China's economic 'rebalancing' likely to hurt world's emerging economies

Countries that supply China with raw materials got a taste in January of what the future holds as the world’s second-largest economy prepares to restructure itself and dampen its mega-growth of the last two decades.

Rattled investors engaged in a massive sell-off of stocks and currencies from so-called emerging markets, hammering countries from Brazil to South Africa that have profited from mining exports to China.

This won’t be the last time the world’s markets react - some would say overreact - to what some call China’s “rebalancing.” China is just getting started on boosting the domestic economy and scaling back the kinds of resource-intensive industries that have made it the world’s manufacturing giant. Because of China’s enormous size and economic clout, even a few baby steps can make the world tremble.

Michael Pettis, a professor of finance at Peking University, said China’s transition would harm numerous developing countries, particularly those that had invested heavily in exporting iron and other metals to China.

“There is no way around it,” said Pettis, who’s also a senior associate in the Asia Program at the Carnegie Endowment for International Peace. “If you are Brazil, Peru . and you made a big bet on (metal) commodity prices, you are going to be very disappointed.”

China isn’t the sole source of financial headaches for certain emerging economies. The U.S. Federal Reserve has been “tapering off” its bond-buying programme that helped supply many of these countries with foreign capital to fuel their exports.