The recent liquidity injections will spread to all markets, with different conditions and quantities. The decisions of the European Central Bank, the Bank of Japan, and the US Federal Reserve (on its third round of quantitative easing) to give oxygen to their economies will have repercussions on all countries, increasing the variety of options for investors. Emerging markets will become not only a destination, but at the same a source for ulterior liquidity thanks to their enviable financial capabilities. The attractiveness exerted by these emerging markets is thanks to stability, prospects for growth, burgeoning industry, and vast reserves of natural resources. Additionally, the actions of the ECB have drastically reduced concerns that the central and eastern European countries could be infected by the contractions in the Mediterranean. Expectations are supported by the liquidity expansionary decisions made by the central banks. The BRICS countries will benefit the most, along with Turkey, Mexico, and South Korea. It is a sign that confidence in the Eurozone is anything but restored in the new markets. Funds continue to move towards foreign bonds and currencies of emerging nations, even if in a different and more complicated way than usual. Beijing now finds itself face to face with a complex situation. The possibility of a hard landing has been averted for now, but the fear of it has already been absorbed by the markets and there should be no disinvestments or further economic downturn. Tensely anticipated however is the next move that Beijing will make to give a boost to its economy. The most commonly used index for expectations, the Purchasing Managers Index or PMI (the most important gauge for present and future predictions of the state of the economy), is in fact again below 50, where caution prevails, albeit barely. If Beijing nonetheless decides on a new round of financial stimulus, where would the substantial amount of new money on the market go? Experience has taught us that when the financial instruments made available lack sophistication and the stimulus translates into an undifferentiated increase in bank lending and bubbles in manufacturing, infrastructure, and housing, there are negative consequences for the Shanghai and Shenzen stock exchanges, which don’t yet have the international range they are aiming for; the renminbi has slowed its race towards internationalization, some manufacturing sectors have been hurt by overproduction, and capital is now exiting China rather than entering, because the expected ROI is greater elsewhere. The alternative of construction industry speculation no longer exists, and the housing bubble could burst if left to market regulation. The accepted solution is investing abroad. After attempting to limit the influx of foreign capital to avoid overheating the economy and bullish pressure on the renminbi, China now finds itself in the opposite situation. To avoid the dual fear of foreign capital entering and domestic capital exiting, the only solution is to accelerate reforms and progressively liberalize the capital markets, a task as linear as it will be demanding for the new leadership.
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