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  • Emerging Markets Debt Daily

    China Corporates - Under Pressure

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    November 17, 2020

    U.S. President Trump’s ban and local default headlines weigh on Chinese corporates. Poland and Hungary threaten to veto disbursements from the EU recovery fund.

    President Trump’s ban on investing in 31 Chinese companies with alleged military ties continues to weigh on the market sentiment this morning (but not on the currency), reflecting concerns that it might be followed by further last-minute restrictions before the president leaves office in January 2021. Local headlines about corporate defaults – including State Owned Enterprises (SOE) – add an extra layer of concerns. Allowing companies to default is not necessarily a bad sign, as it helps price discovery and improves transparency. In the case of SOEs, it can also reduce pressure on the government’s fiscal accounts. However, financial stability considerations are also important, which is why regulators are looking into this right now.

    The rule of law mechanism is back in focus in Central Europe. Earlier this week, Poland and Hungary threatened to veto the EU recovery fund (EUR750B) unless the European Commission removes the rule of law conditionality on the EU structural funds, which Poland and Hungary consider an interference into domestic affairs. Europe clearly does not think so, but the row might delay the recovery fund disbursements to Spain, Greece, Italy and Portugal, which were badly affected by the virus. Germany is trying to broker a deal, and we should hear more on this issue on Thursday. 

    Peru has got its third President within the past two weeks. The country continues to move down the “succession line”, following the surprising impeachment of President Vizcarra and the resignation of interim President Merino after six days in the office. The new interim president is Francisco Sagasti, who is relatively new in politics and usually associated with the technocratic/academic crowd. The market reaction has been positive – in part because the appointment can improve the chances of a moderate candidate in the 2021 presidential election.


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; 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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