Old Policies Might Backfire
May 16, 2022
Read Time 2 MIN
China’s domestic slowdown questions the policy stimulus direction.
China Growth Slowdown, Policy Response
China’s latest domestic activity indicators suggest that the near-term growth headwinds might be stronger than previously thought. April’s slowdown was broad-based, with the services and retail sales hit particularly hard by the zero-COVID policy (down by respective 6.1% and 11.1% year-on-year – see chart below). It is fair to assume that the situation should improve once the virus outbreak is over, but the longer it lasts, the wider the gap between the 2022 GDP growth (currently expected at 4.8%) and the official growth target (about 5.5%). Authorities continue to announce “drip” stimulus measures to boost activity – like cutting the mortgage rate floor for first-time home buyers by 20bps. However, the “big-picture” emphasis is still on supply-side measures, such as infrastructure investments. This approach served China well during the 2020 pandemic wave, but there are growing concerns that subdued consumption and the imbalanced recovery can lead to more lasting damage to China’s growth potential.
Central Europe’s Inflation Challenge
Another region where investors question a “more of the same” approach is Central Europe. Poland’s upside core inflation surprise (7.7% year-on-year in April) comes on the heels of an even bigger overshoot in headline inflation. Still, the central bank insists that its policies can only affect a small portion of inflation pressures, which are linked to domestic factors. Today’s core inflation print, however, suggests that global shocks are already having the secondary impact on domestic prices, and that it is too early to think about a slower pace of rate hikes.
Turkey’s Exchange Rate and External Deficits
Turkey also exemplifies policy prescriptions that prove counterproductive. The president’s fixation on a “stable” exchange rate – while freezing the policy rate at 14% despite annual inflation nearing 70% – blocks the adjustment of external imbalances. It is true that the widening of Turkey’s current account deficit (USD5.55B in March) is in part driven by global shocks – the country is among the most exposed to energy spillovers from the Russia/Ukraine war. However, multiple internal factors (including cheap government-sponsored credit) make the situation worse, creating a negative feedback loop that weights on the currency, which is now getting closer to the end-2021 lows against the U.S. dollar. Stay tuned!
China Retail Sales Testing COVID Lows
Source: Bloomberg LP
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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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Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.