Last year, emerging markets were touted by many commentators as the most vulnerable asset class in 2014, and events this week suggest that the consensus may prove to be correct.

Risk aversion has gripped EM credits and triggered a powerful flight to quality. The main catalyst appears to be China, rather than the "taper tantrum" that caused spreads to spiral upwards last summer. A below par Markit/HSBC China Flash PMI - the index dropped into contraction territory and hit a six-month low - reignited nagging concerns about China's growth trajectory. These were compounded by the elephant in the room in the world's second biggest economy - the shadow banking system.

Wealth management products and trust loans, the two main components of the shadow banking sector, accounted for a third of new credit in 2013. Shadow banking is one of the main sources of finance for investment projects in China, both privately and in local government. State-owned banks have systematically rolled over these loans, and they were regards as quasi-government credit.

But the prospect of a potential default in a trust product - distributed by ICBC bank - has created a chill in China and beyond. China has relied on cheap credit to fuel growth over the last few years, and a retraction in shadow bank lending would have serious repercussions. Perhaps this very fact will encourage Beijing to step in, but it still raises the question of how an orderly deleveraging will be achieved. China's central government may have the resources to support the inevitable damage to state-owned banks, but the magnitude of the explosion in credit in recent times means that a soft landing will not be a formality.

China's CDS widened 8bps on Friday to 104bps, the first time it has breached the 100bps level since early September. The impact on other emerging market sovereigns was severe - the Markit CDX.EM index dropped to 107bps and has lost 3.5 points since Christmas. Its underperformance compared to developed market indices over the last year is stark - it has widened by 50% , while the DM indices have tightened.

Capital flight from countries with large current account deficits - such as Turkey and South Africa - has exacerbated difficult conditions in emerging markets. Argentina, a sovereign with its own unique problems, didn't help matters when it decided to withdraw central bank intervention to support its currency. Turkey's central bank opted to intervene this week, but it is questionable that it has the reserves to sustain this policy and it could soon find itself with the same Hobson's choice as Argentina.

Developed markets weren't unscathed, with the Markit iTraxx Europe widening by 11.5bps in two days to close the week at 84bps. Conditions in North America weren't much better - the Markit CDX.NA.IG gave up 6bps over the same period to close at 71.5bps.

The market focus had been on micro issues such as earnings, but macro concerns may now take precedence next week and beyond.

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