The emerging markets bubble - will it bust?
Simon Johnson sounds a warning:
Our Too Big To Fail banks stand today at the heart of global capital flows. People around the world â?? including from China â?? park their funds in the biggest US banks because everyone concerned believes these banks cannot fail; they were, after all, saved by the Bush administration and put completely â?? gently and unconditionally â?? back on their feet under President Obama. These same banks now spearhead lending to risky projects around the world.What is the likely outcome?
We know that risk-management at the megabanks breaks down in the face of a boom (remember Chuck Prince of Citigroup in July 2007: â??as long as the music is playing, youâ??ve got to get up and dance. Weâ??re still dancingâ?). We know there is a growing boom in emerging markets â?? including through the overseas expansion of would-be multinationals from those countries. This is most notably true of state-backed firms from China, but there is also a more general pattern (think India, Brazil, Russia, and more).
The big global banks, US and European, are charging hard into this space â?? Citigroup is expanding fast in China and India (areas where they claim great expertise); and the CEO of HSBC has moved to Hong Kong. Many investment advisors are adamant that China will power global growth (never mind that it is less than 10 percent of the world economy), that renminbi appreciation is around the corner, and that the value of investments in or connected to that country can only go up.
