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  • Emerging Markets Debt Daily

    China Slowdown – Policy or Trade War?

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 14, 2019

    China’s domestic activity weakened more than expected in October, but deliberate policies are part of the explanation. Turkey’s industrial production growth turned positive, calling for policy calibration.

    China’s domestic activity looked unequivocally weak in October, but the trade war uncertainty was only one part of the story. The slowdown in many sectors appears to policy-driven, including tighter real estate and environmental regulations in September and October, shadow deleveraging and the tightening of fiscal discipline on state-owned companies and local governments. The near-term pain is inevitable, but this can lead to better medium-term structural outcomes. Looking forward, we expect to see more counter cyclical support—especially as regards private companies—but most likely in the “drip” format. Recent reports that a government-linked think tank sees real gross domestic product (GDP) growth falling below 6% in 2020 points in the same direction.

    Turkey’s industrial production (IP) showed a big improvement in September, posting the first positive growth rate (3.4% year-on-year) since August 2018 (see chart below). Manufacturing did really well—a reflection of a major policy stimulus (both fiscal and monetary). With IP growth jumping back to positive territory, policy accommodation might need to get calibrated—especially as headline inflation will climb higher in the coming months. Turkey’s fiscal space already looks constrained (budget deficit is expected to widen to 3.7-4.0% of GDP in 2019), and additional loosening might worsen the existing macro imbalances.

    The Chilean central bank tried to save the day—and the currency—by offering U.S. dollar liquidity in the form of FX swaps (USD4B per week). The move was described as “almost intervention”—Chile simply does not have enough reserves for direct currency operations—but the market remains unconvinced, and the peso weakened further this morning (down by 106bps as of 9:18am ET, according to Bloomberg LP). Meanwhile, the administration is still largely in denial, calling for “a national agreement on peace”, while turning a blind eye to reasons behind the protests.

    Chart at a Glance: Turkey Industrial Production Leaps Into Positive Territory

    Turkey Industrial Production Leaps Into Positive Territory

    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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