IGM FX and Rates
27 Mar 2020
China Insight: Bond inflows pick up amid weak economy
Please click on the attached PDF for our CEEMEA & LatAm 2019 Outlook, which runs through the key external and country specific risks that we expect to impact the region in 2018, and their likely affects.
As we head in 2019, there has been a broad stabilisation in CEEMEA markets, aided by a number of central banks responding to currency weakness with rate hikes, a reduction in trade war risk and a perceived dovish turn from the Fed in response to signs that the US economy is peaking. However, the focus in 2019 will shift from the impact of Fed tightening to slowing global growth as the weak currency impact from 2018 will gradually become more pronounced in the economic activity and inflation trajectory of Emerging Markets next year.
On one hand, the prospect of a weaker USD should mean solid returns for EM assets, but there will be a fine line between renewed carry trade appeal and fear over the pace of growth in developed markets. The net effect of this will be a very cautious rally for Emerging Market local currency assets in 2019.
Thus, the key questions heading into 2019 are:
IGM Credit, IGM FX and Rates
By Tim Cheung 23 Mar 2020
China's activity growth data for February were much weaker than expected, suggesting there is a very good chance the Q1 GDP y/y will fall into negative territory. Among forecasts from major investment banks, the most pessimistic ones for China's Q1 growth y/y are now in the -7/-9% range instead of +2/+3% territory seen a month ago, while that for the 2020 full-year growth are in the +1/+3% area rather than +4/+5%. To avoid the economy worsening further in the aftermath of the COVID-19 outbreak, Beijing inevitably has to ramp up fiscal spending substantially over the rest of the year. Given the postponement of the National People’s Congress (NPC) meeting which was initially scheduled for early March, we so far have no official data on how much the government will spend in 2020. However, with the onshore CNY IRS curve steepening sharply recently (chart 1), we doubt the potential increase in government expenditure will be small. Meanwhile, we reckon most (if not all) of the extra spending will be financed by the issuance of special bonds, in particular, the long-term ones. As per chart 2, special bond issuance increased substantially in Jan and Feb, which may be setting a trend for most of the year.
Topics Industry News