Emerging market economies

Emerging market economies (EMEs) continued to record strong growth, moderate inflation and current account surpluses in 2006 and into the first quarter of 2007. Yet inflation pressures raised concerns in some countries, in part because of robust demand and in part due to uncertainties about commodity prices. Despite moderate monetary tightening, credit growth has remained strong in a number of EMEs. At the same time, fiscal consolidation and improved debt management have enhanced the resilience of EMEs.

Asset prices in EMEs have surged. Gauging the influence of foreign investors is not straightforward: for one thing, net private capital inflows are small relative to foreign exchange inflows arising from large current account surpluses. Foreign investors have, however, boosted their holdings of emerging market assets to a greater extent than net financing data show, and may have acquired positions in EME assets through derivatives. While there is some evidence that EME asset prices are moving more with global asset prices, it is not yet clear whether foreign influences have added to asset price volatility.

The emergence of China in world trade, as an importer of intermediate goods and exporter of final goods, is relevant globally and particularly within the Asian region. Commodity exporters have tended to benefit from increased demand from China. However, the gains to its neighbours and other emerging market trading partners are not as clear-cut. Some have lost market share in third markets, although this has been offset to a greater or lesser extent by increased exports of intermediate and capital goods to China. A rise in the relatively low level of China's demand for imports to satisfy domestic final demand would provide further opportunities to its trading partners, and would also increase the extent to which Chinese growth could offset any potential slowdown in US demand. Finally, China's emergence also has mixed implications for the exchange rate policies of its neighbours.