Global equity markets have fallen sharply since the new year. And emerging market (EM) equity and credit portfolios have experienced substantial outflows since 2015. In our 2016 Outlook, we envisioned a year of generally low and volatile returns. But now, the key question is whether we are facing a new EM crisis – which could have contagion effects on the global economy – or a more benign outlook for growth.
As a $10.3 trillion economy, China is now significantly larger than both Asia in the 1997 crisis and peripheral Europe in its 2011 crisis. The faltering actions by the Chinese authorities to de-lever and to control markets, as well as to avoid a hard landing by loosening monetary conditions, have increased the pressure on the yuan to devalue as China shifts its currency peg away from the US dollar to a trade-weighted basket of currencies.
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