In twenty years time, I have no doubt that our kids will look back at our markets and wonder “why all this endless obsession with US equities”.  American economic hegemony has been so complete that we no longer even sub-consciously question it. One small example – we all watch the US Federal Reserve for the slightest hint of what might happen next in the global economy. In a few decades time, we’ll be doing the same for China’s central bank, the PBOC. I’m no starry-eyed Sino enthusiast but it strikes me that a profound shift in the balance of world trade and economics is underway. President Trump may well be right about IP theft but that only reflects a deeper truth – that the Asian economies are powerful enough to threaten US hegemony. Anyway, the big shift is underway and in a few decades time, we’ll all be trying to figure out ‘what’s the best way to capture the Asian story’, just as we currently wonder which bit of the US market to capture via a fund or an individual share.

The important point is that we all need to become China-watchers in one way or another – whether we like it or not. And maybe we should start by watching the creation of credit in China. We worry about the US government’s massive tax cuts and then fret about increased US corporate leverage but China’s credit bubble – and loose liquidity – is arguably a bigger systemic issue. My hunch is that the next – or maybe the one after that – financial crisis will start in the East, probably in China and then spread around the interconnected global economy. My own worry is that if this crisis does start in China, it could easily tip into something much more sinister and represent the start of a strategic confrontation with profound consequences. Anyway, for now though, perhaps it’s best to stay focused on central bank watching. That’s certainly what London based research firm Cross Border does for a living.

They keep a beady eye on central bank liquidity – and in their most recent report, they reckon they might have spotted (another) warning sign. The PBoC might be joining in the great Central Bank Tightening Game. If so, expect more trouble and strife.

Cross Border observes that ” PBoC (People’s Bank of China) liquidity picked up but not convincingly from the Lunar New Year distorted data for February. This may be a blip but, given China’s size and influence, it is a blip that could matter. Figure 1 [see below] shows a rolling 60-day total of the PBoC’s net liquidity injections. This measure sacrifices breadth of coverage for higher frequency, but it still reinforces the message from our more comprehensive monthly indexes. The chart clearly pinpoints the decisive change in PBoC policy to early-2016, or the socalled ‘Shanghai Accord’. Admittedly, with the Yuan firm, inflation cool and the rapacious shadow banks now under control, we see no reason for the PBoC to tighten in 2018. Moreover, the policy emphasis on the Belt and Road Initiative likely requires the PBoC to expand liquidity in order to feed the policy banks. Notwithstanding, the latest data are a warning.”

If China is looking a tad concerning, where should emerging markets investors look next? Using liquidity measures as a risk signal Cross Border’s analysts now believe that “liquidity conditions are most buoyant in Brazil, Thailand and Russia, and weakest in Mexico, Taiwan, Turkey, and India. The largest gains in liquidity over six months have occurred in Mexico, Turkey and Indonesia. Higher oil and commodity prices are helping many EM, but renewed sanctions on Russia have spooked foreign investors. Risk appetite measures across EM still show wide dispersion, with Brazil (41.9), Russia (49.1) and India (24.8) at high extremes, and China (-26.4) and South Africa (-16.8) at the other. Pulling this together, our risk traffic lights put China, Thailand, Korea, South Africa and Poland at the top of our attractiveness rankings, but warn of conditions in Turkey, the Philippines, Malaysia, and India. Our favoured EM trades are China over India; Thailand over the Philippines, and Poland over Turkey“.