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  • Emerging Markets Debt Daily

    China Credit Supply Shows Restraint

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 12, 2019

    China’s credit supply remains under control, with shadow financing still in contraction territory. The snail’s pace of Turkey’s industrial production recovery may encourage additional monetary and fiscal stimulus.

    money aggregates for June are out, and the good news is that authorities are not going overboard with credit stimulus. Total social financingrecovered last month (to CNY2,260B), but the monthly increase was visibly smaller than the recent peaks. Shadow financingcontinued to contract, while new yuan loans are trending higher (see chart below)—both are encouraging structural signals, in our view. The data also revealed several deficiencies, such as a big jump in short-term corporate lending. The release shows that a more accommodative turn in the central bank’s policy stance is an appropriate strategy, and we expect to see more “drip stimulus” initiatives to promote bank lending to small and privately-owned companies in the coming months.

    Turkey’s industrial production continued to rebound in May—albeit at a snail's pace. The “snail” aspect, unfortunately, suggests that authorities may be tempted to open fiscal and monetary spigots wider, moving further away from orthodox macroeconomic policies. These considerations, however, are not the main reason why Turkish assets sold off in the morning trade. Headlines that Turkey had already received the Russian missile system and that the U.S. will address the issue later today spooked the market, reviving sanctions concerns.

    Mexico’s May industrial production growth looked seriously concerning. The pace of yearly contraction quickened to -3.1% (seasonally adjusted)—it was well below consensus and is now officially the worst reading since the global financial crisis. The epicenter appears to be in construction, but all sectors posted negative monthly growth. The outlook is dim—in part due to local reasons, in part due to the impact of softer manufacturing in the U.S. This also means a greater slack in the economy and moderating inflation pressures. Against this background, the central bank should be in a position to lower its policy rate in the coming months (provided the currency “cooperates”).

    Chart at a Glance

    China Credit Aggregates

    Source: Bloomberg LP

    1Total social financing is a broad measure of credit and liquidity in the economy that includes off-balance sheet financing such as initial public offerings, loans from trust companies, and bond sales.
    2Shadow financing comprises private credit intermediation occurring outside the formal banking system.


    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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