Asia-Pacific

China

Pullback in easing expectations overdone

The Loan Prime Rate (LPR) remained on hold for the 18th straight month today. And investors have recently pared back their expectations for monetary easing. But given growing economic strains, especially in the property sector, we still think the PBOC will cut policy rates before long.

20 October 2021

Pulling the plug; power rationing in China

Power rationing in China has raised concerns about metal supply. But perhaps less obvious is that power rationing will also negatively affect demand if manufacturing activity is curtailed. On balance, we think that the supply impact will dominate and support prices in the coming months, but we expect prices to fall back in 2022 as economic activity, particularly construction, in China continues to slow.

19 October 2021

Supply shortages take their toll

The supply shortages that have affected many DMs have also intensified in emerging economies over the past couple of months. The automotive sector has been hit hard by global semiconductor shortages, weighing on recoveries in Mexico, Czechia and Hungary in particular. More broadly, EM manufacturers are struggling to meet new orders, causing backlog of works to increase. Meanwhile, recent power shortages have weighed on recoveries in China, India and Brazil. As shortages continue, they are likely to not just weigh on growth, but also add to upward pressure to core inflation. That will probably keep central banks in Latin America and Central Europe in particular in tightening mode.

18 October 2021
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Lower valuations may not help EM equities outperform

We don’t think the low valuations of emerging market (EM) equity indices relative to those of developed markets (DMs) is reason to expect EM equities to outperform over the next couple of years.

China GDP (Q3), Activity & Spending (Sep.)

In q/q terms, official GDP growth slowed to a crawl last quarter. And our China Activity Proxy points to a sharp contraction. Although some of the recent weakness in services is now reversing, industry and construction appear on the cusp of a deeper downturn.

Energy price rally may spill over to other commodities

Most commodity prices increased this week. Optimism over electrification, which was a hot topic during LME Week, seemed to feed through into higher industrial metals prices. But the prices of energy commodities were the pick of the bunch. Brent crude rallied throughout the week and briefly breached $85 per barrel on Friday. OPEC’s monthly oil market report showed that output in September was still 390,000 barrels per day short of target. As prices rise, there are growing calls for higher OPEC production. But it seems doubtful that the group could raise output much faster, unless it abandons the current quota system. Meanwhile, a cold spell that has blown through China has compounded upward pressure on energy prices. That is in addition to the Chinese government allowing coal-fired power prices to rise by up to 20% from base levels from Friday. Looking to next week, China is set to publish its September activity and spending data and Q3 GDP on Monday. We suspect that China’s economy contracted in q/q terms. So far, commodity prices have largely shrugged off the slowdown in China’s economy. And we wouldn’t be that surprised if they continue to do so as currently elevated energy prices spill over to other commodity markets by substantially raising production costs of agriculturals and metals.

Property downturn deepens, triggering easing

Supply-side disruptions mean there is an unusual amount of uncertainty about China’s recent economic performance. But one thing that’s clear is that the property sector downturn has gathered pace in recent weeks. Policymakers have responded by allowing banks to step up mortgage lending. Other easing measures are likely to follow, including rate cuts. But limits on developer financing are here to stay.

China Consumer & Producer Prices (Sep.)

Producer price inflation reached a new high last month due to the surge in global coal prices. There are few signs that this is feeding through to higher output prices of consumer goods, however. The overall inflation outlook remains benign, with PPI inflation likely to drop back around the turn of the year and CPI inflation set to remain muted for the foreseeable future.

14 October 2021
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