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  • Emerging Markets Debt Daily

    China Funding Costs, Trade Talks Take Center Stage

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    January 07, 2019

    China’s monetary authorities are explicitly focusing on stable and reasonable funding costs. The unexpected participation of China’s top trade negotiator drew more attention to the U.S.-China talks.

    The unexpected participation of China’s top trade negotiator, Vice Premier Liu He, in the U.S.-China trade talks in Beijing generated far more excitement this morning than China’s latest international reserves print. There were no surprises there – the headline reserves edged higher by USD11B in December (see chart below), staying just above the USD3T mark. The State Administration of Foreign Exchange’s (SAFE’s)1emphasis on “stable” currency controls together with its promise to crack down on non-compliance suggest that the reserves are likely to remain stable for now – more so if authorities are willing to relax the currency stance. The latter is linked to China’s ability to lower its funding costs, which seems to be the current focus of policymakers (check the central bank’s latest policy target to keep market rates at a “reasonable and stable level”).

    An upside surprise in Chile’s economic activity (up by 3.1% year-on-year in November) gave more credence to the central bank’s signal about the gradual withdrawal of monetary stimulus (according to the latest policy minutes). With core inflation grinding higher, the market has a lot of reasons to continue pricing in one full hike over the next three months.

    The U.S. dollar remained under the “Powell” spell this morning, sliding further against the euro despite a miserable factory orders print in Germany and uninspiring retail sales in the Eurozone. The below-consensus Institute for Supply Management services survey for December (down to 57.6) sealed the deal for the greenback. Risky assets enjoyed the Federal Reserve’s perceived dovishness (the market priced out all additional hikes, seeing 29bps of rate cuts in the next two years), with multiple rallies in both emerging markets equities and currencies this morning.


    Chart at a Glance

    Changes in International Reserves in Mainland China

    Source: VanEck, 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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