The second cut in China’s interest rates in three months reveals key elements in Beijing’s thinking as it tries to reconcile an economic policy agenda beset with conflicting priorities, analysts said on Monday.

The task before China requires some delicate manoeuvres. It aims to wean the country off an extraordinary debt binge (see Martin Wolf ) while keeping GDP growth fairly robust. It hopes to combat disinflationary pressures while preventing the renminbi from sliding too sharply against the US dollar. It wants to curb a dangerous slump in industrial profits without resorting to another round of investment pump-priming. It needs to keep domestic liquidity levels buoyant in spite of a surge in capital flight.  Read more

Fears over “original sin” are once again stalking emerging markets (EM). As the US dollar surges against most EM currencies, a multi-year EM binge on US dollar debt is morphing into an inevitable hangover.

As the chart below shows, the international borrowings of many developing countries have vaulted higher since the 2008 financial crisis. A significant portion of these debts are in US dollars, setting up scenarios for “original sin” – in which the dollar debt servicing requirements far exceed borrowers’ direct ability to generate dollar revenues. Read more

China faces a monetary policy “wall of worry” as its economy slips towards a deflationary spiral driven by structural forces that are simultaneously dragging prices lower and depressing economic growth, analysts said on Tuesday.

The important insight, the analysts said, behind a decline in consumer price inflation (CPI) to a five year low of 0.8 per cent in January was that it was caused not by isolated or temporary factors but by a confluence of mutually-reinforcing trends that will require a concerted and accelerated easing in monetary policy if China is to avoid a deflationary cliff. Read more

China’s currency policy dilemma sharpened on Monday as the country announced a record January trade surplus in spite of falling exports and reported dismal imports in spite of a strong appreciation of the renminbi against the euro and yen.

Exports contracted 3.3 per cent year on year in January, down from an increase of 9.7 per cent in December. Meanwhile, imports also declined 19.9 per cent, falling from a 2.4 per cent contraction in December. This produced a record merchandise trade surplus of $60.0bn, up from $49.6b a month ago (see chart). Read more

The Bric countries – minus India – embellished their growing reputation as laggards in the emerging market (EM) universe in January as manufacturing activity in Russia and China declined and Brazil turned in another subdued performance, data published on Tuesday shows.

The result is that, as a bloc, the Bric countries (Brazil, Russia, India and China) are diverging from the rest of the EM universe in manufacturing output and the trajectory of GDP growth. Other EM countries, meanwhile, are reaping the benefit of positive global demand and assuming a role as the key engines of developing world growth. Read more

Russia’s surprise cut in its key interest rate to 15 per cent from 17 per cent on Friday was primarily a product of political pressure and may do more harm than good to Moscow’s twin aims of restraining inflation while softening the impact of an incipient recession, analysts said.

“The CBR’s (Central Bank of Russia) move will likely have quite a reverse effect on inflation,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Russian investment bank. “The market is already increasing pressure on the rouble which, in turn, will transform into higher – rather than lower – inflationary expectations going forward.” Read more

Clouds hang over Russia and challenges abound in Latin America and South Africa, but emerging market (EM) consumers remain robust in Asia and are voracious almost everywhere when it comes to buying cars, smartphones and holidays, a survey of 16,000 EM consumers conducted by Nielsen, a research firm, shows.

The survey – conducted in Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, Turkey and South Africa for Credit Suisse – shows that differentiation between countries and products is key to understanding EM consumer trends this year, rather than generalising across emerging markets as a whole. Read more

Russia’s economy is heading for a deep recession this year. Brazil is stagnating and China’s dynamism is dissipating, helping to depress the prices of commodities that many developing countries produce. But in spite of such afflictions, analysts caution against thinking that a multi-year consumer bonanza in emerging markets (EM) is running out of steam.

The “biggest growth opportunity in the history of capitalism”, as McKinsey called EM consumer spending in a 2012 report, may suffer setbacks in some key markets this year, but overall the narrative is set to flourish as disinflation triggers interest rate cuts and low oil prices put more money into EM consumers’ pockets, analysts said. Read more

Emerging Asia is set to be the world’s fastest-growing region again in 2015, skirting the contagion from Russia’s crisis and riding the fall-out from weak commodity prices, according to Fitch, the credit rating agency. Nevertheless, structural frailties stalk seven out of 10 countries in the region, with surging debt levels a particular concern, the agency said.

The region, excluding China, is expected to expand by 5.9 per cent in 2015 and 6.1 per cent in 2016 – compared to an average for global emerging markets of 4.1 per cent and 4.5 per cent respectively, Fitch said in a report. These forecasts compare with the International Monetary Fund’s (IMF) estimates that developing economies would this year grow at 4.3 per cent, accelerating to 4.7 per cent in 2016. Read more

Unexpectedly early interest rate cuts in India, Peru and Egypt on Thursday indicate that falling oil prices and gathering disinflationary pressures are accelerating a cycle of monetary easing in many emerging market economies, analysts said on Friday.

The easing in key EM economies – added to expectations that several more countries will also cut rates – stands in stark contrast to a recent market consensus that 2015 would herald upward pressure on EM rates as the US Federal Reserve espoused a tighter policy, analysts said. Read more

The skidding prices of oil and other commodities are starting to cleave sharp divisions between those emerging market (EM) regions, countries and industries that are suffering and those that are starting to reap some benefit.

Data released by Capital Economics on Thursday revealed emerging Asia as the only EM region to register export growth in November last year. By contrast, the value of exports from emerging Europe, Latin America and the Middle East and Africa was dragged significantly lower during the month (see chart). Read more

Guo Guangchang, an entrepreneur who claims inspiration from China’s oldest sages - as well as from the “sage of Omaha”, Warren Buffett – has topped an inaugural ranking of the wealthiest Chinese investors with a personal fortune estimated at $4.5bn.

Guo (above), 48, typifies the eclectic acquisitiveness of China’s emerging cohort of investors. His company, Fosun International, this month won the longest takeover battle in French history by beating Italian investor Andrea Bonomi to take control of Club Méditerranée, the vacation organiser, after a 16-month wrestling match. Read more

China’s “big four” state banks are losing share in the country’s fast-growing retail banking market as customers embrace a more sophisticated array of products and swell a burgeoning fashion for digital banking, according to a survey of savers conducted by McKinsey, the consultancy.

The main beneficiary from the slide of the “big four” – the Agricultural Bank of China, the Industrial and Commercial Bank of China, the Bank of China and the China Construction Bank – have been the joint-stock commercial banks, which include institutions such as China Merchants Bank, China Everbright Bank and CITIC Bank. Read more

A severe slump in Russia and ebbing momentum in China contributed to an overall subdued performance for manufacturers across emerging markets (EM) in December last year, according to a compilation of data published on Tuesday.

The overall purchasing managers’ index (PMI) reading for EM manufacturing edged down from 51 points to 50.9 points in December (see chart), according to a Capital Economics compilation of data collected by Markit, the research company. The number suggests that while EM manufacturing activity is still expanding, the pace of that expansion is slowing. Read more

Portfolio flows into emerging markets (EM) suffered their sharpest slump in December since the 2013 “taper tantrum” as the Russian currency crisis and sliding oil prices intensified risk aversion among both equity and debt investors, according to estimates by the Institute of International Finance (IIF), a global association of financial institutions.

The IIF’s EM Portfolio Flows Tracker, released on Tuesday, estimated total outflows from EM at $11.5bn during the month, with flows out of debt accounting for $7.8bn and flows out of equities reaching $3.7bn. The only EM area to register net inflows was emerging Asia, following foreign buying of Indian bonds and equity issuance throughout the region (see chart). Read more

Bahrain, Angola, Ecuador and Venezuela rank as the emerging markets (EM) most vulnerable to a downgrade in their sovereign credit ratings if oil prices do not recover in 2015, Fitch Ratings said in a report published on Tuesday.

With benchmark Brent crude prices close to $80 a barrel, down from $115 a barrel in mid-June, the revenues of all oil producers are under pressure. But due to differing levels of fiscal reliance on oil income, the speed of deterioration in domestic budgetary conditions varies sharply among EM producers. Read more

As Alan Beattie wrote recently, a clear divergence in monetary policy is polarising the emerging market (EM) universe. Some countries, such as China last Friday, have cut interest rates to invigorate demand while others, such as Russia and Brazil, have had to hike rates to battle inflation.

The divide is growing starker, forming a basic template for EM investors. Softer oil and commodity prices are subduing inflation in most countries, creating room for easier monetary conditions. Other countries, however, are still struggling with ideosyncratic frailties, preventing them from capitalising on the ebbing EM prices. Read more

Zhou Xiaochan, China's central bank governorClearly, China’s interest rate cut on Friday was motivated by a desire to manage a flagging growth story. But the announcement also revealed a few sub-plots, which together may say more about Beijing’s mindset than the dominant narrative.

The first point, several analysts said, is that Beijing’s monetary easing may well have further to run, following the decision by the People’s Bank of China (PBoC) to cut its benchmark lending rate by 0.4 percentage points to 5.6 per cent, while cutting its deposit rate by 0.25 per cent to 2.75 per cent. Read more

“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”

For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.

But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more