How emerging markets will eventually be a victim of US-China trade war

International News

US measures to confront China on trade are shifting from tariffs to imposing restrictions on the activities of Chinese firms, which will have adverse consequences not only for the yuan but emerging markets overall.
With China accounting for 40% of the gross domestic product in developing economies, investors should expect the yuan’s recent weakness to accelerate as Chinese savers seek to hedge their risk by switching to dollar-denominated investments. Despite efforts by the central bank to stem the fall, the currency is likely to depreciate beyond the closely watched threshold of 7 per dollar at which the currency last traded in April 2007. This would have adverse implications for both China’s debt as well as the economy’s rate of growth.
Negative Trends
It's taking more yuan to buy $1, and China's stocks are sufferingWith total dollar-denominated debt of Chinese companies rising in recent years, also expect defaults to surge in response to a weakening yuan. Particularly affected would be companies in the property sector, which owe debt denominated in dollars but cater to Chinese tenants and buyers who pay in yuan. Defaults tend to have a domino effect because lenders to property developers, in turn, would be unable to service obligations to savers from which they get their funds.
Chinese local-currency obligations accounted for 6% of the Bloomberg Barclays Global Aggregate Index as of April, and the share will increase in coming months. When the phase-in is completed, Chinese debt will form the fourth-largest component in the index after the dollar, euro and yen, according to Bloomberg. Expect trade tensions and the fallout on other emerging-market debt to push the index lower in coming months.Missing Out,Concern about rising defaults its causing China's bond market to show losses

On the equity front, China was included in various MSCI indexes last year. The share of China in the MSCI Emerging Market Index is forecast to more than triple from less than 1% at initiation to about 3.3% by the end of 2019. Passive investors using such indexes for exposure to emerging markets will find that other developing economies cannot make up for losses they incur in Chinese equities.