Slow growth in the Chinese economy continues to put pressure on commodity prices and makes a growth recovery in emerging markets almost impossible. China’s trade relations with the rest of the emerging world have simply become too important. On top of that, many emerging markets have relied heavily on cheap money from the US and Europe, and the subsequent credit boom. Since 2014, emerging markets have seen net capital outflows, which mean that the inevitable deleveraging is underway and a clear end of it is not yet foreseen.

China’s declining demand and the normalization of US monetary policy put considerable pressure on the emerging economies. Most emerging markets are vulnerable, due to the excessive credit growth in prosperous years and the deteriorating economic policies of more government intervention and rising budget deficits. A recovery in growth is therefore not expected this year or next.

These prognoses are for a scenario of a sustained but controlled Chinese slowdown. If the Chinese authorities are unable to stop the capital flight and the renminbi will devalue significantly, the risk of a systemic crisis will increase substantially. The unprecedented increase in credit as a percentage of GDP, of no less than 100 percentage points in seven years, will then prove to be unsustainable. In this risk scenario, the emerging world is off far worse. The recent turmoil on financial markets can be explained by a gradual pricing in of this scenario.

The high volatility in the Chinese stock markets and the clumsy attempts of the authorities to stop the falling prices, have only added to the nervousness about China’s future. What is worse is that China’s capital outflow has forced the Chinese government to change course towards the renminbi. Beijing now tries to gradually devalue the currency, against the US dollar and against a basket of currencies of major trading partners. This leaves the currencies of other emerging markets even more vulnerable than they already were. In recent years, a stable renminbi was pretty much the only support for those currencies. Further turmoil in the currency markets seems obvious. And with ever weaker exchange rates in the emerging world, the five-year-old emerging markets crisis is getting closer to a climax.


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