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  • Emerging Markets Debt Daily

    China Policy Move Sparks QE Buzz

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    January 25, 2019

    The introduction of a new policy instrument in China sparked comments about a potential big policy shift. Argentina’s weak currency and high interest rates continue to depress output.

    The quantitative easing (QE)1 buzz is all the rage among China watchers this morning. The reason is the introduction of a new policy instrument, the central bank bills swap (CBS). The goals are noble. Qualified banks issue perpetual bonds that can be swapped into CBSs. The latter can be used as collateral for other People’s Bank of China (PBoC) funding facilities, which strengthens banks’ lending capacity and boosts economic growth (that’s the idea). A major uncertainty at this stage is which party – bond buyers or the PBoC – will assume the credit risk associated with perpetual bonds. If this is the PBoC, the new setup would look more QE-like, signaling a big shift in the policy direction.

    Argentina’s economic activity proxy fell by another 7.5% year-on-year in November (the weakest since the 2008 crisis - see chart below). Retail, manufacturing, and construction were hit particularly hard. The main reason is the negative impact of last year’s devaluation and sky-high interest rates on purchasing power and local financial conditions. Looking forward, recovering agriculture and lower interest rates should provide some support for economic activity later in 2019. The base effect should also turn positive starting from Q2. The ongoing decline in consumer confidence, however, suggests that this will still be an uphill struggle for President Mauricio Macri and his government in the run up to the October general elections.

    The U.S. dollar is underperforming big time today, with many commentators pointing to press reports about the earlier end of the U.S. Federal Reserve’s (Fed’s) balance sheet reduction. The original schedule targeted the balance sheet of about 6.5% of nominal gross domestic product (GDP) by 2022 (roughly in line with the multi-year pre-crisis average), but this is now in flux. Next week’s communication from the Fed is therefore gaining in importance.


    Chart at a Glance

    Argentina Economic Activity Index

    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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