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IMF warns on China’s credit boom

August 2017

China’s credit growth continued to pose a problem in August. The IMF has urged China’s authorities to take steps to deflate the country’s credit boom, warning that China’s credit growth poses a serious threat to its stability and economic growth.

  • India’s economic growth slowed down
  • The RBI cut India’s key interest rate to 6%
  • Brazil’s rate of inflation remained well below target

To view the series of market updates looking at the markets through August, click here

Emerging markets generally rose during August, although investor sentiment was somewhat unnerved by rising tensions between North Korea and the rest of the world.

“China’s combined household, corporate, and government debt could reach almost 300% of GDP by 2022”

China’s credit growth is on a “dangerous trajectory” that puts the country at risk of a “disruptive adjustment and/or a marked slowdown in economic growth”, according to the International Monetary Fund (IMF) . China’s combined household, corporate, and government debt could reach almost 300% of GDP by 2022, compared with 242% in 2016. The IMF urged the country’s authorities to take steps to “deflate the credit boom smoothly” and warned that a sharp correction in China’s housing market could undermine stability.

The IMF also criticised China’s annual economic growth targets , which it believes have “fostered an undesirable focus on short-term, low-quality stimulus measures”, and called for reform that will “accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment” . During August, the Shanghai Composite Index rose by 2.7%.

India’s economy expanded at an annualised rate of 5.7% in the three months to June this year, compared with growth of 6.1% in the previous quarter. The slowdown was partly attributable to lower growth in the manufacturing sector, which expanded by only 1.2% – compared with 10.7% in the same period last year – and to confusion following the introduction of a new Goods & Services Tax (GST) earlier this year.

Policymakers at the Reserve Bank of India (RBI) cut its key interest rate from 6.25% to 6% at the start of August, citing inflationary weakness. The RBI’s last rate cut took place almost a year ago in October 2016 . Looking ahead, the RBI still expects inflationary pressures to pick up towards their 4% target, supported by salary increases for government employees, rising prices for food, and the inflationary impact of the new GST. The CNX Nifty Index fell by 1.6% in August.

Brazil’s annualised rate of inflation continued to fall in August, dropping to 2.68% . The country’s central bank has an inflation target range of 4.5% (plus or minus 1.5 percentage points), so this continued weakness in inflation stoked fresh expectations of another cut in interest rates. The key Selic rate currently stands at 9.25% following a cut of one percentage point in July. During August, the Bovespa Index rose by 7.5%.

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