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  • Emerging Markets Debt Daily

    China’s Stunning Credit Rebound

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

    China’s January credit rebound shows the efficacy of past policy moves, but also some structural deficiencies. Argentina’s surging inflation complicates President Mauricio Macri’s election agenda.

    China’s credit aggregates skyrocketed in January (see chart below), with new loans surging by CNY3,230B and total social financing1 by CNY4,640B. The increase reflected, in part, seasonal factors associated with the Chinese New Year, but also the impact of the 100bps reserve requirement ratio2 cut and the inaugural use of the targeted medium-term lending facility. On the upside, it appears that the past policy moves are bringing fruit and that there is less urgency to roll out additional “bazooka” stimulus (January’s core inflation dynamics point in the same direction). However, the impressive headline numbers also hide structural deficiencies, such as a large share of short-term debt in corporate lending and the return of shadow financing (the first monthly increase since February 2018), which is concerning as regards China’s growth model and the accumulation of macro imbalances.

    Argentina’s latest inflation prints suggest that the Macri government may have more problems on its hands than previously thought. Both headline and core inflation exceeded expectations by a wide margin in January, rising to 49.3% and 49.9% year-on-year, respectively. The acceleration was broad-based and it took place despite slowing domestic demand, the stable currency, and very high interest rates. One obvious risk here is that rising prices will continue to eat into real wages, undermining consumption and real gross domestic product growth, and leaving the government very little time to improve the outlook in the run up to the presidential elections.

    A stream of negative macro surprises in the U.S. continued this morning, with both industrial production and capacity utilization3 undershooting consensus big time in January. The University of Michigan survey for February fared better, but there was a sizable downside revision of inflation expectations (both short- and long-term). The dollar retraced some of the morning gains after the releases, as markets received more reasons to question the strength of the U.S.’ macroeconomic narrative.


    Chart at a Glance

    China Credit Aggregates

    Source: Bloomberg LP (note: aggregate financing numbers combine both new and old series)

    1Total social financing is a broad measure of credit and liquidity in the economy that includes off-balance sheet financing such as initial public offerings, loans from trust companies, and bond sales.

    2The reserve requirement ratio is a central bank regulation, employed by most of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial bank.

    3Capacity utilization measures the proportion of potential economic output that is actually realized.


    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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