Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How China's Export Surge Is Reshaping Emerging Markets
Transcript
- Lucas: China's exports in June rose at the fastest pace since 2021. That's the headline from overnight data — exports up sharply, driven by what the reports call an AI boom and a tariff rush. Luna: A tariff rush — meaning companies rushing to ship goods before new US tariffs hit? Lucas: Exactly. Front-loading. But also, the AI boom is real — China's exporting a lot of components for data centers and AI infrastructure. The overall trade surplus widened again. And that's creating this really interesting split in emerging markets right now. Luna: Split how? I mean, China is an emerging market itself. A surge in Chinese exports should be good for EM broadly, right? Lucas: You'd think so. But look at the ETF flows this week. The iShares MSCI Emerging Markets ETF, ticker EEM, is down almost two percent in five days. The VWO, the broader EM index fund, is basically flat. Meanwhile, the China-specific ETF, FXI, is up nearly three percent. And Alibaba, BABA, is up fourteen and a half percent in five days. Luna: So China is booming, but the rest of EM is stagnating or falling. That's a huge divergence. Lucas: It is. And it's driven by a few things. First, the strong dollar. Even though the trade-weighted dollar index dipped slightly to 120.5, it's still near multi-year highs. That crushes countries that have dollar-denominated debt and need to import goods priced in dollars. Luna: Second thing, I'd guess, is geopolitics. The Middle East tensions — the US striking Iranian assets, Hormuz toll threats — that's hammering energy-dependent EMs. Lucas: Right. Oil extended gains today on supply worries. That's a tax on net oil importers like India, Turkey, South Korea. Look at South Korea's ETF, EWY, down over seven percent in five days. Korea imports almost all its oil. Compare that to Brazil's EWZ, up over two percent — Brazil is a net oil exporter. Luna: So the divergence isn't just China vs rest. It's commodity exporters vs importers, too. Lucas: Exactly. And there's a third layer: the yuan is quietly becoming a trade finance currency. Recent developments suggest that more EM central banks are holding yuan reserves and settling trade in yuan instead of dollars. That shields Chinese exporters from dollar strength and gives them a competitive edge. Luna: Which makes the Chinese export machine even more formidable. Their goods get cheaper in yuan terms while competitors in, say, Vietnam or Bangladesh have to price in dollars. Lucas: Bingo. So you have this three-way split: China and commodity exporters benefiting, commodity importers getting squeezed, and then a third group — countries like Vietnam, which is trying to become a semiconductor hub — caught in the middle. Vietnam's ETF, the VNM, is not moving much. They export a lot to China but also compete with China in electronics. Luna: And the Chinese tech giants themselves are having a moment. Alibaba up 14%, JD up 9%. That's not just the export data — that's also the AI narrative, right? Lucas: Yes. Chinese AI models are gaining traction with US companies, and the regulatory environment has become more predictable. Plus, e-commerce platforms like Pinduoduo are expanding aggressively into EM markets. PDD is up two and a half percent this week alone. Luna: Let's talk about the trade balance data more specifically. The US goods and services trade deficit widened to nearly 78 billion in May, down from 54.6 billion? That's a big jump. Lucas: It is. Imports rose faster than exports. That's partly the tariff rush — US companies importing ahead of potential new duties. But also, the strong dollar makes imports cheaper for Americans, so they buy more. And exports are held back by the strong dollar making US goods expensive abroad. That deficit is a headwind for EM that export to the US, but it also means the US consumer is still spending, which supports EM exporters. Luna: It's a tangled web. So for an EM investor, the play right now seems to be: buy China and commodity exporters, avoid importers. Lucas: That's a reasonable first cut. But the nuance is within China — Alibaba vs, say, Baidu. Baidu is up only one percent this week. The AI trade is favoring platforms with consumer reach, not just search. And also, you have to watch the yuan. If the yuan strengthens, Chinese exporters lose some edge. Luna: The yuan is at 6.78 per dollar, down slightly from 6.79. So it's actually strengthening a tiny bit. That could be a signal. Lucas: Right. And the People's Bank of China has been managing it carefully. They want stability, not a sharp appreciation. But if the dollar weakens further, the yuan could rise, and that would compress margins for Chinese exporters. That's a risk for the second half of 2026. Luna: And then there's the Middle East. The Hormuz toll idea — that's a new variable. If the US actually tries to toll tankers through the Strait of Hormuz, oil prices spike, insurance costs go through the roof. That would be catastrophic for South Asia and East Asia. Lucas: It would. And it's the kind of tail risk that EM investors have to price in but can't hedge perfectly. That's probably why we're seeing EEM and VWO languish while China-specific ETFs rally — China is less exposed to oil shocks because it's a major producer and has strategic reserves. Luna: That's actually a good point. China's energy security is better than most EMs. So in a geopolitical crisis, it becomes a relative safe haven within EM. Lucas: Speaking of navigating the economy with us — if walking through the data and the dynamics of emerging markets has made something click for you, or if you find these conversations useful, listener support is what keeps this show ad-free and independent. We don't run sponsorships, we don't do paid segments. It's just us talking through the numbers. If that's valuable to you, you can support the podcast at buy me a coffee dot com slash fexingo. No pressure, but it helps us keep going. Luna: Yeah, and it really does make a difference. Even a small contribution helps cover hosting costs and research time. Lucas: So back to the divergence. Another way to play this is through currency ETFs or individual country funds. But the key takeaway for this week is: don't treat emerging markets as a monolith. The strong dollar, geopolitics, and the China AI boom are creating clear winners and losers. Luna: And the winners right now: China tech, Brazil oil, and maybe India? INDA is down slightly, but India is more domestically driven. Lucas: India is interesting. The Indian ETF, INDA, is down 1.1% this week, but the long-term story is still strong — IT services, manufacturing. But India imports a lot of oil, so the Middle East tensions are a near-term drag. Meanwhile, China's export machine is humming, and the AI trade is lifting the tech names. Luna: So if I'm building a portfolio today, how would I allocate? Lucas: I'd overweight China tech, underweight Korea and Taiwan until the oil situation clears, and hold some Brazil for commodity exposure. But I'd also keep cash — because if the Hormuz situation escalates, everything EM will sell off, and you want to be able to buy the dip. Luna: That's cautious but sensible. And it reflects the uncertainty in the data. The trade balance numbers are backward-looking, the ETF flows are real-time, and the headlines are shifting by the hour. Lucas: Exactly. And that's the challenge of covering emerging markets — you have to synthesise all these signals quickly. But the reward is finding those asymmetric bets before the rest of the market catches on. Luna: All right. Next week we'll dig into the Brazilian oil story and whether it can sustain. For now, thanks for listening.