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  • Emerging Markets Debt Daily

    China Credit Finally Turning?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 11, 2018

    China credit prints surprised to the upside in November, but the need for more stimulus is still there. Turkey’s textbook current account adjustment encourages the market expectation of significant monetary policy easing.

    The closely watched monetary and credit aggregates in China showed some acceleration in November, although it is too early to talk about a new trend. New bank loans and total social financing1 surprised to the upside, signaling that past monetary easing may be having an effect. Shadow financing continued to shrink (down by 8.77% year-on-year) - an indication of the ongoing structural shift. However, M12  growth (a useful gauge for private sector financing) collapsed to a mere 1.5% year-on-year, “begging” for more policy/regulatory support. The appropriate policy mix is a hotly debated issue. The reserve requirement ratio (RRR)3  cuts alone do not seem to affect China’s financial conditions as much as they have done in the past, hence more emphasis on fiscal stimulus lately.

    The external balance watch in emerging markets produced two extreme results. The Philippine trade deficit reached a record high in October, driven by strong imports (which indicates strong domestic demand). Still, the market expects the central bank to stay on hold tomorrow in order to assess the impact of past rate hikes (175bps in 2018). In contrast, Turkey's external adjustment continued unabated in October, with the current account surplus beating consensus and widening to USD2.77B. Even though the capital account remains fragile (small foreign direct investment4  inflows and large repayments), the market is now pricing in a black-swan-free macro outcome for Turkey that would allow the central bank to cut its policy rate by 823bps in the next 12 months.

    Today's macro prints in the developed markets disappointed, feeding into the global growth slowdown narrative and dovish expectations for the upcoming European Central Bank and Federal Open Market Committee meetings. Germany's ZEW survey5 looked miserable, especially the current situation assessment (which collapsed to 45.3 in December). Across the pond, the NFIB Small Business Optimism Index6 in the U.S. also surprised to the downside, moderating to 104.8 in November and posting a big jump in the uncertainty index. All eyes are now on tomorrow’s inflation print in the U.S. The consensus sees sizable moderation in November to 2.2% year-on-year.



    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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