27 July 2021
VanEck Blogs | Emerging Markets Debt Daily
China Contagion vs EM Policy Breakthroughs

China’s sell off continued this morning, but the newsflow in other EM was more encouraging. Which one will prevail?

China contagion concerns dominate this morning, following another big drop in the CSI 300 equity indexand the fact that China’s government bonds sold off (yields widened) in unison with equities (see chart below) instead of acting as a “safe haven” asset. Against this backdrop, the upcoming release of China’s activity gauges (PMIs) would be of utmost importance because of their potential to reinforce or undermine China’s 2021 growth story. The consensus forecast for 2021 GDP growth is still unchanged at 8.5%, despite tighter regulations in real estate and the tech sectors, and new mobility restrictions/virus outbreaks. Weaker than expected PMIs could become the proverbial straw that broke the camel’s back. 

The China daily newsflow contrasts with the rest of emerging markets (EM), where we see more evidence of orthodox policies in actionHungary’s central bank delivered a hawkish surprise this morning, raising its benchmark rate by more than expected in an attempt to keep inflation pressures under control. This is the second consecutive rate hike, and central bank officials made it very clear that their policies have to be proactive in order to bring annual inflation from >5% back to the 3% target. 

Across the globe, South Africa’s public sector unions agreed to the government’s wage increase proposal that was already budgeted. This is very good news, given that the recent deadly riots led to the extension of fiscal support.  We watch South Africa’s developments with interest because the riots opened the door for political changes - especially as regards the balance of forces inside the ANC and between the ANC and other political actors. Moving away from the ANC infighting and improving South Africa’s fiscal and growth trajectories would be a real game-changer (both for equities and bonds). Stay tuned!

Charts at a Glance: China Government Bonds Feeling the Tech Rout’s Heat

Charts at a Glance: China Government Bonds Feeling the Tech Rout’s Heat

Source: Bloomberg LP

1The CSI 300 Index is comprised of the 300 largest and most liquid stocks in the Chinese A-share market.


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Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy