There is growing concern over disruption to global supply chains, given the now multiple rounds of tariffs in the US-China trade dispute. Despite all this, China’s current account and trade surplus look robust. This resilience is partly driven by a shift in the composition of exports away from the US and towards destinations like ASEAN and the Euro zone.

Low breakeven oil price for the current account provides buffer against shocks. Introduction of the fiscal rule in 2017 has led to significant reserve accumulation. Debt repayments spiked after the 2014 sanctions but are now less of a concern. However, private sector capital outflows have picked up and may accelerate. Portfolio inflows have returned but are sensitive to sanctions announcements.

China’s $2 trillion external liability seems large, but is manageable given China’s GDP, exports, and foreign assets. FDI loans, trade credits, and bank deposits are relatively sticky. China’s external debt overhang should be a minor concern for BoP and RMB depreciation. 

Lebanon’s economy is at a turning point. Despite the recent downgrades we still believe that Lebanon will not default given its sizable international reserves, robust banking system, and a track record of having never defaulted on foreign-currency debt. 

During August, EM stocks and bonds suffered the worst outflows since November-2016. Our broader measure of net capital flows, which lags by one month, shows a reversal of net flows from June to July, from -$42.0 bn to $5.2 bn.

Mounting trade tensions are putting depreciation pressure on the RMB. We investigate contagion risk to the rest of EM from further RMB weakening. During the surprise RMB devaluation in august 2015, commodity currencies like the Russian Ruble and Colombian Peso were hit most, as markets traded weaker global growth and thus falling commodity prices. We see this as a good template for possible contagion effects now.