If China Sneezes, Who Else Gets Sick?

• Another round of economic data out this week continues to point to weakness in China
• Emerging markets will likely be hit hard by the drop-off in trade with China
• Barclays believes that the Fed will not be raising interest rates this month
 

The attention of global investors is squarely on China these days, and a growing number of data point are showing that coming growth in China may not be nearly as strong as previously predicted. In a new report, Barclays analyst Michael Gapen looks at just how contagious China’s economic sickness could be for the rest of the world.
 

The illness
China’s August trade data shows that both Chinese imports and exports contracted further in the month of August, with imports dropping 13.8 percent year-over-year (Y/Y). The weakness has led Barclays to cut its 2015 overall import growth projection for China from -6.7 percent to -10.3 percent. Barclays is calling for a benchmark rate cut of 0.25 percent from China before the end of the year and predicts two more 0.5 percent RRR cuts in Q4 as well.

Market contagion
Unfortunately, Barclays believes that other emerging market economies will likely be hit hard by China’s weakness. China is Korea’s largest trading partner, and Korea witnessed a 14.7 percent Y/Y decline in exports in August. Indonesia, Taiwan, the Philippines and Brazil could also suffer from Chinese economic contagion.

Developed economies
Developed economies will also be hit to a lesser degree by China’s woes.

“Altogether, slower growth in China may have a more forceful dampening effect on growth in emerging markets, but momentum in developed markets is not sufficiently strong to shake off weakness in external demand,” Gapen explains.

Barclays believes that the Federal Reserve’s decision on the timing of the first interest rate hike will remain data-dependent. Although the exact month of the first hike remains up in the air, Barclays does not believe it will be September.