What Will Happen When The $8 Trillion In Emerging Markets Begins To Evaporate?

The world is entering a new era of "quantitative tightening". The global central bank's external reserves will remain stable after 20 years of continuous growth, and are likely to continue to decline in the next few years. The continued decrease in external reserves will lead to an increase in the bond market yields, as well as the appreciation of the US dollar against the euro and yen. The decline in global liquidity will lead to a revaluation of assets that had been inflated during the period of ample liquidity.

　　 A shares The crash and the recent sharp decline in China's external reserves have led global investors to worry that the trend of accumulating foreign reserves in the emerging markets has begun to reverse in the past ten years. As the Federal Reserve is about to start raising interest rates, the cost of borrowing by the US led western countries will soar as emerging markets sell for about 8 trillion dollars in ten years.

IMF estimates that in the past ten years, all emerging market The total external reserves increased by nearly $7 trillion, reaching the peak of about US $8 trillion and 50 billion in the middle of last year, and about half of the increase in external reserves came from China. China's massive stockpiling of bonds from other low-risk countries such as the United States has supported the 20 year bond bull market of these countries, which is also the main reason for their half cost of borrowing in the past ten years.

IMF data also showed that after the middle of last year to the first quarter of this year, after the middle of last year, the global central bank's external savings dropped to $1 billion 143 million from the peak of 1 billion 198 million dollars, and the external savings of emerging market countries decreased by about 500 billion dollars, and this trend is far from over. Reuters reported that the trend of buying bonds in emerging market countries is likely to be a big problem even if there is only a slight reversal in the trend of buying bonds. This trend is even more serious when the Federal Reserve ends QE and the western economic recovery is putting pressure on the western central banks such as the Federal Reserve to restore normal interest rates.

China today Central Bank Announced that in August this year, China's foreign reserves decreased by 93 billion 900 million US dollars to US $3 trillion and 557 billion 400 million, which declined for four consecutive months, and the August decline has hit a single month's record highs. In August, the drop in the month was more than 1/4 of the 340 billion US dollars in the past year. At the beginning of this month, Deutsche Bank estimated that the Central Bank of China only sold $200 billion in the last few weeks of August, and the emerging market reserves have reached the peak. By the end of next year, the central banks in these areas will have to store $1 trillion and 500 billion for capital outflows.

Reuters reported that Axa Investment Managers's fixed income chief investment officer Chris Iggo argued that the process of accumulative reversal in emerging markets has just begun, and that it may be at the edge of the reversal of the global commodity price downward trend, the partial reversal of the Fed's monetary policy and the over expansion of the balance sheet expansion of emerging markets. The reversal of all these trends will result in a surge in US Treasury yields.