China, emerging markets

Chinese officials have struggled to bring the correction in share prices under control. Though the Shanghai Composite has rebounded 11.8% from the 9 July low of 3373, it is still down 28.4% from the 12 June peak of 5,178 of. Commodities, energy, metals and agriculture, have fallen alongside Chinese stocks, propping up currency volatility and dragging down the exchange rates of commodity exporting countries and countries with substantial funding gaps current account deficits.

"The PBoC, China's central bank, has stepped on the monetary accelerator twice already in Q2, lowering the one-year deposit and lending rate by 25bp on 10 May - and again on 28 June. The 'whatever it takes' moment as economist Wei Yao calls it report here came in the first week of July when the government rolled out liquidity to boost its equity market", says Societe Generale.

 Amid the tempest sweeping through Chinese equity market, the renminbi has been a safe port in the storm among its Asian peers. CNY has been much smaller compared to other EM currencies, and how the CNY exchange rate has decoupled from Asian currencies against the US dollar. This stability is now attracting the interest of Russian issuers who are faced with rising bond redemption payments in September and December.

In August, the focus will turn to the PBoC meeting (no official date has been confirmed), where the central bank will discuss the current economic and financial environment. Though economists expect one more RRR cut in Q4, they doubt that further monetary easing is on the agenda next month. If the stock market resumes its fall, then authorities could try to contain the negative spillover to the economy by weakening the currency bullish USD/JPY and EUR/JPY. The central bank could achieve this by raising the daily yuan fixings, but this is not the base case scenario. China is treading carefully and does not want to sacrifice the stability of the currency ahead of the IMF review of the SDR (Special Drawing Right) in Q4 15. The IMF could decide to include the renminbi to the SDR basket which currently consists of USD, EUR, JPY and GBP, notes Societe Generale.