Concerns grow over China’s credit growth

Emerging Markets

Emerging markets briefing

As a whole, emerging equity markets outperformed developed markets during September. However, concerns appear to be growing over China’s credit-to-GDP gap, which has risen sharply, creating potential problems for the country’s financial sector.

  • The IMF added China’s yuan to its basket of reserve currencies
  • Russia’s key interest rate was cut from 10.5% to 10%
  • Brazil is predicted to meet its inflation target next year

Emerging equity markets generally performed better in September than their developed counterparts . During the month, Brazil’s central bank predicted that the country’s rate of inflation should meet its official target for the first time since 2009 next year, commenting, “Price development shows evidence that disinflation is under way”. The target rate of inflation is 4.5%, and the bank has cut its 2017 forecast to 4.4%. Brazil’s key interest rate currently stands at 14.25% , but hopes of monetary easing are starting to rise. The Bovespa Index rose by 0.8% over September.

China’s policymakers are likely to continue their strategy of meeting short-term GDP targets by using strong credit growth.

According to a survey undertaken by MNI , business sentiment in China rose during September to reach its highest level since August 2015, underpinned by strengthening confidence in the manufacturing sector and a rise in new orders. Elsewhere, the International Monetary Fund (IMF) added China’s yuan to its basket of reserve currencies. This “SDR” – or “special drawing rights” – basket already contains the pound, the US dollar, the euro, and the yen. This is the first time that a new currency has been added to the basket since the euro was adopted.

However, the Bank for International Settlements (BIS) believes that stresses in China’s banking sector are rising, citing the country’s credit-to-GDP gap, which rose to 30.1% in the first quarter of 2016. Meanwhile, credit ratings agency Fitch warned that China’s economic rebalancing has not yet resulted in a move away from dependency on rapid credit growth. Fitch believes that China’s policymakers are likely to continue their strategy of meeting short-term GDP targets by using strong credit growth – an approach that will increase the potential for asset-quality problems in the financial system. The Shanghai Composite Index fell by 2.6% during September.

Policymakers at Russia’s central bank voted to reduce its key interest rate from 10.5% to 10% at their September meeting. They cited a “noticeable decline” in inflation – Russia’s annualised rate of consumer price inflation fell from 7.2% in July to 6.6% in September – but emphasised that this slowdown was primarily caused by currency factors. In order to allow inflation to achieve a sustainable decline, therefore, policymakers expect to leave its key rate unchanged at 10% until the end of the year. Looking ahead, the Bank of Russia expects the annualised rate of inflation to reach its 4% target in late 2017. The Micex Index rose by 0.3% during September.