How The Emerging Markets Will Unravel As China Unwinds Its Debt

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.