A failure by Chinese officials to anchor inflation expectations by tightening monetary policy may hasten a reversal of capital flows out of emerging markets into developed economies, said Adam Levinson, co-chief investment officer of global macro funds at Fortress Investment Group LLC.
China’s policy stance is too loose and officials should be more aggressive in curbing inflation now to avoid more “draconian” measures later, Levinson said in Singapore. While China makes “incremental” moves, Asian central banks are reluctant to “actively” raise interest rates and allow excessive currency appreciation that will attract more inflows to their economies, he said.
Prospects for faster U.S. economic growth have prompted analysts including those at Goldman Sachs Group Inc. and HSBC Holdings Plc to raise their forecasts for where the Standard & Poor’s 500 Index will finish 2011 after a 12.7 percent rally last year. China is lagging behind counterparts across Asia that took steps earlier to raise borrowing costs from global recession lows.
“If China is sufficiently aggressive, it will cement inflation expectations,” Levinson said in a talk organized by the BNP Paribas Hedge Fund Centre in Singapore on Jan. 12. “If they are incremental, it would make U.S. equities the most attractive equity market this year or developed-market equities generally.”
China raised its benchmark rate twice last year -- in October and December — compared with India’s six increases and Malaysia’s three rate moves since early March. Taiwan began increasing rates in June and South Korea in July.
Chinese Premier Wen Jiabao’s government ordered banks to set aside more reserves six times last year to curb asset bubbles after record gains in lending and property prices. The nation’s consumer prices jumped 5.1 percent in November, the most in 28 months, on surging food prices.
Emerging-market stock funds took a record $92.1 billion last year and bond funds investing in developing economies had inflows of $53.1 billion, according to EPFR Global. In contrast, developed-market equity funds had net outflows of $62.4 billion, led by the U.S. with $36.4 billion, EPFR said.
Most Asian currencies have surged the past year and some of the region’s stock markets have reached record levels as the U.S. Federal Reserve’s quantitative easing and Europe’s debt crisis spurred investments in the region’s assets.
“If the emerging-market world is going to allow itself to run too hot and overheat, you’d want to be a seller into emerging markets at that point,” Levinson said. He moved to Singapore from New York in January to lead the buyout and hedge-fund firm’s Asia-specific macro-trading activities from the Singapore office.
The Fortress Macro Offshore Fund LP returned about 11 percent after fees in 2010, said two people with knowledge of its performance. Gordon Runte, a spokesman for New York-based Fortress, which managed $44 billion as of Sept. 30, declined to comment.
Macro funds seek to profit from broad economic trends by trading currencies, bonds, stocks and commodities.
Emerging-market equity funds posted the first net withdrawals since May in the week ended Dec. 22, EPFR said.
Foreign-currency reserves at some Asian central banks have risen to record levels as authorities bought dollars to slow the appreciation in their currencies. The Chinese yuan’s 2010 gain was the least among emerging Asian currencies after South Korea’s won and Hong Kong’s dollar.
“Everyone else in Asia runs a shadow policy relative to China because nobody wants excessive currency appreciation and if you’re out in front actively raising rates to control inflation, you are likely to get more hot money inflows in a world of high liquidity,” Levinson said.
Goldman Sachs, Wall Street’s most profitable investment bank, predicts the Standard & Poor’s 500 Index will rally 18 percent to 1,500 by the end of December.
Should China decide to act aggressively in tightening policy, “it would be very supportive for emerging markets actually,” Levinson said. China’s moves will encourage other central banks to do more, Levinson said.
“You end up circumventing the sequence of events that we have central banks behind the curve and having to come back very aggressively later in the year, at which point the rate environment is really very inhospitable to emerging-market equities,” he said. “Developed-world equities can do fine in that environment but it becomes much less clear that they outperform.”
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