markets

As Emerging Markets Sell Off, the Biggest One's Doing Fine

Updated on
  • Chinese stocks, currency and bonds show few signs of panic
  • Trade war, deleveraging and rising rates cloud outlook

NatWest Markets Says Dollar Will Strengthen Slightly Against Asian Currencies

Within a chorus of warnings about the threats facing emerging markets, little is being said about the largest of them all.

And with everything else that’s going on, why would you worry about China? Stocks are up this month in Shanghai, the yuan is at a two-year high against a basket of peers, and bonds are about as prized relative to Treasuries as they’ve been since 2016. A similar picture exists outside of financial assets, with the economy growing at a steady clip and domestic demand supporting imports -- including from emerging peers.

That’s the sort of stability that’s been hard to come by in some developing markets, where even superfan Mark Mobius sees more pain to come.

Yet the country isn’t immune to what’s afflicting investors from Buenos Aires to Ankara. The People’s Bank of China has been following the Federal Reserve (albeit at a slower pace) with higher interest rates; a deleveraging campaign is another form of tightening that risks slower growth and more corporate defaults; and an unpredictable trade war with the U.S. poses a threat to exports and economic confidence.

“China’s financial markets are enjoying support from strong fundamentals and they are not that sensitive to global volatility," said Shen Jianguang, chief Asia economist at Mizuho Securities in Hong Kong. “The biggest latent risk to the markets is the trade war, which I don’t think is going to be simple to resolve."

For more on emerging-market jitters:

China offers a shelter partly thanks to capital controls, which were tightened to stem a rush of outflows in 2015 and 2016. Investors in the nation’s stock market -- the world’s second-largest -- are forced to use highly regulated channels via Hong Kong’s exchange or are limited by state-set quotas. The yuan is tied to a daily reference rate set by the central bank.

The biggest developing economy is also a rapacious consumer of everything from semiconductors to soybeans, and a key customer of its emerging peers.

Last year, China imported 13.1 percent of all goods exported by emerging economies, just below the 13.8 percent shipped to the U.S. It has trade deficits with countries including South Korea, Brazil, and Malaysia. And President Xi Jinping’s silk road initiative is a $500 billion trade and development project with spending that spans more than 70 economies including South Africa, Russia, Egypt and Indonesia.

“China’s steady growth and markets are benefiting emerging markets," said Ken Peng, an investment strategist at Citi Private Bank in Hong Kong.

But like many others, Peng sees a hurdle ahead: the Fed’s a sure bet to raise rates in June and keep tightening from there. The end of easy money in the world’s largest economy will drive up borrowing costs around the world and support the dollar, raising the specter of capital outflows. Beyond the drama of the emergency rate hikes in Argentina and Turkey, the Indonesian central bank is stepping into markets to support the rupiah. Foreign reserves in India and the Philippines are dwindling.

For Rajiv Biswas, Asia-Pacific chief economist at IHS Markit Ltd., a protracted China-U.S. trade war may trigger further troubles for emerging-market assets, because of the damage it could do to Chinese growth and exports.

“It is not that China has solved everything, but the main issue now is the U.S.," said Arnab Das, the head of emerging-market macro at $934 billion money manager Invesco Ltd. in London. Still, “China is always very important to watch as we have a very large economy rapidly evolving and changing.”

— With assistance by Aline Oyamada, Justin Villamil, and Xiaoqing Pi

(Updates 11th paragraph with analyst’s comments.)
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