Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    China Appreciation – Too Much Of A Good Thing?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    May 27, 2021

    We've got a bunch of developments this morning pertaining to key storylines in EM.

    China's exchange rate policy and EMFX: The rembinbi is trading at the strongest level against the U.S. Dollar since mid-2018 (see chart below), buoyed by the post-pandemic growth rebound, the widening interest rate differentials with the U.S., and the index-inclusion inflows. However, the one-way appreciation trade might be too much of a good thing for the central bank (PBoC). We are not talking about a major regime shift, but there are definitely some policy tweaks. At its latest meeting with market participants, the PBoC clearly emphasized that two-way FX fluctuations are the norm. The PBoC also raised the offshore borrowing limits for some banks recently. China's exchange rate policy is closely watched by the EM investment community due to the renminbi's stronger correlations with the rest of EMFX.

    EM "hawk talk"/"taper talk": Polish local rates got spooked by the central bank's lower than expected auction intake, which led to suggestions that the policy taper might already be on the cards. The central bank's governor indicated recently than the taper would happen before a rate hike, which the market does not see until much later this year. But the unequivocal hawkish guidance from Poland's regional neighbors (Hungary, the Czech Republic) puts monetary authorities in the spotlight.

    Global inflation and food prices: The spike in global food prices worsens the inflation optics in many EMs, creating policy challenges for central banks. A potential upside risk might come from an unexpected source – the EU sanctions on Belarus (following the forced landing of the Ryanair flight). The sanctions might include restrictions on Belarussian imports. But Belarus is the home of one of the largest potash producers in the world (Belaruskali) – hence concerns about the impact on fertilizers and agricultural prices down the road.

    China’s Renminbi – Strongest in Years


    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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.  This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.  Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.  Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.  Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest.  As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.  Diversification does not ensure a profit or protect against a loss in a declining market.  Past performance is no guarantee of future performance.

  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

    Explore My Insights