NEW YORK (TheStreet) -- Emerging markets are in a tough spot, trapped between two huge economies that are moving in completely different directions.
As the world's largest economy moves towards recovery, China seems to be in an economic turmoil and sending mixed signals to emerging markets. The reactions to any news coming from China or the U.S. seem to be driving the markets in directions that are making it difficult for any strong predictions.
China: With falling stock markets, bad economic reports on its output data and investment growth, nothing seems to be going well for China. Amidst all this mayhem, the investors seem to be losing confidence and fleeing to safer markets. Whatever the reason for China's devaluation of the yuan, the fact remains that the emerging markets are caught between the devil and the deep blue sea and the worse may not be over yet. According to the Economist, the fluctuation in the "emerging-market currencies that have occurred so far may be a sign of more trouble to come."
Emerging markets at one time had pinned their hopes on China, when the developing economy took some bold steps in announcing New Development Bank in Shanghai (a bank led by five countries: Brazil, Russia, India, China and South Africa) and Asian Infrastructural Investment Bank (AIIB) in Beijing. The step was to get emerging Asian countries to rely less on international institutions like the World Bank and the International Monetary Fund. However, China's official reason for creating the new banks was entirely different -- to meet Asia's massive infrastructure-funding space.
The recent fall in China has many neighboring emerging markets worried. A classic example of this contagion effect was the turmoil in the emerging markets when China decided to suddenly depreciate its own currency, the renminbi (also known as the yuan). Stock markets in emerging economies tumbled, spooked by the specter of currency wars. Many emerging economies lowered the value of their currencies, so as to avoid trade losses. Low commodity prices and China's slowdown are already burdening the economies of Vietnam and Kazakhstan, which devalued their currencies. GDP growth in Singapore has gone to its lowest in three years below 2%.