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China Growth – Reboot and Rebalance

April 18, 2023

Read Time 2 MIN

China’s stronger than expected growth bodes well for many EMs – but does it also mean additional inflation risks down the road?

Global Growth Outlook

China’s stronger-than-expected Q1 GDP number (4.5% year-on-year) gave more credence to the “two-speed” global growth story, which creates more opportunities for emerging markets (EM) assets to perform well in the coming months. Even though the IMF spring meetings eased concerns about a recession in advanced economies, both the U.S. and the Eurozone are expected to expand by about 1% or so this year in real terms. Meanwhile, China’s Q1 GDP print suggests that both the consensus growth forecast for 2023 (5.3%) and the official growth target (about 5%) might be too conservative. The next question is which emerging markets are better positioned to benefit from a stronger rebound in China – and this is where China’s changing growth drivers come into play.

China Recovery

China’s Q1 recovery was led by consumption (see chart below), including post-reopening “revenge” spending on services and travel, among other things. A big upside surprise in March’s retail sales (up by 10.6% year-on-year) seconded this conclusion. This, in turn, gave rise to suggestions about the frontloaded recovery that might lose steam later in the year. “Revenge” spending is not going to last forever, of course, but there is also a possibility that housing can pick up the baton in H2 if the current real estate trends – which show clearer signs of recovery – continue. Further policy calibration can definitely help to boost property construction, as well as address such obvious weaknesses as private investments, which continued to lag well behind state-owned peers.

EM Spillovers From China

China’s recovery is now more “inward-looking”, limiting positive spillovers to EM manufacturing, but still offering support to services (especially tourism) and commodities. And if growth continues to surprise to the upside, we might see more concerns about potential inflation spillovers down the road, which can intervene with a super-supportive H2 base effect across EM. Other potential risks that might slow or temporarily disrupt the disinflation process in EM include Argentina’s mega-drought and a higher risk of El Nino (a 40% probability, according to a recent report from Deutsche Bank). Stay tuned!

Chart at a Glance: China Growth – Services Spring Back To Action

Chart at a Glance: China Growth - Services Spring Back To Action

Source: Bloomberg LP.

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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