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  • Emerging Markets Debt Daily

    China – Embracing Structural Changes

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    May 06, 2020

    China is providing valuable insights into the post-crisis growth patterns and structural shifts. The Turkish lira remained under pressure as official communications failed to reassure the market.

    China’s growth nowcasts are moving into positive territory (see chart below), but the pace of recovery remains slow—the Golden Week’s travel and tourism numbers agree with this assessment. The consensus expects the economy to grow only by 1.8% in 2020, and the talk of the day is that the official growth target for 2020 will be abandoned during the annual meetings of the National People’s Congress. China is rightly considered a “bellwether” country in the current crisis—and not just as regards growth patterns. Structural/secular changes are also closely watched. One interesting development is a digital currency trial that is taking place in several major urban areas. The currency is, of course, state-run, and the trial involves some public servants getting paid in e-FX. Interesting times… Stay tuned!

    The Turkish lira is under pressure again this morning, as the latest PR “offensive” from authorities failed to impress the market. Generally speaking, we like the fact that the currency is weakening—especially on a risk-off day like today. Using the currency as a shock-absorber helps to reduce macroeconomic imbalances—especially on the external side—and create a stronger fundamental backdrop going forward. The problem, however, is that we continue to hear stories about state-controlled banks selling U.S. dollars. And this means the country might end up with both a weaker currency and a much smaller external “cushion” (which is not a good place to be).

    The market continues to price in a 50bps rate cut in Brazil later today. If the cut materializes, the real policy rate will drop to zero, reinforcing concerns about insufficient policy buffers at a time when the political noise remains high. This underscores the importance of the second-round vote on the “war budget” constitutional amendment in the lower house, which can widen the range of policy tools available to the central bank.

    Chart at a Glance: China Growth - Digging Itself Out of a Hole

    Chart at a Glance: China Growth – Digging Itself Out of a Hole

    Source: Bloomberg LP


    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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