China supplants US and Fed as biggest risk for emerging markets

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(Bloomberg) – Emerging market investors are about to find out if there is more to worry about in China than just the Evergrande debt crisis.

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Chinese-made official and private gauges are expected on Thursday, with expectations they will add to evidence of skyrocketing growth. Concerns about the slowdown in the world’s second-largest economy have hampered developing country currencies and stocks in recent weeks, wiping out gains sparked by the U.S. Federal Reserve’s assurance of a calibrated cut in its stimulus measures.

China has now become their biggest risk. While Evergrande has raised fears of a slowdown in the housing market, investors are even more concerned that the wider economy is stalled due to virus restrictions and cuts in consumer spending. Some seek to diversify into markets less dependent on Chinese growth, such as India and Egypt.

“The risks of contagion and further downturn in the property sector are real,” strategists at Goldman Sachs, led by London-based Kamakshya Trivedi, wrote in a note last week. “However, for the rest of emerging markets, what matters most is the negative impact on Chinese growth, and by extension commodity prices, and whether policymakers step in to offset these downside risks . “

Stocks and currency volatility in sync as Fed and China risk sets in

This week’s Chinese data will also serve as a barometer of demand for commodities such as oil and copper, on which countries exporting from Angola to Peru depend to boost their own growth.

The Caixin gauge of Chinese factory activity showed a contraction for August, the first reading below 50 since April 2020. The official measurement of manufacturing has declined for five consecutive months. Retail sales, industrial production and investment all slowed, confirming the deceleration.

Meanwhile, Evergrande is turning into a cliffhanger, with another payment due this week as part of the $ 669 million bond interest due until the end of this year. Whatever the immediate outcome, working on the leverage incurred in a slowing real estate market can be complicated and take some time, according to Goldman strategists.

The Chinese economy will now grow at a slower rate than expected over the years through 2023, according to Bank of America Corp. It lowered its forecast for 2022 to 5.3% from a previous estimate of 6.2%.

Contagion contained

Some investors are trying to get past the Evergrande crisis amid growing optimism that the Chinese government will step in at some point and prevent wider contagion.

“The magnitude of Evergrande’s fallout takes center stage, but Chinese state support for its operations as opposed to its listed securities should allay some of the worst-case fears,” said Hasnain Malik, chief executive. from Dubai-based research to Tellimer Research.

Concerns about China come after a respite from the Fed, which said it was set to cut the stimulus but kept the door open to extend it if necessary. President Jerome Powell also pointed out that the process would not offer a direct signal on the timing of lift rates.

“The Fed’s message was one of accommodative policy and continued market support if needed, which is good for risky assets,” said Todd Schubert, head of fixed income research at Bank of Singapore Ltd.

Bets on diversification

Those who think China’s problems won’t be catastrophic for emerging markets are betting that this leaves room for some smaller countries to start outperforming.

Emerging economies with high real interest rates are better prepared for a world where the United States is tightening its policies and China slowing down, according to Tellimer’s Malik. Markets like Egypt, Ghana, Indonesia, Vietnam and the United Arab Emirates look promising, he said.

The Bank of Singapore, while continuing to buy BB and BBB stocks in the Chinese real estate sector, is looking for bargains in Indonesia and India in case a contagion-induced sell-off materializes.

“Indonesia and India are the biggest Asian credits that remain diversification options away from China,” Schubert said.

Here are the events and data to watch this week:

  • The official China and Caixin PMIs for September are expected to “improve from disappointing readings last month,” Bloomberg Economics said in a report.

    • Yet the country’s economic recovery will remain under pressure from the risks of small-scale Covid-19 epidemics, tighter regulations on the tech-to-real estate sectors, and uncertainty surrounding the debt crisis. ‘Evergrande

  • Colombia is set to join its Latin American peers with its first rate hike in five years on Thursday after inflation accelerated beyond its target in August

  • Banco de Mexico will likely hike rates for a third consecutive meeting on Thursday after inflation surged in mid-month

  • In Brazil, Tuesday’s minutes of last week’s central bank meeting will come under scrutiny after policymakers pledged another one percentage point hike next month for contain price shocks. The central bank launched the world’s most aggressive tightening cycle this year, increasing borrowing costs by 425 basis points since March, with limited impact on prices

  • The Bank of Thailand’s rate decision on Wednesday will be closely watched, after the previous August meeting saw a split vote, with dissidents calling for a cut as growth risks persist

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