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  • Emerging Markets Debt Daily

    Pause in China Credit Expansion

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    May 09, 2019

    A sizable moderation in China’s credit aggregates may signal policy fine-tuning. The market remains skeptical about the piecemeal policy approach of the Turkish central bank.

    A sizable moderation in China’s monetary and credit aggregates did not go unnoticed by the market
    . Aggregate financing and new yuan loans surprised to the downside in April, falling to CNY1,360B and CNY1,020B, respectively. One possible interpretation is policy fine-tuning after earlier upside surprises in domestic activity, albeit this week’s targeted reserve requirement cut shows that the “drip” stimulus remains in place. The activity data flow will remain important going forward, but it is a good sign that authorities chose not to embark on a massive credit spree—especially as regards shadow financing (see chart below), which would be a structural step back.

    There is an overbearing sense of déjà vu in Turkey this morning after the central bank attempted to boost the currency by suspending its 1-week repo auctions. The move pushed the funding rate higher (by 150bps to 25.5%), but did little to address a more fundamental problem of the economic policy’s deficiency. This explains why the Turkish lira continues to underperform in the morning trade, and why Turkish rates and stocks are also in the red. The market clearly does not appreciate the central bank’s piecemeal approach—such as today’s meek 100bps increase in the reserve requirements for currency liabilities. Policy miracles do happen (even in Turkey)—but probably not before the Istanbul elections are re-run.

    A tiny downside surprise in Mexico’s April inflation will not be a game-changer for the central bank. The reason is that both core and headline yearly inflation moved higher—actually a lot higher—reaching 3.87% and 4.41%, respectively. As far as we are concerned, Mexico’s monetary authorities have plenty of reasons to keep the real benchmark rate high—the impact of the government’s inefficient policies on public finances is one of them. Deputy Portfolio Manager David Austerweil wrote a great piece on the subject (Mexico: AMLO Unbound).

    Chart at a Glance

    China Shadow Banking

    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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