China is not the enemy that some make it out to be to emerging market investors – it is the US, according to Ashmore’s global head of research Jan Dehn.
Although China’s economy is no longer growing at the high rates seen previously of 10 per cent or more per annum, its GDP continues to expand at over 6 per cent (significantly higher than the developed world) and is on track to replacing the US as the world’s largest economy.
Dehn said that it will only take two decades for the Chinese markets to be the most dominant around the globe.
“It is a mathematical certainty that China will be two or three times bigger than the United States by 2050,” he explained.
Percentage growth of Chinese economy vs US economy in GDP terms
Source: The World Bank
But he said the problem China is facing is how it will gain credibility “as it assumes the role of global economic and financial hegemon” and invert this common belief that it is evil.
“There is an incredible prejudice against China. The emotional relationship the markets have with China is that of the relationship that we have when we go to the cinema and watch Star Wars and we see the Death Star,” Dehn said.
“And that is just an unfair representation of what China stands for. It is also an unfair representation of where China is going."
He added: “China is very politely and in a very gentlemanly fashion doing everything it possibly can to open its markets on our terms and we are treating it like dirt."
Dehn noted that its integration and growth can continue, with China conducting at least as much structural reform as everybody else both from a fiscal stimulus and short-term stimulus perspective.
“That’s going to ensure that China is going to continue to grow sustainably in high single digits for the foreseeable future. The fact that they’re deleveraging and still able to grow is also a manifestation of the resilience of the Chinese economy.
“So, everything’s lined up for this market to add a lot of value to investors, particularly as an addition to the existing portfolio.”
However, he added that while China has tried to integrate itself into the global economy (more than investors allow or want themselves to believe), people have remained somewhat nervous.
Yet, with the recent inclusion of Chinese bonds into the Barclays Bloomberg Global Aggregate index and the Chinese ‘A’ shares joining the MSCI World index these asset classes will continue to play a larger role in investors’ portfolios. 
“The outlook for the Chinese asset classes is very, very positive and I expect investors to continue to pile in,” Dehn (pictured) said.
On the other hand, the head of global research thinks the US is a problem and it is actually helping China on its way to becoming the dominant global force by ruining its own reputation.
He said: “It is abandoning free trade, it is relinquishing its long-term commitment to fiscal sustainability, it is destroying its relationships with its G7 partners and its buddying up with the biggest dictators in the world instead.
“It is just the most abysmal abandonment of fiscal and economic responsibility I have seen in modern times.
“The fact the ratings agencies have not even responded to this is absolutely astonishing and it just tells you how rigged the entire global financial system is.
Dehn added that all China has to do to become the dominant power is “sit back and let it come to itself”, likening Donald Trump’s protectionist policies to those of Argentina, which is an issue.
“The reason why we have a protectionist president in the United States is because it’s difficult for the US companies to compete internationally. The solution to that is not protectionism – that is an Argentinian-style policy,” he said.
“What worries me so much about the US outlook is that the US has reached full employment, and rather than beginning to focus on the supply-side issues they just do further fiscal stimulus for more financial easing, deregulation. They’re just not taking it seriously.
“And then when they start seeing the symptoms of over-valuation, which is current account deficits and lack of competitiveness, then instead of dealing with those by increasing the competitiveness of the economy what do they do? Slam on protectionism.”
He commented that if any emerging markets country employed such policies, investors would see them as a cause for concern, but since it is the US that is employing these policies investors believe it is risk-free, which it isn’t.
“There’s a macroeconomic problem unfolding. It’s not just political, it’s an economic problem. And that’s why I think the dollar’s surge is temporary,” he said.
Indeed, the US dollar has seen a spike in performance over the past couple of months.
More broadly speaking, Dehn said that it is developed markets in general that are the issue and pointed to the reasons for spikes in the VIX index over the years.
Performance of VIX index
Source: FE Analytics
He said: “Every single risk-aversion event since 1998 has been caused by developed markets. The last time an emerging markets event caused a major risk spike was the Russian crisis in 1998.”
“Developed markets cause problems for everybody all the time. They do bad policies, they have bubbles left, right and centre, they screw up, they’re a completely useless bunch of people. And these guys are the ones we think are risk-free.
“So, because we never price in any of these risks, habitually they end up blowing up. And every time they blow up people say, ‘oh my god I must sell all my Philippine bonds’.”
Here, Dehn is referring to the market’s reaction to Brexit, when the Philippine peso dropped 10 per cent in value, despite having seemingly no relation to the UK’s defection from the European Union.
“Investors sold the Philippines because Britain decided to do a stupid thing,” said Dehn.
“Every time there is a risk-aversion event, investors have this irresistible urge to sell all their emerging markets assets. This is truly insane.”