Emerging Markets Debt Daily
Peak Growth or Peak Concerns?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 21, 2021
China’s financial stability concerns are back in headlines, but the near-term growth outlook remains unfazed.
“Peak growth” and “peak optimism” storylines appear to be “the flavor of the month”, so any development that can confirm or challenge this view is closely watched – especially when it affects two major global growth drivers, the U.S. and China. The next week’s meeting of the U.S. Federal Reserve is a must-watch as regards monetary policy guidance (the Fed Fund Futures place the first rate hike 20-22 months from now). On the fiscal front, there is a great deal of uncertainty ahead of a Senate vote on the bipartisan infrastructure bill.
China’s growth outlook looks solid – there were no changes in the 2021 consensus forecast as of this morning – but the latest twist in the Evergrande saga (several Hong Kong banks halting some Evergrande mortgages) gave rise to another round of concerns about contagion and financial stability. The market fallout from the company’s seemingly never-ending liquidity crisis is limited for now, with China’s major equity indices and the currency being up in today’s trade. Government bond yields were mostly tighter, as should be expected due to their “safer haven” status.
China’s financial stability concerns are not new – a big spike in corporate/SOE1defaults (see chart below) rattled the market earlier this year. There were fewer defaults in the past couple of months (according to Bloomberg LP), but many analysts worry the drop might be temporary because (a) there were no material changes in the government’s approach to the public sector deleveraging, and (b) property developers have big presence on the offshore bond market. This is the reason why the Evergrande story demands full attention, so stay tuned.
Charts at a Glance: China Corporate Defaults – Which Way to Go?
Source: Bloomberg LP
1State-owned enterprise (SOE) – A legal entity that is created by a government in order to partake in commercial activities on the government's behalf.
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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