China rattles the world

"Forget Greece," says Elliot Wilson in The Spectator. China's devaluation last week and the consequent jitters in global markets "could be the biggest financial story of the year". Last week China moved to a new currency regime, effectively devaluing the yuan by almost 2% in a day. By the middle of this week, the yuan had fallen by 3%.

As the yuan's descent steadied, fears of a new currency war with countries across the region racing to weaken their currencies, driving down prices, inflation and profits worldwide have receded. The offshore yuan, which is accessible to foreigners and so a better barometer of the currency's value, has only fallen by around 3.5% since the devaluation.Yet other markets remain unsettled.

The benchmark MSCI Emerging Markets index hit a four-year low, officially entering a bear market after falling by 20% from last year's high. The JPMorgan Emerging Markets Currency index has hit its lowest level since inception in 2000. Commodities continue to plumb multi-year lows, while Brazil's stock exchange is close to a six-year trough.

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The murky outlook for China

Producer prices have fallen for almost four years and are down by 5.4% since last summer. Credit ratings agency Moody's notes that the range and size of recent stabilising measures by Beijing, including cuts to the reserve requirement ratio and interest rates, "have been broader and larger than we expected".

Unofficial measures of activity, such as cement output, electricity consumption and rail-freight volumes imply that growth is a lot weaker than the official figureof around 7%. "No one knows howbad things are," says the FT. If China is really suffering, might it be forced into a bigger devaluation than it planned, eventually sparking a currency war? If it is in big trouble, adds HSBC's Stephen King, then it won't be able to bolster global growth as it did in 2009 if there is another downturn.

Still, investors may be overestimating the potential impact of a Chinese downturn. Jonathan Anderson of Emerging Advisors estimates that exports to China comprise under 9% of total shipments for developing countries. For the US and the eurozone, exports to China account for 0.7% and 1.3% of GDP respectively, according to Bank of America Merrill Lynch research. Note too, says Morgan Stanley, that the property market decline is slowing, while more stimulus measures may be in the pipeline.

Commodities bear the brunt

Emerging markets are beset by structural problems and the prospect of higher US rates, which would draw money away from risky assets. And there's lots of scope for further falls, says Lex emerging markets look reasonably priced, but not dirt-cheap. They are on a 30% discount to developed counterparts. In 2001-2004, they were worth half. "Pick your countries, and your firms, with care."