Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    China Rebound – Strong but Uneven

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 16, 2020

    China’s GDP rebounded strongly in Q2, but the recovery remains uneven. Poland’s core inflation surge is noteworthy, and it might limit additional policy easing.

    China’s Q2 2020 GDP rebound was stronger than expected, but it confirmed that the recovery remains uneven. The headline GDP number looked good (up 3.2% year-on-year), however support came almost entirely from the supply side. Yearly retail sales continued to contract in June (-1.8%) signaling that households stay cautious. This discrepancy reflects the nature of the policy stimulus, as well as social distancing and uncertainty about the virus’s second wave. June’s activity indicators also showed that state-owned enterprises (SOEs) remain firmly in the driver’s seat in this recovery. The gap between private sector investments and SOE investments continued to widen in June (see chart below). Chinese equities sold off after the release (the benchmark Shanghai Composite Index1 ended up 450bps weaker)—albeit the uneven recovery story (as well as “buy rumor, sell fact”) was not the only reason. The state media warnings about an “irrational” bull run might have contributed as well.

    Central Europe’s inflation backdrop started to look even more complicated after Poland’s core inflation surged to 4.1% year-on-year in June. Available evidence points to pent-up demand, higher regulated prices and COVID-related data collection issues as main reasons—some of which should probably be transitory. Still, the last time we saw similar numbers was in the early 2000s. So, it is reassuring that the central bank wants to keep the policy rate above zero for now (according to one of the Monetary Policy Council members).

    Emerging markets (EM) that have room to cut rates are using available policy space. Indonesia lowered its key rate by 25bps overnight, citing downside growth risks amidst low inflation and the improving trade balance. The central bank reaffirmed its dovish message, but it should be considered in a context of the direct government deficit financing program (= a local version of quantitative easing), which is quite sizable (around 4% of GDP). This is a new mechanism and it will affect the timing of additional rate cuts.

    Chart at a Glance: China – Private Investments Still Lagging

    Chart at a Glance: China – Private Investments Still Lagging

    Source: Bloomberg LP

    1The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.


    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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.