China’s Economic Wobbles Might Leave Asian Emerging Markets Lonely

China’s Economic Wobbles Might Leave Asian Emerging Markets Lonely
Paul Allison, CFA

about 1 month ago2 mins

What’s going on here?

Ratings agency Moody’s warned that some Asian emerging markets (EMs) may be left lonely and unloved, as their beloved China cuts them off.

What does this mean?

China is a nice neighbor to have. The country might not keep a spare stash of milk and watch folks’ dogs when they’re on vacation, but it does tend to stock up on a whole host of goodies from its next-door EMs. But now that China’s economic prowess has essentially skipped town, the surrounding nations are missing out on a steady stream of income. That’s a big problem, according to credit agency Moody’s, which doubts that China’s neighbors have the resources to plug that hole.

China deflation
Source: Bloomberg

Why should I care?

The bigger picture: Rock, meet hard place.

EM nations can’t count on foreign lenders to bridge the gap, either. Lenders tend to err on the side of caution when handing out loans in less common currencies, because the higher risk of fluctuation means they might be paid back less than they’d like in their original currency. That’s why EM governments gravitate toward dollars, instead. Problem is, if the country’s currency falls, the difference in value against the dollar would make it more expensive to pay back that dollar-denominated debt. That leaves those countries in a sticky spot: lower rates to spur on an economy, or keep them higher to make borrowing money – essential cash for stimulating businesses – more manageable.

For markets: Star spangled, indeed.

Analysts had predicted that US stocks would lose their dominance, after a decade or so of running the world’s markets. But that was before investors flurried into US tech stocks, a bid to claim a part of the AI theme. So while EM countries are touted for their long-term potential, China’s MSCI index has yet to deliver: you’d be in the red if you’d invested when it started in 1992, a long way off the S&P 500’s 1,000% uptick over the same period.

MSCI China index
Source: MSCI
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