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  • Emerging Markets Debt Daily

    China Rates Reform Gathers Pace

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    August 19, 2019
     

    China’s central bank made yet another move to simplify the interest rates system and make it more market-based. Argentina’s presidential front-runner reiterated that default would be harmful, but the international monetary fund (IMF) program should be renegotiated.

    China’s unwavering commitment to the liberalization of interest rates is quite remarkable
    , given the strain of the trade war (or perhaps authorities have a strong survival instinct, realizing that structural reform is the only sustainable way to boost potential output). On Saturday, the People's Bank of China (PBoC) made major move to simplify the lending rates system and, hopefully, improve the policy transmission mechanism. The new benchmark rate, called the Loan Prime Rate (LPR), will be linked to the 1-year Medium-Term Lending Facility (MLF), which is an anchor for the interbank market. It will gradually replace various existing benchmark rates. Given that the MLF rate is lower than the 1-year Benchmark Lending rate, the PBoC’s initiative falls into the “drip” stimulus category, killing two birds at once (transparency and level).

    A barrage of Argentina-related news continued over the weekend, bringing us the resignation of Minister of Finance Nicolas Dujovne and more statements from the presidential front-runner Alberto Fernandez. Oh, and Argentina got downgrade by Fitch and S&P - but this was not too surprising. The good news is that (a) Dujovne’s replacement, Hernan Lacunza, is a well-respected professional, and (b) Fernandez reiterated that default would be harmful. At the same time, Fernandez noted that Argentina’s obligations cannot be repaid under the current circumstances and that the IMF program should be renegotiated. The IMF’s forthcoming visit to Buenos Aires is, therefore, of utmost importance.

    There is still some time left before the next policy meeting in Turkey, but the central bank decided to give a helping hand to the economy by lowering the lira reserve requirements (to 2%) for banks with loan growth between 10% and 20%. The move comes just days after a big downside surprise in industrial production raised additional concerns about the gross domestic product (GDP) outlook.

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    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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