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How Emerging Economies Are Steering Clear of China’s Influence to Thrive in the Face of Rising Interest Rates

As 2023’s global financial landscape unfolds, one trend stands out: Emerging economies are showcasing a newfound resilience against higher interest rates. More intriguingly, they seem to be breaking free from the economic orbit of China, positioning themselves to capitalize on fresh opportunities. This phenomenon, as observed by Ruchir Sharma, chair of Rockefeller International, is reshaping the global economic narrative.

Historically, when China’s economy stumbled, a domino effect was observed across other emerging markets. Similarly, previous periods of interest rate hikes in the 1980s and 1990s sparked crises in these developing nations. Given China’s recent economic dip and the looming tightening campaign, many Wall Street analysts were bracing for a repeat of past patterns. However, the expected turmoil is yet to materialize.

Contrarily, of the 25 largest emerging economies, 75% have outperformed growth forecasts this year, with nations such as India and Brazil exceeding expectations by a substantial margin. Moreover, the upward revisions to global growth forecasts for 2023 seem to be primarily driven by these emerging economies.

What’s behind this surprising resilience? Sharma cites improved fiscal discipline and robust banking systems that many developing countries have built up over the decades. These improvements meant that when the pandemic struck, these nations didn’t need to borrow heavily to fuel stimulus spending. In fact, their deficits only rose by an average of 15% of GDP from 2020 to 2022, a significantly smaller jump compared to that of the US.

A shift in monetary policy approaches has also played a role in strengthening these economies. Unlike the Federal Reserve, emerging-market central banks acted swiftly to tighten monetary policy in response to the pandemic. This proactive approach is now bearing fruit, allowing many of these nations to consider cutting interest rates even as the US contemplates further hikes.

In another deviation from traditional norms, inflation rates in developing and developed economies are currently at par, a phenomenon not seen in the last forty years.

Different countries have found success through diverse strategies. For instance, Asia has been bolstered by strong domestic demand, while Latin America’s growth has been driven by steady commodity exports.

An intriguing aspect of this resilience lies in the increasing “decoupling” from China. As Western nations aim to decrease their risk exposure to China, and China in turn seeks to become more self-reliant, the bond that once bound emerging economies to the performance of China is weakening. As a result, as Beijing turns inward, other developing nations are finding new opportunities to strengthen their global trade positions.

These trends are reshaping the global financial map and challenging the preconceived notion that “emerging” equates to “reckless”. This could mark the dawn of a new era in which emerging economies play a more robust and resilient role on the global stage.