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  • Emerging Markets Debt Daily

    China – Back to Policy Easing?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 07, 2021

    China’s State Council suggests lowering the reserve requirements to support the recovery. The IMF calls for urgent action to address the dangers of the two-track recovery and prevent some countries from falling behind.

    Wait… What? Well, the latest activity gauges (especially services) were weak enough for the State Council to suggest lowering the reserve requirements for banks (RRR) and freeing more credit via this channel. It remains to be seen whether this recommendation will be accepted (the previous one was not) – but there are good reasons to believe that the “no sharp policy turns” approach should hold in either direction. The market currently prices in about 50bps of rate hikes in China over the next 12 months (including 36bps in 6 months), which now might look excessive. Shorter-duration government bonds can benefit from downward adjustment in expectations. 

    China’s contemplating a step back on the policy front - while several other emerging markets (EM) are busy hiking - is actually in line with the EM policy divergence narrative, which we discussed yesterday. The pace of vaccinations is a major differentiator here, so a lot will depend on countries’ ability to prop up the recovery (without completely destroying key macroeconomic metrics). China’s pandemic-related support was sizable, but the overall package was smaller (as a percentage of GDP) than in major developed markets (DM). So, arguably, there is room to do more – especially on a targeted basis.

    The two-track post-pandemic recovery and divergence will be among the issues discussed at the gathering of G20 finance ministers and central bank governors in Venice this week. In its latest blog, the IMF noted that “a deepening divergence in economic fortunes” requires urgent action to prevent more countries from falling behind. Vaccine-sharing is one such initiative – the IMF’s USD50B plan to deal with this issue is worth noting. The IMF also said that they are exploring new facilities, including a “vaccine window” facility to support the financing of vaccination programs in lower-income countries and a Resilience and Sustainability Fund (RST). Finally, the IMF once again mentioned that lower-income countries with unsustainable debt burdens “should also seek early action for debt resolution” – so we’re keep our eyes open.

  • 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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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