Chinese economic data has been better than expected in July. During the month, industrial production rising 9.7% year over year, exceeding economists' forecasts.
But positive July figures have not fully allayed investor fears that the Chinese economy will continue to decelerate.
In a note titled "The Great EM Unwind," Morgan Stanley's Manoj Pradhan and Patryk Drozdzik lay out how some of 13 Emerging Market countries (EM) could lose and how some could win when China slows down.
"We identify three channels through which China’s deleveraging is likely to affect the rest of EM: i) The trade of manufactured goods; ii) The trade of commodities; and iii) The impact of a slower Chinese economy on the terms of trade," they wrote.
"In the pre-crisis decade, China’s re-export model and its strong domestic growth helped to improve EM current accounts," they added. "As China deleverages amid a weak export cycle, EM economies stand to export less to China and are therefore likely to see more current account deterioration (with some exceptions due to terms of trade effects)."
From Brazil to Turkey, some emerging markets with large China exposure will be hit hard, while others stand to benefit.
The analysts also discuss the impact of countries domestically scaling back debt as well as how they would be impacted by the U.S. unwinding quantitative easing. We pulled the points that highlight the impact of China.
Brazil's growth will be pushed lower
"Brazil’s investment cycle has been closely linked to the positive terms of trade it faced. Weak terms of trade will hurt investment and consumption, pushing growth lower. A silver lining of the unwind of the terms of trade shock could be a more competitive manufacturing sector, but the exchange rate and real wages have to weaken a lot for that to happen."
Brazil's domestic bond market has so much foreign ownership that it also leaves the country exposed to external shocks.
Source: Morgan Stanley
Chile will see a trade shock
"Despite its copper funds, Chile remains highly exposed to a China slowdown as it faces dual headwinds: 24% of its exports go to China and lower commodity prices will mean a negative terms of trade shock to boot."
Chile’s central bank also has concerns about the slowdown of emerging market credit.
Source: Morgan Stanley
India stands to benefit
"A net beneficiary of a China slowdown due to low exposure via exports and a large net import position for fuels and hard commodities that could benefit from better terms of trade."
India had strong credit in the wake of the crisis, but has since slowed with nominal GDP growth.
Source: Morgan Stanley
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