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  • Emerging Markets Debt Daily

    Is China Deleveraging Back?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    March 10, 2019

    A sizable reduction in China’s February shadow financing is a welcome sign that authorities continue to pay attention to structural issues. Turkey’s sharper than expected Q4 contraction threatens the 2019 growth target and poses policy challenges for the central bank.

    The seasonality of China’s credit supply was on full display this weekend, with February’s numbers undershooting consensus by a wide margin and reversing January’s big upside surprise. An important factor behind the lower total social financingnumber was a sizable reduction in shadow financing (CNY356B)—a welcome development after January’s scare (see chart below), which shows that deleveraging is not quite dead yet. One reason why China’s credit growth gains more attention these days is the return of disinflation (check lower-than-expected February numbers), which pushes the nominal gross domestic product (GDP) growth down and worsens the country’s debt-to-GDP metrics. This may help to explain why the central bank’s governor Yi Gang sounded cautious this weekend when commenting about additional reserve requirementcuts (limited room) and loan provision to small companies (should be linked to reducing risk premium).

    The Turkish economy contracted at a sharper than expected rate in Q4 (-3% year-on-year)—the worst performance since the global financial crisis. Investments and household consumption looked particularly weak, raising a question mark about the government’s ability to meet its 2019 growth target of 2.3% (which underpins this year’s fiscal projections) and complicating the outlook for the local elections. Today’s release also poses challenges to the central bank, which may find itself under renewed pressure to ease despite elevated inflation.

    The election outcome in the province of Neuquen and the central bank’s decision to raise its policy rate by 600bps paved the way for this morning’s relief rally in Argentina. The incumbent’s re-election in Neuquen eliminated a major near-term political risk (which would be the election of former president Cristina Kirchner’s ally). The Leliqrate hike helped to curb the peso’s depreciation for now, but the reversal of easing (to the tune of 1400bps since mid-February) creates additional headwinds to growth—and a big headache for President Mauricio Macri in his bid to get re-elected later this year.

    Chart at a Glance

    China Shadow Banking Social Financing

    Source: Bloomberg LP

    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.
    3Leliq notes are 7-day liquidity bills whose interest rate serves as the benchmark rate in Argentina.

    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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