Emerging Markets Debt Daily
China - Shadow Financing in CrosshairsNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJune 10, 2021
China continues to target shadow financing to lower the risk of asset bubbles. South Africa’s large current account surpluses provide strong fundamental support for the currency.
The continuing decline in China’s shadow lending (see chart below) is a signal that authorities are serious about asset bubbles and financial stability. This was the main reason why May’s total social financing (TSF) missed expectations. Meanwhile, the new yuan loans surprised to the upside and stayed within the multi-year seasonal range, signaling (1) that investment demand remains strong and (2) that authorities are not yet in the mood for “sharp policy turns” (which makes total sense, given the COVID resurgences and the vaccination ratios). The central bank’s governor echoed this sentiment, saying that monetary policy must remain stable, but as usual we would not exclude a possibility of additional policy fine-tuning, depending on the circumstances and the strength of headwinds/tailwinds.
South Africa has a lot of problems, but the external balance is not one of them. The current account surplus widened to 5% of GDP in Q1, beating expectations by a wide margin. A smaller income deficit and the improved terms of trade were the main drivers, helping to compensate for stronger import volumes as the economy continues to rebound from the COVID. Looking forward, the surpluses should be expected to moderate as the recovery continues, denting (but not necessarily fully eliminating) the fundamental support for the currency.
The announcement that Mexico’s Minister of Finance Arturo Herrera will be the next governor of the central bank should reinforce the market expectation of the dovish-leaning policy stance (despite higher inflation). Herrera is known for his conservative but also pro-growth views, and he is expected to be more aligned with President Lopez Obrador’s policy objectives. A big question, of course, is whether the new governor’s “social dimension” and “moral economics” will clash with inflation targeting. Only time will tell. Stay tuned!
Chart at a Glance: On-Going Contraction in China’s Shadow Financing
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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