China’s growing share of the global economy means its familiar role as the bulwark between emerging market pain and developed economies has never been more crucial.
This year’s turmoil in markets across Argentina, Turkey, South Africa and now spreading to Asia has done little damage to the growth outlook for most developed economies. Indeed, Federal Reserve Chairman Jerome Powell has showed little sign he’ll slow the pace of monetary tightening, which is causing so many strains across the developing world.
If the slowdown in China’s economy gets much worse though, it’ll be a different story. The $12 trillion economy faces fresh challenges as Donald Trump mulls new U.S. tariffs on up to $200 billion of Chinese imports, which may be announced as soon as this week.
China makes up about 15 percent of the global economy versus just 3 percent during the Asian crisis two decades ago and contributes more than 30 percent of global growth. It’s the biggest trading partner for many emerging markets and the largest buyer of many commodities they rely on.
"China is the locomotive that keeps the EM train rolling along," said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. "Slowing growth in China thus poses an especially acute challenge to emerging markets, after already grappling with higher dollar funding costs for their debt."
Bloomberg Economics’s Tom Orlik says seismic shocks for emerging markets from Asia’s 1997 meltdown to the periodic crises afflicting Latin America "have been little more than ripples on the surface of their developed neighbors." But China is the exception to that rule.
He notes the ripples that spread around global markets in 2015 as Chinese equities plunged, its currency weakened and capital outflows unsettled investors. This year has also seen the yuan depreciate, stocks slide and recent economic readings disappoint -- so far without a sense of panic though as analysts expect recent stimulus measures to cushion growth.
Deutsche Bank AG expects authorities would allow the yuan to depreciate to 7.4 to the dollar in 2019 (it’s now trading around 6.8) if no trade deal is reached. Such a move would erode the yuan’s anchor role for other emerging economies.
China has long played a stabilizing role. Its decision not to devalue the yuan during the Asian financial crisis helped prevent even deeper fallout. A decade later during the global financial crisis it unleashed massive stimulus to prop up its economy, leading to a surge in demand for commodities that boosted many emerging markets and some developed economies like Australia’s along the way.
"China remains the linchpin," said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte in Singapore. "If the trade war sinks China’s economy, the emerging world and rest of Asia will inevitably feel the full gravity of the downforce."
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In an extreme scenario that few are expecting, a hard landing for China would unleash a "tsunami of contagion" according to Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit.
"The shock waves of contagion would also spread more widely to other global emerging markets, notably commodity exporting nations, as world commodity prices for key commodities such as iron ore, copper and aluminum would also fall sharply," says Biswas.
That outcome appears unlikely. Authorities in Beijing have already shifted towards pro-growth policies and have propped up the yuan to prevent it falling through the key level of 7 to the dollar.
That means the biggest emerging economy of them all remains a buffer for the global economic outlook even as many smaller emerging markets wobble. But even China’s resilience can’t insulate the world from the impact of tightening monetary policies.
"China could take actions to prevent a further deterioration of the global backdrop for EM," said Stephen Jen, chief executive officer of Eurizon SLJ Capital Ltd. in London. "But it will not be able to fully offset the headwind resulting from the Fed’s prospective policy actions."
Source： Bloomberg
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