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  • Emerging Markets Debt Daily

    China Stands Firm on Credit

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 11, 2019

    China’s October credit aggregates looked alarming, but the decline reflected seasonality and deliberate policy choices. Mexico’s industrial activity remains “under water.”

    I might be the only economist out there who is not panicking (yet) about China’s latest credit numbers—the reason is on the chart below. China’s monthly credit aggregates (including new loans) are notoriously volatile, with strong seasonality—and this October was no exception. Importantly, even though the Chinese economy is facing multiple headwinds, the decline in shadow lending and new household lending was due to deliberate policy choices (tighter mortgage regulations starting from October 8) to minimize asset bubbles and reduce riskier sources of financing. Multi-month moving averages paint a less alarming picture, but nevertheless support an argument that the economy (especially the private sector) needs more policy support. A massive spike in the price of pork is a challenge for the central bank—which, I am sure, keeps an eye on potential second-round effects—but all other price indicators show that deflation is a bigger risk right now. So, while we are happy that authorities are not flooding the system with credit, we expect to see more stimulus (most likely in the “drip” format) in the coming months.    

    Mexico’s industrial activity remains “under water,” and this factor will affect the central bank’s policy decision later this week. Yearly industrial production contracted by 2.04% in October (seasonally-adjusted), with construction activity hit the most, due to the impact of binding fiscal constraints on civil engineering projects. Manufacturing is getting some benefits from a more competitive exchange rate, but it is not a game-changer yet. The market currently prices in 31bps of rate cuts for this week. The softening growth outlook (the consensus real gross domestic product (GDP) forecast for 2019 had been slashed to a mere 0.3%) suggests that the pace of easing might accelerate in the coming months.

    India’s latest industrial production (IP) print shows that Moody’s outlook downgrade on growth risks was fully justified. The IP growth surprised significantly to the downside in September (-4.3% year-on-year), reflecting a big drop in capital goods and consumer durables. Weak global demand is a contributing factor. However, there are growing concerns that the monetary transmission mechanism is not working as intended, reducing the efficacy of policy rate cuts.  

    Chart at a Glance: China Credit Aggregates—Pay Attention to Seasonality

    China CNY Monthly New Loan

    Source: Bloomberg LP

    Note: The red line shows this year’s new yuan loans relative to the last eight years’ monthly highs, lows and averages..


    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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