13 May 2022
VanEck Blogs | Emerging Markets Debt Daily
Paradigm Lost?

China’s credit aggregates were so weak that they challenged authorities’ “drip” stimulus approach. Elsewhere in EM, a 50bps rate hike is a popular sequential choice among EM central bankers.

China Weak Credit, Growth Headwinds

An absolutely massive downside surprise in China’s latest credit aggregates is a reason why the “drip” stimulus approach is getting increasingly questioned as President Xi Jinping is preparing for his re-election (3rd term) later this year. One can reasonably argue that the targeted (“drip”) support is a more “grown-up” version of the policy stimulus – as opposed to “wall of liquidity” often practiced by Chinese authorities in the past (and by most developed markets (DM) after the global financial crisis of 2008). We think that this approach is generally justified by China’s north-of-200% leverage. However, today’s numbers strongly suggest that China’s near-term growth forecast (the 2022 consensus number was cut to 4.8%) risks moving even further away from the official target. So, we look forward to hearing more about additional policy initiatives (including monetary) that will prop up the economy, while keeping leverage “within reasonable range”. In the meantime, it is hard to see the depreciation pressures on the renminbi abating any time soon.

EM Rate Hikes

China’s policy direction is an opposite of most major emerging markets (EM), where a 50bps hike appears to be the “it policy rate” of the season. Mexico’s central bank did not disappoint yesterday, delivering an expected +50bps and sounding hawkish. The Peruvian central bank followed in its footsteps. And, the central bank of Serbia made a similar policy choice earlier in the day. Across the world, South Africa is now expected to step up rate hikes to 50bps next week, especially if headline inflation breaches the target range. Finally, Brazil is set to finish its tightening cycle with a “farewell” 50bps hike in the summer. There are exceptions, of course. Poland’s final headline inflation print for April was revised up to 12.4% year-on-year – and this means the central bank should have done at least +50bps x 2 instead of +75bps at its last rate-setting meeting. A slower pace of hikes might necessitate a more extensive tightening cycle.

Central Europe Culture 

Finally, as you know, we have been on a research trip in Central Europe during the past few days, and we would like to finish the week on a lighter note – with some less serious takeaways. We learned about Budapest’s very cute “uncle Karl” (a fat policeman statue) – tourists and locals like to rub his (copper?) belly for luck (see picture below). We saw a cylindrical “brutalism architecture” building in Bucharest (see picture below). And we also saw a dude in Warsaw wearing a live snake as a necklace (too scary to ask for a photo). Have a great weekend and stay tuned!

Chart at a Glance: Central Europe - More Than Policy Challenges

Chart at a Glance: Central Europe - More Than Policy Challenges

Source: Natalia Gurushina

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Natalia
Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income