The higher debt levels in emerging economies are accompanied by a surge in the debt service ratio (DSR), the share of the income which is used to pay down debt and interest. The DSR as a percentage of GDP is now higher in China than in most developed economies, Jeffery points out.
The pace of credit growth in EM has even been larger than in the run-up to the Asia crisis in 1998, which was largely caused by excessive credit creation. So in that light, it seems fair asset managers are approaching emerging markets, and especially a country like China which has been the stage of a debt-fuelled housing and infrastructure boom in recent years, with caution.
As Western investors continue to repatriate money from emerging markets, evidenced by record net outflows from emerging market equity funds in July, EM investors would better brace themselves for more turbulent times to come. The recent plunge in EM currencies only seems to complicate matters, as it causes direct problems for the many EM-based companies with dollar-denominated debt, which they will now find harder to service.