Emerging Markets Debt Daily
China Growth – Glass Half Full?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 15, 2021
China’s Q2 growth slowdown was not as sharp as feared. The data flow, financial stability considerations and the level of funding costs will determine if more policy easing is required going forward.
China’s Q2 GDP and June’s domestic activity indicators signal that growth is indeed moderating, but the slowdown is not as sharp as feared. Given the COVID-related distortions, a sequential measure of growth (quarter-on-quarter) might be more appropriate to look at – and it beat expectations at 1.3%. There were some encouraging developments on the growth rebalancing front as well (in the form of stronger than expected June’s retail sales), albeit the consumption recovery is still lagging and growth remains driven by industry and external demand (exports). Anyway, the market looked quite content after the release – China’s major equity indices were up, and the renminbi traded stronger against the U.S. dollar.
So, was China’s recent “blanket” cut in the reserve requirement ratios (RRR) for banks justified, and, importantly, does China need to do more easing? On the one hand, it does not look like the recovery is in danger (it is “steadying” but not “faltering”). Further, the progress in vaccinations should give an extra boost to services closer to year-end. However, the high funding costs for privately owned and smaller companies is a major (structural) stumbling block, and authorities believe the RRR cut should help to bring them down. The moral hazard (corporate defaults)/financial stability considerations is another important layer. If China continues to fade its fiscal stimulus, we might see more support on the liquidity/monetary side. We will keep an eye on the upcoming Politburo meeting for more policy signals.
The consensus forecast for China’s 2021 growth had been quite stable. As regards the rest of the world, analysts are much more decisive when it comes to changing their growth projections. Among developed markets (DM), the U.K. had the largest upgrade in the past three months, while Japan’s 2021 GDP forecast was cut alongside regional emerging markets (EM) (see chart below). EMEA’s 2021 GDP is still being lifted up (cautiously), but LATAM is on a roll, with the region’s 2021 growth projection 1.21% higher than just three months ago. Stay tuned!
Charts at a Glance: EM Growth Revisions Go Both Ways
Source: VanEck Research; 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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