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  • Emerging Markets Debt Daily

    China Stabilizing Though Headwinds Linger

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 31, 2019

    China’s manufacturing gauge showed a marginal improvement in July, but small companies remained under pressure. Mexico’s stagnating economic growth should encourage the central bank’s doves.

    Our main takeaway from China’s official manufacturing surveys is that the marginal improvement in July was driven by state-owned companies, while the private sector remained under pressure. The persistent weakness of small companies’ Purchasing Managers Index (PMI) is disappointing (see chart below). So is the fact that their funding costs started to grind higher again—despite the People's Bank of China's (PBoC’s) declarations/demands that bank branches should lend more. Anecdotal evidence suggests that demand for loans is there, but disconnect between potential small business borrowers and the money persists, creating a headwind for growth. So, while we think that the Politburo’s decision to stick to its “drip” stimulus policy (as opposed to “bazooka”) was appropriate, it is hard to see how China’s private sector will progress without meaningful and innovative structural changes in the banking sector.

    The good news is that Mexico managed to dodge recession in Q2. The bad news is that the yearly growth was the weakest since the global financial crisis, with the economy expanding by mere 0.14% year-on-year in seasonally-adjusted terms. Stagnation will no doubt encourage the central bank’s doves to start policy easing in August—sticky core inflation notwithstanding. The central bank’s thinking appears to be shifting towards a dual mandate, despite the fact that officially it still targets inflation.

    An unexpected spike in Poland’s headline inflation (from 2.6% year-on-year in June to 2.9% in July) raised a question mark over the central bank’s relaxed monetary policy stance. Details show that the increase was mostly due to higher food prices, which are (rightly) treated as transitory. Core inflation was on the increase lately, but it remains well within the target band, and this suggests to us that local hawks will have to remain in the shadows for now.

    Chart at a Glance: China’s Small Companies Activity Gauge Is Well in Contraction Zone

    China’s Small Companies Activity Gauge Is Well in Contraction Zone

    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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