Chinese Economic Slowdown Fallout 2016: Emerging Markets Should Brace Themselves, Mexico Bank Chief Warns, Urging Policy Action

This year promises to be an uncertain one for emerging markets, with "a potentially severe shock," and so governments should plan accordingly, Agustín Carstens, governor of the Bank of Mexico, has warned. Over the past year, the Chinese economy has slowed dramatically, taking a noticeable toll on other countries.

“Emerging markets need to be ready for a potentially severe shock,” Carstens told the Financial Times. “The adjustment could be violent and policymakers need to be ready for it.”

Amid the Chinese slowdown, global investors pulled some $40 billion from emerging markets in the third quarter of 2015. The market uncertainty is far from over; the Chinese market dropped so sharply — by 7 percent — on its first day of trading in 2016 that the market shut down.

Carstens suggested that governments not begin quantitative easing, or when central banks buy financial assets on a large scale to pump needed funds into the financial system. They should, however, swap high-risk assets for shorter-term and less risky ones.

The fallout from the Chinese slowdown is expected to affect emerging markets differently. Brazil, which is grappling with both economic woes and a high-level political corruption scandal, is one country that faces particular risk in 2016, analysts said. South Africa and Turkey are also troubled, but Mexico and Poland could fare better, analysts have noted.

In 2015, the Chinese economy saw some of its slowest annual growth in years. As a manufacturing powerhouse, it’s among the biggest importers of raw materials in the world, and as its economy has slowed, commodity prices have fallen, hurting developing nations.

By mid-to-late 2015, outlooks for emerging markets as a result of the Chinese slowdown had begun to deteriorate. Slowdowns in the emerging markets could in turn affect the U.S. economy.

“We’re focusing on China and emerging markets now as the biggest risk to the U.S. economy and global markets,” David Spika, global investment strategist at GuideStone Capital, told the Wall Street Journal in September. The U.S. economy has not been as deeply affected by the Chinese slowdown as many emerging markets have been so far, but if the Chinese economy continues to worsen, that could soon change, analysts have said.

“A slowdown of half percentage point, or even a percentage point slowdown, is not going to have a very big impact on the U.S. economy. If you’re South Africa or Peru, Chile, Colombia, Malaysia, or Thailand, then it’s a different matter,” Paul Sheard, the chief global economist at Standard & Poor’s Ratings Services, told the Washington Post.