Emerging Markets Debt Daily
China Gets a Booster ShotNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 09, 2021
China is sensitive to growth headwinds. The first line of defense is a blanket 50bps cut in the reserve requirements for banks and stronger credit expansion in June.
China’s preemptive cut in the reserve requirements for banks (RRR) was telegraphed in advance, but it was a blanket rather than targeted cut – hence an element of surprise. Estimates show that the move can free up to CNY1T in additional long-term liquidity (some of it to replace the maturing medium-term lending facility), and authorities hope that this will help to lower the funding costs in the real economy, especially for smaller and privately-owned companies.
The RRR cut announcement came on the same day as an upside surprise in June’s new yuan loans and total social financing. Two surprises in one day raise a valid question about a directional shift in China’s monetary policy. Well, first of all, the RRR cut was not massive – the reserve requirement for large state-owned banks will still be at 12% after the cut. Second, China had already unwound some of the stimulus and its real policy rate is now the highest in emerging markets (EM) (see chart below) – it almost looks like China “normalized” a bit too much and now needs to take a step back. Third, a sizable drop in June’s shadow financing suggests that authorities continue to move forward with structural changes and maintain tight regulations in some areas of the economy (real estate).Further policy adjustments cannot be excluded at this stage, and a lot will depend on the pace of vaccinations. The higher the share of the population that is fully vaccinated, the less the government would have to rely on movement restrictions to deal with the outbreaks (=less headwinds to growth). China still lags behind some major developed markets (DM) in this respect, so the near-term risks to domestic activity might be to the downside (note that today’s announcement is less than a week away from the Q2 GDP release).
China’s Real Policy Rate – Highest Among Major EMs
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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