Since 2010, China has been the main reason why emerging markets are slowing down relative to developed ones. After the huge injection of liquidity into the Chinese economy in 2008 and 2009 in response to the global credit crisis, growth began to falter in 2010. And the slowdown is continuing. In the first half of the year, Chinese growth was around 6,8%. Recently, the economic slowdown and growing concerns about the sustainability of the growth rate have put severe pressure on commodity prices.
There were therefore repercussions on the main exporters of commodities, starting with Brazil and Russia. Over the past decade, China had become the main trading partner of many emerging economies and not just on the raw materials front. For these countries, therefore, the negative consequences of the continued Chinese slowdown cannot be taken lightly. In addition to the direct negative impacts of lower Chinese growth on trading partners, emerging markets face an additional complication.
Since 2008, aggressive stimulus measures have led to an explosive increase in China's debt. As a percentage of GDP, debt has grown by no less than 70 percentage points in the last five years. This is an unprecedented increase and is causing significant pressure on the financial system, with a significant share of loans tending to default. In the past, we have seen numerous examples of this. The most recent debt crisis in the emerging world was that of Russia in 2008, preceded by a rapid and excessive growth in the debt ratio.
Investors need to take into consideration the elevated risk to China's banking sector as a result of uncontrolled debt growth since 2008. In other words, there is a significant risk that in the coming years, due to a debt crisis, China's growth may collapse. And that partly explains why emerging countries are under such pressure. In the last two years, capital flows to these countries have slowly dried up as a result of the high imbalances in the various emerging economies, expectations of the Fed's decisions regarding a slowdown in expansionary monetary policy and also in response to the risk posed by China .
Recently, there have been some positive signs of a slight recovery in economic growth in China. A stabilization would be good news for all emerging markets, after the growing worries of recent quarters. Such a situation would mean that in the near future there could be a recovery of the losses suffered. On the other hand, however, a couple of slightly improving quarters can't do much to change the long-term outlook. The slowdown will continue and the risk of a banking crisis in China, with major consequences for all developing countries, remains too high to ignore.
