Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
July 10, 2020
China’s credit continued to expand in June, confirming that the stimulus is bringing results. Upside inflation surprises in EM continue to add up, but price pressures might turn short-lived.
China’s latest credit aggregates confirmed that that the policy stimulus is working as intended. New yuan loans went up (as expected), and the improvement was fairly broad-based. Both household and corporate loans were higher, and a pickup in medium and long-term corporate loans was particularly encouraging. Further details reveal, however, that the recovery remains uneven. For example, stronger household loans reflected an appetite for real estate, while short-term consumer credit continued to lag. Another structurally questionable development is the on-going increase in shadow financing (positive for the fourth month in a row—see chart below), as authorities are looking for ways to boost lending to smaller and privately-owned companies. This leads us to believe that policy bias will remain accommodative despite the recent hawkish comments from thePeople's Bank of China (PBoC). Importantly, the PBoC has enough room to continue the drip stimulus—just look at the expansion of its balance sheet relative to major central banks in developed markets (DM).
We’ve got a bunch of inflation releases in emerging markets (EM) this morning (Czech Republic, Romania and Brazil). They all edged up in June, adding to the overall number of upside surprises (9 out of 15 countries so far in June). COVID-related pressures and disruptions should be treated with caution though. We are definitely seeing higher demand for foods and other basic goods, as well as some logistical issues on the supply side. But it is not clear whether these pressures will be sustained in the longer-term, as negative output gaps and weak aggregate demand will be pushing in the opposite direction. Still, higher inflation can pose near-term policy challenges, which explains why the market thinks we are getting closer to the end of the rate cutting cycle in EM.
Continuing the COVID disruptions theme, Russia’s current account surplus dropped to a measly USD600M in Q2 2020 (from USD21B in Q1 2020). The unusually low number reflected a big decline in export volumes, as well as lower commodity prices—so the shock might prove temporary. Today’s release notwithstanding, Russia has an enviable combination of very high international reserves and a very low debt-to-GDP ratio. So, a single quarter drop in the current account surplus should not be a big deal.
Chart at a Glance: China Credit – New Loans Are Up And So Is Shadow Financing
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
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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