Fra Fanthom consulting via Reuters
Although Chinese policymakers are reluctant to admit that China has slowed dramatically, the onslaught of measures aimed at stimulating the economy surely hints at their discomfort. Their most recent strategy, a 3% devaluation of the renminbi, looks to have triggered a reassessment of the prospects for growth — certainly in China and quite possibly beyond. Spurred on by the weakest reading on the Caixin Manufacturing PMI in six years, Chinese equities have been hit hard. But equity market falls are not confined to China. At the time of writing, the Nikkei 225 is down 10% on the week, with the S&P 500 losing 6%.
We have argued since the beginning of this year that a hard-landing for China was inevitable, and that the effects of this would reverberate the world over. Although difficult to determine, those countries most vulnerable to dwindling Chinese demand are likely to be those whose exports to China constitute a considerable proportion of their gross domestic product. On this basis, as our graph demonstrates, there are two groups of emerging market economies that look particularly vulnerable.
There are the commodity rich nations, such as Sierra Leone and Angola, which have met China’s insatiable demand for natural resources. And there are also the East Asian economies, such as South Korea, Malaysia and Vietnam, which export semi-manufactured and finished goods to China. Data suggest that China’s slowdown has already hit commodity producers hard, and they will continue to suffer — with crude oil prices hitting new six-year lows.
But most major economies, including the US, which exports less than 1% of its GDP to China, should have much less to fear. On that basis, the sharp fall in US equity prices over the past week is a little puzzling. It may have more to do with increased uncertainty surrounding the timing of the Fed’s first move, than US exposure to China per se.
