EM local markets, especially currencies, as well as EM credit spreads are under pressure following renewed volatility in China and escalation of tensions in the Middle East. Almost all EM currencies are falling year-to-date and high-beta FX are bearing the brunt of the pressure. The global spillovers from China's reduced rate of growth are probably much larger than anticipated. 

Emerging markets also have to deal with "the burden of dollar-denominated debt" and, although the increased fall in oil price is partially caused by the stock market crash in China, it adds to the volatility. The "spillover" effects from U.S. Federal Reserve's rate hike which could lead to tighter credit conditions and higher debt servicing costs for emerging markets add to the concerns. Companies that have loaded up on dollar-denominated debt are at particular risk, with increased chances of defaults. IMF data shows that emerging market borrowing has doubled in the past five years to US$4.5 trillion. 

Some emerging markets are heavily reliant on foreign inflows to fund fiscal or current account deficits. If investment returns in the U.S. become attractive, international capital flows away from emerging markets could accelerate and make funding the "twin deficits" more difficult. However, stronger Emerging Market fundamentals, such as higher real GDP growth, stronger external current account, lower inflation, and a lower share of local debt held by foreign investors, may shield against larger spillover effects. 

There are indications that China is likely to temporarily slow down the pace of currency depreciation, after having allowed CNY fixings to fall in a near one-way fashion by 4% since early November. On Friday, the PBoC announced a USDCNY fix that is substantially below the previous days' spot closing rate (-303bp). Today, the central bank set the mid-point for the yuan at 6.5626 per dollar higher for a second day. The stock market rout will probably lead authorities to further stabilize CNY fixings in coming weeks in order to prevent further exacerbating negative market sentiments. 

Beijing's ultimate policy intent is still muddy, but the move seen as an effort to calm concerns about a competitive devaluation only added to market confusion. Both the onshore and offshore yuan markets strengthened modestly following the PBoC's decision to set the daily fix for USD/CNY marginally lower for the second consecutive day, but the sell-off in the Chinese equity market extended, dragging Asian markets lower. Attention now shifts to China's December trade report due Wednesday, focus will be on whether further declines are seen in exports and imports.