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  • Emerging Markets Debt Daily

    China Preps for Benchmark Bond Index Inclusion

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    September 04, 2019

    J.P. Morgan announced China’s inclusion in its benchmark local bond index (GBI-EM). Fitch removed Argentina’s restricted default rating.

    China’s inclusion in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) is finally happening. The phased-in process will begin in February 2020, and at the end, China’s weight will reach 10%. This is a great news for China’s onshore bond market, as well as for the yuan which might get additional support from potential inflows. On our part, we hope that this will encourage deeper structural change, which is the only sustainable way to boost China’s potential growth. As regards near-term growth outlook, this morning’s headlines that China’s cabinet is calling for a “timely” cut in reserve requirements (RRR) might signal a shift from the targeted (“drip”) stimulus to broader policy initiatives.

    Argentine external bonds are doing better this morning—the country’s upgrade from RD (Restricted Default) to CC by Fitch might have helped at the margin (it’s nice when rating agencies acknowledge their mistakes in a speedy fashion). Capital controls are still on everybody’s mind, with the senate’s provisional president, Federico Pinedo, stressing that the 2001 “corralito” regime (freezing bank accounts and forbidding withdrawals from U.S. dollar-denominated accounts) is not coming back and that dollars would be available for withdrawals from banks. The gap between the official exchange rate (the red line on the chart below) and the “transactional” exchange rate (the blue line on the chart below) is still there, but the good news is that it remains fairly tight.

    Malaysia is one of the few emerging markets (EM) economies that continue to send positive growth signals, despite external headwinds. The latest example is an upside surprise in July’s foreign trade numbers. A strong rebound in exports (driven by electronics) is particularly noteworthy, in part because it supports an argument that the country is moving up the value chain. Imports continued to moderate, but less than expected and with a high base effect explaining a big portion of it. These improvements notwithstanding, the central bank might choose to play it safe and go for another policy rate cut—perhaps as early as next week.

    Chart at a Glance: Gap between Argentina’s Official and “Transactional” Exchange Rates Still Tight

    Gap between Argentina’s Official and “Transactional” Exchange Rates Still Tight

    Source: Bloomberg LP

    RRR — Reserve Requirement Ratio: The RRR is a central bank regulation, employed by most of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial bank.

    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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