Emerging Markets Debt Daily
China’s Policies - Moving Targets?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 26, 2021
China is trying to balance more support for smaller privately owned companies that are still struggling with more regulation in “bubbly” sectors.
The latest developments suggest that China is implementing both “targeted” easing and “targeted” tightening; trying to balance support to small privately owned companies with more restrictions in “bubbly” sectors, such as property developers and online platforms. Examples of the former include City of Shanghai raising mortgage rates and Ministry of Housing and Urban-Rural Developments promising to step up supervision of property developers. As regards online platforms, regulators just banned Tencent from exclusive online music rights and tightened rules for online food delivery services.
China’s regulation drive in real estate is understandable, especially with the on-going liquidity crisis in Evergrande, China's second-largest property developer by sales, which is widely considered systemically important for the economy. It also comes on the heels of the continuing decline in shadow lending. The anti-trust push in the tech sector appears to have political connotations as well - most likely due to fears that tech giants might challenge the supremacy of the communist party. Authorities are not in the mood to back off yet, and the market is becoming uneasy about wider implications for the economy, which is one of the reasons behind today’s 322bps drop in the CSI 300 Index.1
The tech/real estate crackdown is taking place alongside more support for companies/sectors that are still struggling against headwinds created by insufficiently high vaccination rates and additional mobility restrictions. This was behind the central bank’s seemingly “blanket” cut in the reserve requirements for banks, which was mostly aimed at boosting loans for smaller and medium-size companies. Will China broaden this kind of support? July’s corporate default rates and the next batch of activity gauges (PMIs) will send important signals. Note that for now, authorities chose to keep all benchmark interest rates unchanged.
1The CSI 300 Index is comprised of the 300 largest and most liquid stocks in the Chinese A-share market.
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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