A mix of weaker growth in China, the U.S. dollar's rise in value and high levels of dollar-denominated corporate borrowing pose a risk to emerging markets, the Bank for International Settlements warned in a report Sunday that highlighted many trouble spots for the global economy.
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"China's economic slowdown and the US dollar's appreciation have confronted [emerging market economies] with a double challenge: growth prospects have weakened, especially for commodity exporters, and the burden of dollar-denominated debt has risen in local currency terms," the Switzerland-based consortium of central banks said in its quarterly report.
"We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines," said BIS chief economist Claudio Borio.
Financial markets have swung wildly in recent weeks, due in part to a decision by China last month to devalue its exchange rate. This raised fears that the world's second-largest economy had lost momentum, threatening an already tepid global economic recovery. Uncertainties over the timing of future interest-rate increases by the U.S. Federal Reserve have added to the volatility in markets.
"Global financial markets have suffered repeated blows over the past few months, with a number of them due to events in China," the BIS said.
Another risk, noted Mr. Borio, is a slowdown in credit flows to emerging-market economies, which could make it harder for those countries to finance large stockpiles of dollar-based debt. When the dollar rises in value, it makes debt denominated in the U.S. currency more expensive to finance.
"The data reveal a certain bifurcation in global liquidity, with credit to China, Russia and, to a lesser extent, Brazil being especially weak," Mr. Borio said. At the same time, the amount of dollar-denominated credit to nonbank borrowers in emerging markets has nearly doubled since 2009 to more than $3 trillion.
"Much of it has found its way to corporates, raising serious questions about the financial vulnerabilities involved and the implications for self-reinforcing movements in exchange rates and credit spreads," Mr. Borio said.
Amid growth uncertainties and falling commodity prices, a number of central banks in emerging markets have eased policy in recent months including China, India, Hungary and Russia.
"Diverging monetary policies have continued to be an important driver for markets over the past few months," the BIS said in its report. "Although the timing of the Federal Reserve's first move has become more uncertain, interest rate differentials between the United States and many other countries have remained wide, with important consequences for foreign exchange markets."
Mr. Borio repeated warnings that the BIS has made in recent years that financial markets have become too dependent on monetary policy to address the economic burden of weak productivity and high debt.
"This is also a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks' every word and deed, in turn complicating the needed policy normalization," he said.
"It is unrealistic and dangerous to expect that monetary policy can cure all the global economy's ills."
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