Igor Kutyaev
China’s activity gauges rebounded strongly in January. What are the implications for China’s growth outlook and EM asset prices?
China Growth Outlook
China’s rebound, which has boosted emerging markets (EM) asset prices, is real, and it is led by consumption – these are the main takeaways from the latest set of domestic activity gauges (Purchasing Managers Indices1). Both the manufacturing and the services PMIs moved back to expansion zone in January (respectively, 50.1 and 54.4 – see chart below), paving the way for further 2023 growth upgrades (currently 5.1%, according to the Bloomberg consensus forecast). Details show that China’s external environment remains challenging – the new export orders PMI is still contractionary (46.1) – and that small privately-owned companies are still struggling (47.2). These are good reasons to keep stimulus flowing for now. A sharp improvement in the services PMI (by nearly 13 points) is, however, an encouraging signal for those of us who have been complaining about China’s unbalanced growth since the onset of the pandemic. This is also a reason why the consensus sees higher inflation pressures in China down the road, expecting some policy tightening in the second half of the year.
China Rebound and EM
The market (both bonds and equities) has been anticipating improvements in China’s activity indicators for some time now – given the U-turn in the housing sector policies and the removal of COVID restrictions. An important question now is what China’s growth rebound means for the rest of EM, which has been plagued by higher inflation and rising interest rates for most of 2022 but had a very good start to the year (so far). The TTC approach – China’s impact on trade (T), tourism (T), and commodity prices (C) – gives us a broad idea where to look for potential winners in 2023 (both in EM Asia and beyond). Thailand, South Korea, and Indonesia are definitely on the list – as are commodity exporters (Chile).
Disinflation and Rate Cuts
It is not entirely clear, though, how China’s reopening will affect the pace of global disinflation and various central banks’ ability to cut rates in the coming months. Market expectations continue to price in H2 rate cuts across major EMs and in the U.S., setting a potentially positive stage for lower interest rates. But China-related growth tailwinds, as well as a new inflationary impulse, can potentially thwart these plans, leading to a longer pause rather than outright easing. If the U.S. Federal Reserve falls into this category, the market might become more discriminating in its assessment of the 2023 prospects for EM. Stay tuned!
Chart at a Glance: China Activity Gauges – A Nice Rebound
Source: Bloomberg LP.
1 We believe PMIs are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, we believe the manufacturing PMI is the number to watch for cyclicality.
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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