Morning Bid China data flood amidst deepening EM turmoil

Morning Bid China data flood amidst deepening EM turmoil

Decoding the Storm: China’s Economic Challenges Leave Asian Markets Bracing for Impact

Asian Markets

Aug 15 (ANBLE) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

As waves of volatility crashed over emerging markets on Monday, most notably in Argentina and Russia, the focus on Tuesday once again returns to the root of much of the deeper anxiety and uncertainty around EM: China.

Investment, retail sales, unemployment, and industrial production figures for July will be released against a worrisome backdrop of deflation, slowing growth, market weakness, and growing contagion risks from an imploding property sector.

If recent Chinese economic numbers are any guide, the latest batch on Tuesday is liable to disappoint. ANBLE polls of ANBLEs suggest annual growth in investment and industrial output will remain steady from June’s levels, while retail sales growth will rise to 4.5% from 3.1%.

Authorities have so far resisted the growing clamor for large-scale fiscal or monetary stimulus. One of the reasons is the currency – it is already extremely weak and investors are shunning Chinese assets. Beijing will not want to add fuel to either fire.

The offshore yuan slumped on Monday to its lowest level this year, approaching the 7.30 per dollar mark, and the yuan’s official onshore exchange rate is the weakest in a month.

Tuesday’s data dump comes a day before the central bank delivers its latest monthly monetary policy decision. A ANBLE survey of ANBLEs says rates on the bank’s medium-term policy loans will be left unchanged, although another round of notably weak economic indicators could shift the dial.

Some investors are slashing their exposure to China. Regulatory filings show that some major U.S.-based hedge funds cut their holdings of Chinese companies in the second quarter.

China’s blue chip CSI 300 index slipped 0.7% on Monday, following Friday’s 2.3% slide – the biggest fall since October – contributing to weakness across the continent and the EM complex.

MSCI’s Emerging Market and Asia ex-Japan indices both fell 1.3% on Monday, following 1% falls on Friday. With the U.S. dollar and U.S. Treasury yields marching higher, global financial conditions are tightening, and there doesn’t appear to be any respite for emerging markets on the immediate horizon.

China’s Economic Woes Cast a Dark Shadow

The Asian markets are bracing themselves for another turbulent day as volatility continues to rattle emerging markets across the world. However, the real storm center lies in China. The economic challenges and uncertainties plaguing the world’s second-largest economy are causing deep anxiety and apprehension among investors and policymakers.

China’s upcoming release of investment, retail sales, unemployment, and industrial production figures for July only add to the prevailing pessimism. With deflation, slowing growth, market weakness, and the imminent implosion of the property sector, there are grave concerns for the health of Asia’s economy.

Moreover, if recent economic indicators are any indication, the data to be released is likely to disappoint. Analysts predict that despite remaining steady, annual growth in investment and industrial output will not meet optimistic expectations. On the bright side, retail sales may see growth rise to 4.5% from the previous month’s 3.1%.

Resisting the Temptation of Rapid Fixes

As China faces mounting pressure for fiscal or monetary stimulus measures to counter its economic challenges, authorities have, thus far, chosen to resist these calls. One of the reasons for their caution is the weakened state of the currency and the resulting aversion of investors toward Chinese assets. Adding any stimulus may exacerbate the situation, potentially leading to greater instability.

The offshore yuan, for instance, experienced a significant slump on Monday, reaching its lowest level this year and approaching the critical 7.30 per dollar mark. Meanwhile, the onshore exchange rate for the yuan sits at its weakest level in a month. This continuous downward slide in the currency’s value further compounds concerns about China’s economic outlook.

The Central Bank’s Monetary Policy Decision Looms Large

Tuesday’s data release precedes China’s central bank’s latest monetary policy decision, which is scheduled for the following day. Currently, experts predict that rates on the bank’s medium-term policy loans will remain unchanged. However, if the economic data fails to improve significantly, the central bank might have to reconsider its stance.

Investor Sentiment: Slashing Exposures to China

In response to the mounting uncertainties surrounding China’s economy, some significant U.S.-based hedge funds have been slashing their exposure to Chinese companies. Regulatory filings indicate a reduction in holdings during the second quarter, as investors seek safer havens for their capital.

Ripple Effects: Asian and Emerging Markets Feel the Strain

The impact of China’s economic struggles is not confined to its own borders but reverberates across Asia and emerging markets worldwide. Monday’s decline in the CSI 300 index, China’s main blue-chip index, fueled further weakness on the continent and within the emerging market complex.

MSCI’s Emerging Market and Asia ex-Japan indices also experienced significant falls, dropping 1.3% and 1% respectively on Monday. With the U.S. dollar and U.S. Treasury yields strengthening, global financial conditions are tightening. As a result, immediate relief seems unlikely for emerging markets in the near future.

Key Developments on the Horizon

To gain a clearer understanding of where the markets are heading, investors are keenly watching several key developments unfolding on Tuesday:

  • China retail sales, unemployment, investment, and industrial production data for July
  • Release of the Reserve Bank of Australia’s meeting minutes
  • Japan’s Q2 GDP growth figures

The outcome of these events carries significant weight in shaping market sentiments and may either ease or exacerbate the current economic uncertainties across Asia and emerging markets. As global financial conditions tighten, the coming days will prove critical for understanding the trajectory of these economies.