China Still An Emerging Market?

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diligentinvestor1994
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China Still An Emerging Market?

Post by diligentinvestor1994 » Wed Nov 07, 2018 7:03 pm

Why is China still considered an Emerging Market country?

Isn’t it number 6 in terms of market cap? Above Germany, Switzerland and Australia.

At what point does an Emerging economy become classified as developed? And therefore, when would it be added to developed world indices?

columbia
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Re: China Still An Emerging Market?

Post by columbia » Wed Nov 07, 2018 7:10 pm

MSCI ANNOUNCES THE RESULTS OF ITS ANNUAL MARKET CLASSIFICATION REVIEW

https://www.msci.com/market-classification

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vineviz
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Re: China Still An Emerging Market?

Post by vineviz » Wed Nov 07, 2018 7:14 pm

diligentinvestor1994 wrote:
Wed Nov 07, 2018 7:03 pm
Why is China still considered an Emerging Market country?

Isn’t it number 6 in terms of market cap? Above Germany, Switzerland and Australia.

At what point does an Emerging economy become classified as developed? And therefore, when would it be added to developed world indices?
Market cap really doesn't have any direct bearing on whether a country is classified as developed or emerging, though it does indirectly in terms of market liquidity.
The MSCI Market Classification Framework consists of following three criteria: economic development, size and liquidity as well as market accessibility.
https://www.msci.com/documents/1296102/ ... 3886ab8cc8
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nisiprius
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Re: China Still An Emerging Market?

Post by nisiprius » Wed Nov 07, 2018 9:32 pm

Wikipedia's article on emerging markets contains a summary table of which countries are considered to be emerging markets by nine different authorities.

Nine out of nine consider China to be an emerging market. It's unanimous.

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unclescrooge
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Re: China Still An Emerging Market?

Post by unclescrooge » Wed Nov 07, 2018 11:04 pm

diligentinvestor1994 wrote:
Wed Nov 07, 2018 7:03 pm
Why is China still considered an Emerging Market country?

Isn’t it number 6 in terms of market cap? Above Germany, Switzerland and Australia.

At what point does an Emerging economy become classified as developed? And therefore, when would it be added to developed world indices?
It's number 2 in terms of GDP.

But the criteria had more to do with currency controls, business regulations and accounting regulations than just sheer size.

But so what?

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whodidntante
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Re: China Still An Emerging Market?

Post by whodidntante » Wed Nov 07, 2018 11:10 pm

Emerging market does not mean that the underlying economy is small. People with expensive educations decide what it means.

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Re: China Still An Emerging Market?

Post by willthrill81 » Wed Nov 07, 2018 11:26 pm

diligentinvestor1994 wrote:
Wed Nov 07, 2018 7:03 pm
At what point does an Emerging economy become classified as developed?
It has literally taken generations for some nations to move from "developing" to "developed."

China's GDP per capita is still a fraction of that of OECD countries.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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MP123
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Re: China Still An Emerging Market?

Post by MP123 » Wed Nov 07, 2018 11:46 pm

Are there any Emerging Markets ex-China funds?

Most EM funds seem to be heavily concentrated in China.

AlohaJoe
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Re: China Still An Emerging Market?

Post by AlohaJoe » Wed Nov 07, 2018 11:52 pm

MP123 wrote:
Wed Nov 07, 2018 11:46 pm
Are there any Emerging Markets ex-China funds?

Most EM funds seem to be heavily concentrated in China.
If you type that exact question into Google you will find some, yes.

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Re: China Still An Emerging Market?

Post by lack_ey » Wed Nov 07, 2018 11:53 pm

Some of the MSCI docs were posted above. For reference, here is FTSE's assessment of quality of markets for Asia-Pacific:
https://www.ftse.com/products/downloads ... latest.pdf

(Keep in mind the difference between the non-A shares Chinese market, mostly those H shares in Hong Kong and some others like those listed in US stock exchanges like Alibaba; and the A shares Chinese market trading in Shanghai and Shenzen with all of the restrictions and the quotas on foreign investment)

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Re: China Still An Emerging Market?

Post by JackoC » Thu Nov 08, 2018 12:00 am

China I think will be a category of one whether it's classified 'emerging' or not. It will likely* dominate EM indexes as it does now and a level of development of the country that would justify putting it in DM indexes would imply a super huge economy whose stock market might dominate an ex-US DM index by then. But I agree with the comments that there's no plausible rationale for including China as a DM now.

*though you never know, whether for example India could become comparable in weight, they are 35% and 11% of Vang's EM fund now, Taiwan is 15%, not to get into either whether or in what sense it's part of China, or whether it's really an EM, which w/ Taiwan you could actually seriously debate.

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Re: China Still An Emerging Market?

Post by columbia » Thu Nov 08, 2018 12:22 am

John McCain once described Russia as a “gas station masquerading as a country.”

China is certainly quite different, but expecting it to meet the various criteria to be a DM in the lifetime of anyone reading this thread, is probably unrealistic.

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Re: China Still An Emerging Market?

Post by traveler901 » Thu Nov 08, 2018 1:07 am

FTSE Criteria for Developed Markets is below. Pretty easy to see why China does NOT meet the criteria.


They are high income economies (as measured by the World Bank GNI per capita Rating, Market and Regulatory Environment)
Formal stock market regulatory authorities actively monitor market (e.g., SEC, FSA, SFC)
Fair and non-prejudicial treatment of minority shareholders
Non or selective incidence of foreign ownership restrictions
No objections or significant restrictions or penalties applied on the repatriation of capital
Free and well-developed equity market
Free and well-developed foreign exchange market
Non or simple registration process for foreign investors

Custody and Settlement
Settlement - Rare incidence of failed trades
Custody-Sufficient competition to ensure high quality custodian services
Clearing & settlement - T +3 or shorter, T+7 or shorter for Frontier
Stock Lending is permitted
Settlement - Free delivery available
Custody - Omnibus account facilities available to international investors

Dealing Landscape
Brokerage - Sufficient competition to ensure high quality broker services
Liquidity - Sufficient broad market liquidity to support sizeable global investment
Transaction costs - implicit and explicit costs to be reasonable and competitive
Short sales permitted
Off-exchange transactions permitted
Efficient trading mechanism
Transparency - market depth information / visibility and timely trade reporting process

Derivatives
Developed derivatives markets

Size of Market
Market Capitalisation
Total Number of Listed Companies

jalbert
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Re: China Still An Emerging Market?

Post by jalbert » Thu Nov 08, 2018 1:39 am

diligentinvestor1994 wrote:
Wed Nov 07, 2018 7:03 pm
Why is China still considered an Emerging Market country?

Isn’t it number 6 in terms of market cap? Above Germany, Switzerland and Australia.

At what point does an Emerging economy become classified as developed? And therefore, when would it be added to developed world indices?
China A-shares only this year were upgraded from frontier market status to emerging market status by MSCI.
Risk is not a guarantor of return.

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Re: China Still An Emerging Market?

Post by Valuethinker » Thu Nov 08, 2018 3:44 am

columbia wrote:
Thu Nov 08, 2018 12:22 am
John McCain once described Russia as a “gas station masquerading as a country.”

China is certainly quite different, but expecting it to meet the various criteria to be a DM in the lifetime of anyone reading this thread, is probably unrealistic.
Great line re Russia ;-).

I think you are probably too pessimistic re China - there are people on this thread who will be alive in the next century*. Although they may well be entering the "middle income trap" there is nonetheless a lot of growth yet to come.

The issue may be one of corporate governance - lacking the full and liquid markets with investor protections of a "developed" market. I would not be surprised to see the index providers bend on this one and move China into the Developed Market category.

* on the basis that they are 20 years old, now.

diligentinvestor1994
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Re: China Still An Emerging Market?

Post by diligentinvestor1994 » Thu Nov 08, 2018 4:44 am

nisiprius wrote:
Wed Nov 07, 2018 9:32 pm
Wikipedia's article on emerging markets contains a summary table of which countries are considered to be emerging markets by nine different authorities.

Nine out of nine consider China to be an emerging market. It's unanimous.

Image

But, why do you care?
Fascinating. And I care because I am a curious human being who likes to know things. 😎

diligentinvestor1994
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Re: China Still An Emerging Market?

Post by diligentinvestor1994 » Thu Nov 08, 2018 4:45 am

Thanks for all your replies guys. Really interesting. I’ve learned something today. 😃

Valuethinker
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Re: China Still An Emerging Market?

Post by Valuethinker » Thu Nov 08, 2018 5:42 am

1. on bond markets, China is safer than many "developed" markets. Would you rather own Chinese government debt, or Italian?

2. on equity markets we shall see. There's big hurdles to meet the FTSE criteria.

I sense it's more that certain developed markets are likely to submerge, than that EM are emerging.

Don't ignore the undertone of cultural superiority in all this -- an implicit bias at the back of our brains, of which we are not even aware. It's a default European imperial position that we are smarter, harder working, cleaner than all those southern and eastern countries. Even the Japanese got their comeuppance, eventually - although everyone I know who really knows Japan comments how truly advanced it is in its use of technology - they are only 150 years or so out of feudalism but they have come very very far.

Someone I know just got back from China and commented about the quality of infrastructure built vs. the lamentable state of infrastructure in our own countries.

The last 50 years or so would argue that's not true - about the supremacy of the European Imperium. There are plenty of developed jurisdictions that are corrupt as heck and have stagnated. Meanwhile there are places like Singapore and Hong Kong which are richer than western nations, and if you look at the regional and subregional level, the comparisons can be even worse. (Glasgow has some of the lowest life expectancies in Europe and down there with some "3rd world" countries).

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Re: China Still An Emerging Market?

Post by OnTrack » Thu Nov 08, 2018 10:27 am

China is second by GDP. However, per investopedia: "One unofficial threshold for a country with a developed economy is a GDP per capita of $12,000. Some economists prefer to see a per capita GDP of at least $25,000 to be comfortable declaring a country as developed, however."
https://www.investopedia.com/updates/to ... countries/

Per World Bank, China's per capital GDP is 8,826.99 USD (2017).

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Re: China Still An Emerging Market?

Post by pokebowl » Thu Nov 08, 2018 7:11 pm

Valuethinker wrote:
Thu Nov 08, 2018 5:42 am
1. on bond markets, China is safer than many "developed" markets. Would you rather own Chinese government debt, or Italian?

Going to have to ask for a source on that one if you have it. Other than the usual finance news articles and blogs which have been trying to prop up China over the years I haven't seen any real research released advocating this.
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Re: China Still An Emerging Market?

Post by AlexisAtEasternState » Thu Nov 08, 2018 8:02 pm

pokebowl wrote:
Thu Nov 08, 2018 7:11 pm
Valuethinker wrote:
Thu Nov 08, 2018 5:42 am
1. on bond markets, China is safer than many "developed" markets. Would you rather own Chinese government debt, or Italian?

Going to have to ask for a source on that one if you have it. Other than the usual finance news articles and blogs which have been trying to prop up China over the years I haven't seen any real research released advocating this.
https://www.blackrockblog.com/blackrock ... indicator/
China is above Italy per Blackrock's model. You can click each country to break down into "willingness to pay", "ability to pay", etc.
Taiwan and Czech Republic above many DM.

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Re: China Still An Emerging Market?

Post by MossySF » Thu Nov 08, 2018 8:42 pm

If we're talking about just "government" bonds, China has the better ability to repay.

https://tradingeconomics.com/china/government-budget
https://tradingeconomics.com/italy/government-budget

Private companies, who knows?

But of course, government debt is not what determines EM status or not.

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Re: China Still An Emerging Market?

Post by jalbert » Thu Nov 08, 2018 10:38 pm

AlexisAtEasternState wrote:
Thu Nov 08, 2018 8:02 pm
pokebowl wrote:
Thu Nov 08, 2018 7:11 pm
Valuethinker wrote:
Thu Nov 08, 2018 5:42 am
1. on bond markets, China is safer than many "developed" markets. Would you rather own Chinese government debt, or Italian?

Going to have to ask for a source on that one if you have it. Other than the usual finance news articles and blogs which have been trying to prop up China over the years I haven't seen any real research released advocating this.
https://www.blackrockblog.com/blackrock ... indicator/
China is above Italy per Blackrock's model. You can click each country to break down into "willingness to pay", "ability to pay", etc.
Taiwan and Czech Republic above many DM.
How was the Blackrock model validated? It looks dubious to me.
Risk is not a guarantor of return.

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Re: China Still An Emerging Market?

Post by Valuethinker » Fri Nov 09, 2018 3:52 am

pokebowl wrote:
Thu Nov 08, 2018 7:11 pm
Valuethinker wrote:
Thu Nov 08, 2018 5:42 am
1. on bond markets, China is safer than many "developed" markets. Would you rather own Chinese government debt, or Italian?

Going to have to ask for a source on that one if you have it. Other than the usual finance news articles and blogs which have been trying to prop up China over the years I haven't seen any real research released advocating this.
Italy is rated one notch above junk. BBB with a negative outlook by S&P.

https://www.reuters.com/article/china-r ... SL3N1W73GH

China is rated A+ by S&P.

http://factsmaps.com/30-countries-highe ... gdp-ratio/

shows debt to GDP for Italy of over 130% and 16% for China. Italy has the lowest birth rate in the western world (and an older population than China) as well as the lowest GDP growth rate in the EU 28 (Britain is next). And Italy is part of the Eurozone - which means it cannot just devalue its currency. Didn't Greece tell us that Eurozone sovereign debt crises are possible? The state of the balance sheets of Italian banks is also of great concern - and there's a positive feedback loop there, because Italian banks and insurance companies hold lots of (relatively) high yielding Italian govt debt.

So Italian government bonds pay c. 3% yields - at least 200 basis points over bunds (German). The market, in other words, thinks there is a problem.

There's lots of worries in the Chinese economy. They look to have built the property & asset bubble of all time, largest ever in scale terms. One could imagine a bank bailout which will be enormous in scale (the Irish one was c. 30% of GDP, perhaps the Chinese one could be even bigger?).

However that does not give a lot of concern for the solvency of the government of the PRC with a debt ratio to GDP of 16%.

Which country do you think is more politically unstable?

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Re: China Still An Emerging Market?

Post by Angst » Fri Nov 09, 2018 5:14 am

Excellent document! Thank you lack_ey, this pdf provides a nice graphical perspective for understanding what's going on in categorizing markets. China remains a long way off from becoming a "Developed Market". (I found zooming in 200% was best way to view it.)

lack_ey wrote:
Wed Nov 07, 2018 11:53 pm
Some of the MSCI docs were posted above. For reference, here is FTSE's assessment of quality of markets for Asia-Pacific:
https://www.ftse.com/products/downloads ... latest.pdf

(Keep in mind the difference between the non-A shares Chinese market, mostly those H shares in Hong Kong and some others like those listed in US stock exchanges like Alibaba; and the A shares Chinese market trading in Shanghai and Shenzen with all of the restrictions and the quotas on foreign investment)

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