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  • Emerging Markets Debt Daily

    China Rebound – Can’t Ignore Structural Costs

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 27, 2020

    China’s industrial profits confirm the deepening recovery, but details raise questions about longer-term structural consequences. Mexico’s June trade balance shows textbook adjustment.

    China’s industrial profits jumped up in June, confirming that the recovery continues to deepen. This is great of course, but the release raises more questions about longer-term structural “costs” of the rebound that is driven primarily by state-owned enterprises (SOEs). The chart below shows that SOEs continue to lag in the profitability department, even though they are leading in investments and output. This generates additional concerns about subsidies (hidden or not), imbalances, and dislocations—which is not optimal as regards the longer-term growth outlook that should be driven by productivity-enhancing reforms. Now…China’s private enterprises are tough cookies—their profitability is bouncing back faster despite higher financing costs. They deserve more support—the July Politburo meeting is expected to take place this week and we keep our eyes open for policy signals in this area.

    Mexico’s trade balance showed textbook adjustment in June, with surplus exceeding expectations by a wide margin (USD5.55B). Exports outperformed imports—the latter held down by weak domestic demand and the meagre stimulus. June’s improvement was driven both by oil and non-oil trade balances. The rebound of Mexico’s manufacturing exports continued to mirror the industrial production’s dynamics in the U.S. (in line with long-term historical trends). So the policy response in the U.S. and the economy’s reaction to it remain key—but if things turn right this can provide a much-needed boost to Mexico’s growth in the absence of large-scale domestic fiscal support.

    A brisk rebound in Turkey’s real sector confidence (pretty close to V-shape) confirms that the central bank did the right thing keeping its policy rate on hold last week. Capacity utilization is also picking up—and this can generate additional inflation pressures down the road. The next quarterly inflation report will be released on Wednesday—we need to see a more explicit commitment to the tighter policies in order to conclude that the central bank is in fact rebuilding its credibility.

    Chart at a Glance: China Industrial Profits – SOEs Lagging Big Time

    Chart at a Glance: China Industrial Profits – SOEs Lagging Big Time

    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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