Constituent policy

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China has announced another supply-side stimulus package as consensus continues to cut growth forecasts for 2022.

Slowing growth in China, policy response

China’s stimulus policy is in the news these days – and the chart below shows why. China’s GDP forecast for 2022 continues to drift further and further away from the official growth target, and the speed of growth downgrades is accelerating despite some encouraging developments on the COVID front. So, is the $120 billion increase in credit quota for China’s political banks – announced yesterday – a game-changer or not? First of all, the package aims to support infrastructure investment – so it looks more like the same (= demand is still ‘orphaned’). Second, it’s not huge in size – well below, for example, the loss of local government revenue from land sales estimated by sell-side analysts. So what we have here is another supply-side “drip stimulus” measure. It will definitely help at the margin, but it remains to be seen whether its impact on GDP growth will not be offset by weak consumption.

New members of the euro zone

China is not the only independent engine of global growth, which keeps investors on their toes. The Eurozone is often referred to as the world’s “weakest link” due to deteriorating growth prospects and a lack of political (and strategic) cohesion. But, apparently, some “wannabes” still want to join the club. Croatia is now expected to join the monetary union in January 2023, and the focus is now on the Croatian Kuna/EUR conversion rate and potential rating upgrades. Membership also means that Croatia to drop from JP Morgan’s Emerging Markets Sovereign Bond Index (EMBIG), although its low weight (0.52%) means that the relative weights of the other constituents will not change much.

Ukrainian War and Political Challenges

The last big political decision of the day is The huge rate hike in Ukraine, which took the key rate from 10% to 25%. The size was truly surprising, with the central bank pointing to rising inflation and larger foreign exchange interventions (the currency is currently pegged to the US dollar) as the main reasons for reactivating the policy tool so dramatically. This is a strong signal for sure – but the problem is that international aid only covers part of Ukraine’s budget deficit, and the country continues to rely on monetary financing as Plan B (which stimulates inflation). Stay tuned!

Chart at a glance: China’s 2022 growth forecast continues to stray from target

Source: Bloomberg LP