hostility.) India seems to provide a good example of this phenomenon, as the Reserve Bank cut its key policy rate 100 basis points over the last year despite a CPI inflation rate of 10.4%.

In summary, investors in local currency emerging market bonds should recognize the threat of inflation and consider protecting themselves against it.

"Real" Inflation in the US

P.S. To have a broad picture citing The Economist's Big Mac index, Peter Schiff says real inflation has been understated since the government started adjusting the way inflation was measured in the early 2000s. Since 2002 the Big Mac has risen in price at nearly three times the rate of overall inflation.

Eurobonds et Eurosceptiques

L'Allemagne devrait elle sortir de l'Euro ?

Si nous partageons quasi sans réserve son analyse au plan économique, il nous semble omettre sur le plan politique et social que les humains ne sont pas des abstractions, ce sont des êtres vivants, pas toujours intelligents, plutot « sheople », dociles, mais jusqu’à un certain point . Dans l’analyse il faut réintroduire l’humain, la société, la société civile, l’effort, le sang, les larmes, bref il faut remettre du concret.

Le réponse de  Hans Werner Sinn Should Germany Exit the Euro? est comme à l’accoutumée remarquable. Il démystifie les propositions de Soros  de défendre les eurobonds. La logique y règne en maitre en montrant que les eurobonds sont la solution des debtocrates qui veulent faire leur plein sur le dos des peuples. 

Il trace l’articulation entre la crise financière et les problèmes économiques sous-jacents comme la sous compétitivité des pays du sud et de la France. Car l’essentiel est là. Faire l’économie d’une restructuration économique ne permet que de gagner du temps, les problèmes restent intacts, mieux ils s’enracinent , et Sinn le montre bien. 

Il nous fournit le chiffre colossal déjà consenti :  1,2 trillions ont été consentis à ce jour. 

Là ou Hans Werner Sinn pêche, c’est lorsqu’il aborde la politique. Il ne considère pas que les demandes des eurosceptiques doivent être prises en compte, il faut les balayer, il faut faire contre elles, contre la volonté, finalement, des peuples. Cela le conduit à prendre ses désirs pour des réalités :  Le redressement par l’austérité et la dévaluation interne sont possibles. Il néglige la politique et donc le social, ce qui est une faiblesse considérable. 

De la même façon , il écarte la possibilité que l’Allemagne sorte de l’euro, non en se situant au niveau économique , mais en se situant au niveau de la politique étrangère, la frontière avec la France, C’est une pirouette! Ce n’est pas parce que le mythe de la réconciliation forcée entre la France et l’Allemagne a la vie dure qu’il faut y souscrire. Le peuple Français ne se rapproche pas du peuple Allemand, il s’en écarte , mieux , l’animosité se développe des deux cotés du Rhin. L’euro forcé, l’euro à tout prix, dresse les peuples les uns contre les autres , il ne les rapproche pas. Donc l’argument de Sinn ne résiste pas à l’analyse. 

see also Germany is not profiting from the eurozone

Auditer la dette !

Il y a une voie que Sinn n’a pas encore explorée dans ses réflexions, c’est celle de la restructuration européenne concertée des dettes et des créances. C’est la seule voie qui permet de traiter le passé,. de libérer l’avenir, de libérer les énergies , de s’attaquer au problèmes conjoints de la compétitivité et de l’investissement. 

On ne peut à la fois solder les comptes du passé et  préparer l’avenir, Il faut choisir. Les ressources sont rares, si on les consacre à payer des dettes et solvabiliser des créances fictives, on ne peut en même temps avoir les capitaux pour investir.  Le refus de restructurer les dettes condamne à plus de 10 ans de régression. 

La restructuration concertée des dettes serait la contrepartie qu’il faudrait donner aux peuples pour qu’ils acceptent l’effort de la productivité, de la mise à plat des systèmes sociaux. Elle serait la pierre angulaire d’un grand projet  qui redonnerait un avenir à l’Europe et un sens aux efforts demandés aux citoyens.

Si nous partageons quasi sans réserve son analyse au plan économique, il nous semble omettre sur le plan politique et social que les humains ne sont pas des abstractions, ce sont des êtres vivants, pas toujours intelligents, plutot « sheople », dociles, mais jusqu’à un certain point . Dans l’analyse il faut réintroduire l’humain, la société, la société civile, l’effort, le sang, les larmes, bref il faut remettre du concret.

On ne peut raisonner en stricte économie car l’économie c’est bon en rythme de croisière, de beau temps. Derrière l’économie, ce qui se dissimule et n’apparait que dans les périodes de crise et de dislocation , c’est la force, la violence.

Notre idée est que nous approchons d’une de ces périodes. Ce ne sera pas linéaire, progressif comme le pensent les politiques et les économistes, non, ce sera en rupture. En tout ou rien. Un jour on supporte,  les idiots croient à la linéarité et puis le lendemain, c’est le fétu de paille sur le dos du chameau, la goutte qui fait déborder le vase et les réactions non linéaires, les réactions de foule s’enclenchent. C’est cela la vie, c’est cela l’humain… Bien sûr cela se situe en dehors de la capacité d’entendement des  Bernanke , des Enanistes, des socialistes de la sociale démo . Et c’est pour cela que la crise précisément a éclaté en 2008, la non linéarité, les phénomènes de foule.

Quand c’est trop, c’est trop.

sources BB

Emerging Markets Roundup

Following the Smart Money

(See our previous  global research : Searching for New Emerging Markets )

Forget indexing. In the emerging markets, a more complicated global economy calls for a more sophisticated strategy. Here it is. The opportunities of investments remain high. It is however necessary to refine from now on our strategy of investment according to the particular case of every country. It is our quest  in our search for new merging countries  to inform you of the best opportunities throughout our tours in Emerging Markets.

Hence we shall determine and offer our best recommendations in terms of opportunities of investment. The  supposed "fall" or "increasing power" of BRICS means anything in particular. Since then it is necessary for us to analyse independently one from another.

For nearly a decade, the key to successful investing in emerging markets could be summed up in a single word: emerging. Economies like Brazil, Russia, India, and China were creating an emerging middle class, which in turn would create emerging demand for consumer goods, commodities and everything in between. It was a virtuous cycle -- or so it seemed. In the five-year period from 2003 through 2007, the MSCI Emerging Markets Index compounded at a 36% annual clip, and all it took to make money was to buy the index or a fund that hewed pretty closely to it.

Then came the global financial crisis, complete with a near-worldwide recession, housing and stock market crashes, and endless political strife -- all rooted in the developed markets but nonetheless affecting the emerging markets. The so-called BRIC countries, which make up 43% of the index, initially made a strong comeback in 2009, but have faltered since, dragging down the whole group. The broad indexes that track emerging markets are skewed toward the largest companies, which are often state-run and sometimes managed for political gain rather than economic gain. They're also typically export-oriented, dependent more on Americans buying gadgets or on commodity prices than local demand.

While the MSCI Emerging Markets Index is down 2% over the past year, other markets have fared far better. It is the first time in 15 years that developing shares have underperformed during a global market rally. They are, it seems, victims of their own decade-plus of outsize success, with their governments trying to contain inflation while keeping growth at a satisfactory pace. 

Though the BRICS (Brazil, Russia, India, China, Southern Africa) did not say their last word. They held last week their fifth summit in Durban. See Summary. 

They have faced serious growing pains. Brazil's economy grew a scant 0.9% last year. India is projected to grow at just 5% this year, the slowest rate in a decade, and while China averted a much-feared "hard landing," its new leaders are targeting economic growth of 7.5%, down from its 10% rate of recent years. Uncertainty about how the leadership of both nations will handle the current economic conditions is keeping pressure on their broad stock markets -- and hiding some gems.

see Buy India - Sell China


For first three months of the year, the developed countries markets  progessed of 6,6 %, against 3 % for the emerging countries.

S&P500 - green - and MSCI EM (orange)

Of course, competition to catch up with the qualification level of the developed countries remains long and perilous, or at the end only a few will know the destiny of Taiwan or of Chile. However our disappointment today is just like our past enthusiasm : excessive. 

There are exceptions to this trend, like Thailand and the Philippines. The latter, in fact, was highlighted by Turner Investments touting the era of the TIMPs, which groups Turkey, Indonesia, and Mexico alongside the Southeast Asian upstart. See  paper (PDF)

The MSCI Frontier Markets Index, which includes Pakistan, Kenya, and Vietnam, is up 9%. The JPMorgan Emerging Markets Bond Index Global Diversified index of dollar-denominated sovereign debt in these markets is up 17%.

Carve up the emerging markets even finer, focusing on where local consumer markets are thriving, and the results are even better: The MSCI Philippines index, for example, is up 39% in the past year; Nigeria is up 70%; and Mexico is up 17%.

See Mexico's Trust Buster

Hence we shall determine and offer our best recommendations in terms of opportunities of investment. The  supposed "fall" or "increasing power" of BRICS means anything in particular. Since then it is necessary for us to analyse independently from one of another.


The opportunities of investments remain high. It is however necessary to refine from now on our strategy of investment according to the particular case of every country.
It is our quest  in our search for new merging countries  to inform you of the best opportunities throughout our tours in Emerging Market 

There are two ways to invest and profit from this developing trend :

• Agricultural commodities

The total increase in commodities prices in 2000s did not distinct between producing countries, either they are producers of guavas, of soya or of copper. Today, evolution of prices is  more contrasted according to the type of commodity to the. Also, some countries succeeded in rationalising their production to remain profitable, others still wait from new price explosion to balance their budget. The first have a good future.

• The new emerging countries (our triple D's)

The slower growth in China can also be viewed as the result of its rise in power. By externalizing the productions which made its glory over these 20 last years, China offers the opportunity to new countries to register high growth.

The set back move which we identified in the emerging countries tis last year is explained by an only big reason, the Chinese slowdown. Indeed, put out India, which economic model is based on services, the other three partners of China are first suppliers of raw materials. That it is Russia (oil, gas), Brazil (soya and iron) or South Africa (platinum). That is why the above mentioned common plans have an interest only as much as China, main provider of fund of these plans, will be capable of financing them.

Understanding the emerging countries and identifying the emergence of new countries, means first to understand where does Beijing go. 

Let’s review the Chinese  situation today and then we shall recommend then three new horizon of investment

Facilities

Investments dedicated to the production plants went down from 30 % to 20 % over the 10 past years.

The profitability

According to the analysis, the profitability of the capital was reduced.

The abundance of the work force

The rural exodus which pushed millions of not qualified workers to migrate to the factory plants is decelerating, causing in some places a shortage of work force and an increase in wages.

Urbanization

The urbanization of the Chinese population continues, but at a lesser pace than these last years. It is this phenomenon which supported investments in facilities, in buildings or else in transports.

It is not possible to say that this slowdown is a surprise. The stages of development of any country are characterised by specific criteria. So, according to study, the level of the GDP per capita in China corresponds to the entrance in an intermediate stage, or the per capita income is "medium", around 6 000 $ a year. Consequently, the analysis assumes a Chinese growth from 10 % to 6,5 % before 2018.

The reasons of optimism remain present, however. Simply because the level of current development of China is comparable to that of Japan in 1970s, and of South Korea in 1990s. What means on one hand that there remain theoretically some years of strong growth for China, and on the other hand that in longer-term, China is going to continue its growing trend to get closer to the level of the developed countries.  Chinese GDP per capita is still only the fifth of that of the United States.

How to use this growth ? 
A new model of development is being put into place. The increasing power of consumption, awaited for a long time, should finally arrive. The part of consumption in the GDP should pass from 48 % currently to 56 % before 2022.

As you understand it, change will be slow  and requires time to be put into place. However, opportunities to invest on other economies in full boom, which they enter their 30 glorious barely, are existing 

The Consumer

Undoubtedly, the most tempting part of the emerging markets story is the consumer. Since 2008, consumer-oriented sectors, such as health care, staples (such as food and household items) and consumer discretionary (retailers and media companies) have outperformed. Markets such as Thailand, Colombia, and Turkey, which are skewed toward consumption, have racked up double-digit gains in the past three years. Funds that hew close to the broad index, however, likely missed the bulk of those gains, since the three sectors make up just 18% of the index and those three countries comprise only 6% of the index's assets.

There are several ways to gain access to the sought-after emerging-markets consumer, including U.S. or European companies like Nike (NKE), which gets a quarter of its sales from emerging markets, and LVMH Moet Hennessy Louis Vuitton (MC.France), which gets about a third of its sales from emerging markets.

Small and Frontier Markets

While much of the developed world has been starved for economic growth, a handful of smaller markets -- including countries as far-flung as the Philippines, Indonesia, Mexico, and Turkey -- have expanded enviably, largely on the heels of economic reform and newfound political stability. That's led to gains as high as 39% for the Philippines in the past year, and 17% for Mexico, and strong inflows into both markets. Both markets now seem a bit pricey at first glance: The Philippines trades at 17 times and Mexico 14 times next year's earnings, compared with the multiple of nine for emerging markets as a whole.

Southeast Asia, the other China 


It is almost like a historical trend. Japan developed from a model supported by a low cost work force and an exporting economy. Once reached some levels, South Korea and Taiwan took over the model. Then China. Currently, it is the turn of the South east Asia countries to copy the model.

So the Philippines today use a model mixing weak currency and low labour costs, to support the growth of the country at 6,4 % last year. Better, Standard and Poor' s raised the note of the country debt. And forecasts are exceptional also. According to the bank HSBC, the country should pass from the 44th place of economies of the world to the 16th in 2050.

See Myanmar's huge potential

Another country is making headlines : Malaysia. Malaysia is competing with China on its own ground. So, during the summit of Durban, an analysis of the Conference of the United Nations on trade and development (Unctad) showed from now on that Malaysia is the third investor in Africa, behind France and the United States, but in front of China.

This performance is explained as for Philippines by Malaysian capacity to keep a high growth rate in 2012, even though the exporting markets slowed. It is however necessary to underline that it is the oil which brought in Malaysia an important part of its growth (40 % budgets of the government). 

Of course, there are investments on the local companies of the country, which are better and better managed. For some investors who would have an expsoure in the Malaysian market, the oil group Petronas is being transformed into one oil major, and an can be interesting target is.

Increasingly, advisors are also adding a little exposure to frontier markets like Sri Lanka, Vietnam, and sub-Saharan Africa -The latest development for Africa see The Economist -

They're in an earlier phase of consumption and offer longer-term growth potential. Frontier markets -- typically defined by fast economic growth but nascent stock and bond markets -- also offer greater diversification. With a 0.61 correlation to the MSCI All Country World Index and a 0.60 correlation with emerging markets, frontier markets have offered some of the highest diversification in the world of stocks over the past decade.

Experienced managers, still say they can dig up some deals in what appear to be pricey markets. Investors sometimes balk at valuations too quickly, underestimating the longevity of some consumer trends,for instance Nestle Nigeria (NESTLE.Nigeria), which trades at 21 times 2014 earnings. That's not an unreasonable level, based on the country's per capita gross-domestic-product figure. 

Consumers now have more income, and are willing to pay a premium for branded food and beverages. A similar situation played out in India with Nestle India (Nest.India), she says. Nestle India now trades at 31 times forward earnings, but was far pricier in 2000.

Other small markets are attractive because the returns haven't been as outsize. Indonesia's 6% return in 2012, for instance, paled in comparison with its neighbors. Though blessed with resources and a large and young population, investors have been wary of Indonesia because of its high current-account deficit and weak currency. But some money managers say the softness in the Indonesian market allows them to scoop up companies with good long-term potential.

The New Way to Play Emerging Markets

Investing in the developing world has become a lot more complicated, and sophisticated investors are taking a much more nuanced approach. These funds capitalize on the big themes in emerging markets today.

Cheap Markets

Looking for the cheapest markets brings investors back to the BRICs, specifically, Brazil, Russia, and China. BRIC funds have seen outflows in 50 of the past 51 weeks, according to EPFR Global. While these countries struggle to navigate slower economic growth, they are bound to recover from their recent slumps. Earnings expectations are steady, whereas they are being cut in Europe and the U.S. Meanwhile, BRIC valuations have dropped to levels that are piquing managers' interest.

Few money managers, for instance, expect to see much change in the transparency and governance issues that have kept Russia on the cheaper end of the spectrum. And state-run companies in any country pose a risk. But with the market trading at just five times earnings and energy giant Gazprom (GAZP.Russia) trading at three times, it's cheap enough to warrant a look, even though it's 50% government-owned.

There are also catalysts to watch for. Brazilian stocks will get a reprieve if the government backs away from recent interventionist measures, such as trying to keep a lid on energy prices and pushing banks to lend. Just one example: Shares of the state-run Brazilian energy giant Petrobras (PBR) rallied 15% earlier this month after the company raised diesel prices -- a move it was able to make as government pressure to keep energy prices low eased. Some managers are looking at banks and real-estate investment trusts in Brazil as indirect consumer plays that are cheaper than retailers and other more obvious consumer stocks.

China, as mentioned before, is a more complicated story. Wages are rising, which means consumer stocks are appealing, as are some more subtle plays, like automation companies that can replace pricey workers. The most obvious consumer plays, even in these battered markets, are not bargains, but there are plenty of indirect ways to tap the consumer that are still reasonable, like Chinese PC maker Lenovo Group (992.Hong Kong) as a way to tap demand for computers and smartphones in emerging Asia, especially smaller markets other global players may not be able to easily tap. Lenovo derives two-thirds of its sales from emerging markets. Reynal is also looking at natural-gas companies as China struggles to combat its record levels of smog.

As the Chinese focus on cultivating domestic demand, smaller local players will be among the beneficiaries. The trouble for U.S. investors is that the universe of companies to invest in is far more limited for those investing in China through the more-accessible Hong Kong market. The Chinese A-share market -- mainland China's two stock markets, Shenzhen and Shanghai -- is denominated in the local currency and restricts foreign investment. But many of those stocks are more geared toward the "new China" story, with companies targeting the smaller cities that are in the earlier part of the consumption cycle. But the greater volatility and restrictions make it difficult for even professionals to invest. Just a handful of U.S. managers invest in A-Shares, including the tiny $43 million Aberdeen China Opportunities (GOPAX), which has the highest exposure at 5% of assets, according to Morningstar.

Dividend Payers

If dipping into these riskier areas makes you queasy, dividend stocks can offer some relief. Over the past decade, dividend-paying emerging-market funds have generated better returns and less volatility than the MSCI Emerging Markets Index, according to Morningstar. The average dividend yield of 2.7% in emerging markets and 3.9% in frontier markets is undoubtedly attractive as well.

But there's another reason to own dividend payers. As investors move into smaller markets where information is harder to find, dividends may be one of the best road maps available, since they telegraph a management's confidence in the future, ie : Forward Select EM Dividend Fund (FSLRX).

Here, too, there are some ETF options, but look carefully at their holdings before investing. The $114 million iShares Emerging Markets Dividend ETF (DVYE) yields 3.5%, though 29% of its portfolio is in developed markets. The WisdomTree Emerging Market Income Fund (DEM) yields 3.4%, but one thing to note: After its latest rebalancing, it's more heavily skewed toward Chinese financials -- an area some managers are wary about given the country's shadow banking and nonperforming loans.

Bonds

Yield-seekers have recently discovered emerging-market bonds, and have poured in $144 billion since the beginning of 2010, according to EPFR Global. The appeal is clear: Dollar-denominated government bonds from Russia, Brazil, and Turkey yield more than a full percentage point than Treasuries and are arguably in stronger fiscal health.

But yield isn't the only reason to include bonds in your emerging-markets portfolio. Emerging-market debt offers greater geographic diversification, even when sticking to the index: The JPMorgan Emerging Markets Bond Index Global Diversified index has almost 70% in Latin America and Eastern Europe, for instance, while its equity counterpart, the MSCI Emerging Markets Index generally has about 25% there. What's more, bonds can provide access to economies in the earliest stage of development -- like Senegal or Angola -- through their government bonds, often before there is a sufficiently liquid and vibrant stock market.

Bonds denominated in dollars have garnered the most attention and vast sums of new money. That doesn't bode well for the short term, but in the long run there's still room for big gains. Emerging-market debt makes up just 5% of fixed-income investors' assets, but these economies are on track to account for half of global economic activity, says Jan Dehn, co-head of research at Ashmore Investment Management, which oversees $71 billion in emerging-market assets.

In the shorter term, managers see more upside in sovereign bonds denominated in the local currencies and dollar-denominated corporate bonds -- many of which have yields into the low teens.

Investing in local-currency debt also helps investors diversify away from the dollar. Many noted investors, including Pimco's Bill Gross, have warned that the United States' burgeoning debt levels can cause inflation and a weaker dollar.

Developing countries have more robust reserves and a fraction of the debt -- China, for instance, has $3.6 trillion in reserves -- setting the stage for stronger currencies in the long term. 

Corporate bonds are also attractive, with improvements in credit quality and a greater variety of companies looking for financing. Bond investors can tap industries like railways in Georgia and telecoms in Panama that don't have many liquid publicly traded stocks. Bonds can also be more resilient than stocks, especially in times of government intervention. When the Chinese government announced stricter lending standards earlier this month, Chinese property stocks tumbled 8% in the week following the announcement, but the bonds fell only 0.2%.


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